MuniLand

Understanding the public pension funding gap

This is a guest post by Gregory Mennis, director of state public-sector retirement systems for The Pew Charitable Trusts. It is a response to “Late to the public pension game,” from April 2. 

The Pew Charitable Trusts has been reporting on state and local pension data since 2007 and we applaud Reuters’ attention to this important public policy issue.  Cate Long’s April 2 blog post “Late to the Public Pension Game” questioned why our report, “The Fiscal Health of State Pension Plans: Funding Gap Continues to Grow,” relied on 2012 data, saying it was out of date. These key points explain why Pew’s latest report relies on 2012 data.

Pew has consistently used the states’ own numbers for all of its analysis, and 2012 is the most recent year for which data for all 50 states is available.  Comprehensive data for 2013 won’t be available until later this year. Cate Long’s post cites a Wilshire Consulting report that fills in the gaps of the 2013 state data with Wilshire’s own estimates and projections. Wilshire also calculated states’ plan assets on a market-value basis, rather than using the numbers as reported by state pension plans. Our practice is not to modify, alter, or project data forward.

While the Wilshire report demonstrates that funding is improving on a market-value basis, a number of research groups and economists also believe the funding gap is even greater than our report’s analysis. We believe that using states’ own numbers and being consistent and transparent in our approach allows people using our data to be confident that the pension debt facing states is accurately reported.

The 2012 data allows us to provide information about states’ individual plans. Some states have close to 100 percent of the assets needed to pay for pension promises.  They’ve also regularly made the full actuarial-recommended contributions.  This demonstrates that pensions can be managed so that they are affordable and sustainable.  But several states have set aside less than half of what is needed to pay for pension obligations, and many are falling short on contributions—with two states averaging only 34 percent of recommended amounts over the past three years. Wilshire and the Federal Reserve, which were cited in the blog post, only provide aggregate figures and do not report on individual states’ records in following responsible funding practices, as our report does.

The Treasury wades into muniland

The U.S. Treasury Department has organized a new office to monitor the municipal bond market, along with state and local finances and public pensions. Reuters reports:

The U.S. Treasury Department is forming a unit on state and local finance to coordinate its responses to developments in the country’s $3.7 trillion municipal bond market, a Treasury spokesperson said on Thursday.

According to the spokesperson, J.P. Morgan’s Managing Director for Public Finance Northeast Region and Housing Groups Kent Hiteshew will become director of the new unit in May.

A bankruptcy scorecard for Detroit

Settlements in the Detroit bankruptcy case are arriving quickly. I thought that it might be useful to have a scorecard to tally the pieces. I took the chart above from the Detroit’s June 13, 2013 Proposal to Creditors (page 98). It lists the unsecured creditor claims. So far, Detroit has settled four unsecured liabilities valued at $4.107 billion for $1.213 billion, or 30 percent.

Here are four announced settlements with numerous caveats.

UTGO settlement: Detroit originally argued that the unlimited tax general obligation bonds (UTGO) were unsecured. This interpretation flew in the face of established muniland legal precedents and was watched closely by market participants. In its settlement with the bond insurers who wrapped these bonds, the city reversed its stand and agreed to acknowledge that the debt was secured by a specific lien on property tax revenues. Bond insurers will be paid 74 cents on the dollar and bondholders will be made whole by the insurers. The property tax lien will continue to be collected by the city and 26 cents on the dollar will go to a fund to help the lowest income retirees. It will cost the city $287 million to resolve $369 million in liability with the bond insurers.

Pension unfunded liabilities: Detroit originally estimated that its two pension systems were underfunded by $3.4 billion. Morningstar and others argued that the city had over-inflated the pension liability. They were right. Retirees will not face big cuts. The city has reached agreements with pension leaders. Detroit expects contributions from the state, private foundations and the Detroit Institute of Art to further fund the pension systems in exchange for preservation of the city’s art collection. The Detroit News has the pension settlement details:

New analytical tools for muniland

Some great new tools have arrived in muniland that begin to stretch the boundaries of how we organize and process our endless information. Staying on top of 80,000 municipal issuers, 50 states and unlimited private activity issuers is no easy task. Check out some of the new arrivals:

Standard & Poor’s

Standard & Poor’s Ratings Services announced the launch of a free interactive web application that gives muniland participants the ability to create and compare credit scenarios. Users can model different capital structures and see possible ratings based on Standard & Poor’s general obligation ratings framework and their own data inputs. This web app follows last year’s launch of the iPad-based S&P U.S. Local Governments Credit Scenario Builder. Log on and have fun. The Bond Buyer lays out some specs:

The app includes the seven criteria Standard & Poor’s uses to assign a credit to a municipality: economy, management, budgetary flexibility, budgetary performance, liquidity, debt and contingent liability, and institutional framework.

Puerto Rico government stumbles on teacher pension reform

The Puerto Rico government encountered a stumbling block in its efforts to right a sinking fiscal ship on Friday when its Supreme Court ruled that legislation amending the teacher’s pension system was unconstitutional. Reuters reports:

The Puerto Rico Supreme Court on Friday struck down a recently enacted overhaul of teachers’ pensions, dealing a major blow to efforts to fix the Caribbean island’s crumbling economy and budget.

Five of the court’s nine members determined that significant portions of the reform law were unconstitutional. Three judges dissented and one recused himself.

Fixed costs squeeze state and local government hiring

I’ve said for several years that hiring by state and local governments is unlikely to rebound after the declines following the 2008 recession. Governments have been faced with increasing costs for Medicaid, pension and retiree healthcare, which are fixed in law and through contract negotiations and are therefore difficult to adjust. The most viable way for governments to balance their budgets was initially through layoffs; now it’s through hiring freezes. Employment data from the Federal Reserve Bank of St. Louis proves this point:

 

Gabriel Petek and his team at Standard & Poor’s wrote a report that addressed the financial outlook for state and local governments. In it, they addressed the employment picture:

As service providers, state and local governments spend a sizable share of their budgets on personnel costs. In fiscal 2011, Census Bureau data show that 37% of spending on current operations went to wages and salaries. By accounting for such a prominent portion of governments’ spending, staffing reductions became a central component to state and local government cost-containment strategies. Outright workforce reductions as a way to lower personnel costs also faced fewer legal hurdles than did reducing current or deferred compensation and benefits.

The myth of Chicago’s “shadow budget”

EXCLUSIVE: Investigation shows @RahmEmanuel diverted pension/school money into secret slushfund enriching his donors http://t.co/mDttLsQ7MV

— David Sirota (@davidsirota) April 4, 2014

I’m not a big fan of tax increment financing (TIF) — property tax assessments that split off revenues derived from increases in property valuations and new construction in a geographically defined portion of a city. These revenues go into a separate pot that funds improvements to school buildings, sidewalk and curb construction and other infrastructure, away from a city’s general fund. I think splitting off revenue streams makes managing a city’s finances more complex, and reduces flexibility as the city’s fiscal priorities change.

Many cities, such as Boston and Pittsburgh, have TIF programs. Some are well-structured and monitored. Others — like the Redevelopment Agency (RDA) in San Bernardino, California (which the state dissolved in 2012) — tried to divert funds illegally. California is allowing bonds issued through the RDA program to mature, but is not issuing any new debt.

Where local government money comes from

Yesterday I wrote about local governments spending $100 billion a year on police, but I realize that I didn’t provide much context for how that fits into overall spending. Here are a few datasets from the U.S. Census Bureau’s 2011 Annual Surveys of State and Local Government Finances to provide a framework.

Local governments had revenues of $1.67 trillion in 2011, according to the U.S. Census Bureau. Here is how federal and state governments contributed to local government revenue flows:

Local governments generated $905 billion of their own revenue:

Local governments generated $578 billion of tax revenues:

Local governments generated $267 billion in fees and charges:

Local governments earned $134 billion in utility revenues:

Local governments also had $73 billion in insurance trust revenues and public employees contributed $73 billion in pension payments.

America’s police — the third rail

For decades, conventional wisdom has said that federal entitlement programs are the third rail of national politics. Any politician advocating reductions would be penalized at the election booth.

Many vital entitlement programs like the Social Security disability program are nearly broke, but no one discusses how to reform them to make them sustainable. Similarly, at the local level, spending on police has put massive pressure on budgets. But it would be political suicide for a politician to advocate reform.

Violent and property crime rates have dropped in America, but spending on police has soared since the 1990’s. According to a 2012 Justice Policy Institute report, the declining violent crime and property arrests have been replaced with drug arrests:

Late to the public pension game

Pew Charitable Trusts has released an ominous report, The Fiscal Health of State Pension Plans: Funding Gap Continues to Grow.” The report finds that in 2012, U.S. public pensions lost ground in their funding ratios and ended the year weaker than they started. What is not clear is why, in March 2014, Pew is reporting 2012 data. Because of large stock market gains in 2013, pension funding gaps are now actually shrinking, not growing. Reuters writes about the Pew report:

Factoring in promises made by local governments to fund pension benefits for their employees, total pension debt climbed to over $1 trillion as of June 30, 2012, the end of the most recent budget year for which data is available.

‘Even though we’ve seen recent market gains and reforms, the funding gap has continued to grow for pensions,’ said David Draine, a senior researcher at the Pew Center on the States.

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