MuniLand

Mapping the pension blues

Chris Mier and his team at Loop Capital recently published the 11th Annual Public Pension Funding Review. It is the gold standard for public pension reporting. Mier was onto the pension story well ahead of Meredith Whitney and others, including myself. One thing that is great about Mier’s report is how graphic the pension data is.

Here is a map of the “actuarially required contributions” (ARCs) that states made to their pension plans. Note the numerous blue states that that made 100 percent or more of what was required. Laggard New Jersey, meanwhile, only paid 15 percent of what it was required.

Loop Capital commented:

Thirty one states continue to struggle with making their full Annual Required Contributions (ARC). During periods of budgetary pressure, legislators are tempted to use funds to ‘pay the bills’ instead of paying into pensions. While revenues continued to improve at the state governmental level in 2012, the slow rate of improvement in the economy and the continuing trend of reduced federal support maintained ongoing pressure on state budgets.

Here is how well various states have funded their public employee pension plans:

Loop Capital on funded status:

Pension reforms have been enacted in over 40 states with legislative activity heavy over the last 3 years. Unfortunately, the cost savings to date have been insufficient to materially reduce UAALs [Unfunded Actuarial Accrued Liability] and boost funded status because of the time lag involved in realizing savings. While the savings will start to build over time, the overall decline in funded status from 2011 to 2012 does not provide a sense that the legislative progress is being translated into a reduction in state fiscal stress as of yet.

Taxing the buzz

Colorado voters approved recreational marijuana sales last November. The infrastructure is now being prepared to begin sales on January 1, 2014. Part of the plan approved by voters is a state tax of 25 percent. Reuters reports:

Under the marijuana tax proposal, a combined 15 percent excise and 10 percent sales tax would be imposed on recreational pot sales, with the first $40 million raised to fund school construction projects.

In Denver, a local ballot measure that would tack an additional 3.5 percent city sales tax on pot shops also appeared headed for passage, by a margin of 69 to 31 percent with roughly a third of votes counted.

The search for real budget numbers

 

I’m not sure anyone in muniland loves numbers more than the members of The National Association of State Budget Officers (NASBO). They are the geek squad who oversees the influx of tax and other government revenues. It’s the daily state money show.

Many state revenue reporting metrics, like the Rockefeller Institute’s, only show state tax collections and do not include other funding sources like federal monies. So it’s often hard to get a complete picture of state fiscal health. NASBO has been collecting state revenue data since 1987 and reports that 2012 saw the first decline in total state revenues. In contrast Rockefeller Institute has been reporting increasing state tax revenues for 13 quarters since 1Q 2010.

NASBO (see chart above) says that fiscal 2012 was a year of transition for states as they continued to emerge from the national recession. State general fund revenues grew 3.6 percent.

Jefferson County’s bankruptcy confirmation hearing

A beautiful thing is happening on Twitter. Local and national reporters are tweeting Chapter 9 municipal bankruptcy hearings as they happen. This is a great service for muniland because there is usually no audio feed at these hearings. Municipal bankruptcies are rare, so each one potentially creates new precedents for those that follow. At the Jefferson County, Alabama hearing to confirm the city’s plan to exit bankruptcy, Kyle Whittemore of the Birmingham News, Katy Stech of the Dow Jones Newswire and Jonathan Hardison of FOX6 WBRC-TV report from the court a day after $1.8 billion of new debt was raised to repay old debt. Bloomberg lays out the back story:

Jefferson County, Alabama, may learn as soon as today whether a federal judge will end its two-year-old bankruptcy by approving $1.5 billion in creditor concessions, the first time since the Great Depression a U.S. municipality has imposed principal losses on bondholders.

“I understand it is somewhat unusual,” U.S. Bankruptcy Judge Thomas Bennett said today of his plan to give an oral ruling from the bench followed by a written order. The county could close on $1.84 billion in new financing by Dec. 3 should the plan win approval following testimony that started today in Birmingham, the county seat.

Michigan’s pension problem

Moody’s Investors has been on a ratings downgrade rampage for Michigan’s school districts. Here is its explanation from the new sector comment report:

A majority of Michigan school districts have realized declines in enrollment over the past decade. Of the 549 public school districts in the state, 425 lost students from 2004 through 2012, with total statewide school enrollment (excluding charter schools) falling by 13.2 percent.

Demographic shifts like the one occurring in Detroit are devastating to municipal budgets. Typically fewer taxpayers have to carry a greater share of the costs of a municipal infrastructure, which rarely shrinks in proportion with population loss. But Michigan has another substantial problem: Its charter schools. From Moody’s again:

Pension underfunding crosses party lines

There is no one-size-fits-all condition for state pensions. The condition of state pensions varies from nearly 100 percent-funded plans in Wisconsin, North Carolina, South Dakota, Washington and New York to less than 55 percent in Kentucky, Connecticut, Rhode Island and Illinois.

The reasons for the funding levels span economic and historical explanations, but do they also touch the political? Are states controlled by Republicans, who are known for fiscal conservatism, harboring better-funded pensions than Democrat-controlled states, which are willing to embrace a broader array of government services?

I mashed up data about legislative control of states with funding levels of pensions plans and how much of the “actuarially required contribution” (ARC) they had made in 2012 (data from Pew page 5):

Did Jefferson County ratings shop?

Jefferson County, Alabama is raising $1.7 billion of new debt to repay $3.1 billion while it is under the protection of the Federal Bankruptcy Court in a Chapter 9 proceeding. A lot of information that normally remains private to the issuer and underwriter has become public.

Barnett Wright, a reporter at the Birmingham News, published the list of fees that are being paid for raising the new debt, including to the credit raters:

Firms and the amounts to be paid on the deal include underwriters Citigroup Global Markets Inc., $4.9 million; Merchant Capital, $1.3 million; and Drexel Hamilton, $568,000, according to the county.

Could the BRIDGE Act be the solution for infrastructure?

New legislation introduced by ten U.S. senators called the BRIDGE Act acknowledges that the likelihood that Congress will increase the gas tax or other infrastructure grants is “bleak.” BRIDGE would create a new form of government sponsored entity (GSE) called the Infrastructure Financing Authority (IFA).

The proposed legislation, led by Virginia Senator Mark Warner, would create an authority that would operate independently of the federal government to make loans and loan guarantees to projects that have sufficient cash flows to repay the loans.

The key provisions of the BRIDGE Act:

·  The BRIDGE Act includes broad eligibility for funding:

Projects would have to be at least $50 million in size, and be of national or regional significance to qualify. Five percent of the Authority’s overall funding would be dedicated to projects in rural regions, and rural projects would be required to be $10 million in size.

This time it’s ‘not in my yard’

I’ve written previously about the local hospital in my community trying to complete a massive expansion in the tiny, historic village of Rhinebeck. Rhinebeck is a 300 year-old American treasure with one of the largest collections of nationally landmarked buildings in the nation. The hospital is surrounded with nationally land-marked homes, including my own.

Northern Dutchess Hospital is one of several hospitals run by the non-profit operator Health Quest. The salaries of those who run Health Quest, like most hospital salaries, are in the high six figures (page 29). Northern Dutchess Hospital is highly profitable and is probably subsidizing the money-losing operation of Health Quest’s Putnam Hospital. The hospital has focused on providing specific medical procedures and its birthing center delivered over 870 babies in 2010. The village population is only about 2,700.

I learned of the expansion last March when local papers reported that the developer, Kirchhoff Medical Properties, was seeking a PILOT (payment of lieu of taxes) for the first floor of the hospital expansion. A PILOT would allow that space to be privately owned by the developer and leased out to private doctors as medical offices. The Village Trustees, under media scrutiny, decided that that a plan for privately-leased physician offices in a non-profit hospital does not qualify for a PILOT.

Puerto Rico’s new liquidity providers

 

There are plenty of stories about how hedge funds are being lured into buy Puerto Rico debt by big dealers. The Wall Street Journal wrote about hedge funds buying distressed debt. Bloomberg reported that Morgan Stanley, Citigroup and Lazard are holding information sessions for hedge funds to learn about Puerto Rico debt. A trader passed me the presentation from the Citi meeting. It was a detailed explanation of the seniority of Puerto Rico debt and the legal covenants and trading history of specific Puerto Rico issuers and authorities. I would guess Morgan Stanley and Lazard did an equally good job on the background for their clients.

Everyone in fixed income markets has been hunting for yield. It’s easy to see how Puerto Rico debt, with its hefty yields, could be attractive to alpha-searching hedge funds. Hedge funds can’t take advantage of the municipal bond tax exemption, so yields for them are not as high as they would be for a risk-loving retail investor. But hedge funds have the advantage of using leverage to buy assets. This leverage usually comes in the form of loans from the hedge funds’ prime broker. Prime brokers are the large dealer banks that provide financing, trading and back-office services to their hedge fund clients. Morgan Stanley is the second-largest prime broker in the U.S. and Citigroup is seventh largest, according to Hedge Fund Alert. These two dealer banks were prime brokers to about 1,800 hedge funds in the first quarter of 2013.

Hedge funds and other buyers that don’t to take advantage of the tax exemption are referred to as crossover buyers. The Federal Reserve does not track the holdings of hedge funds in its “Financial Accounts of the United States” report, (page 98) so we have no official data on how many hedge funds are buying municipal bonds.

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