MuniLand

Has Chris Christie “fixed” the problem?

Joan Gralla of Reuters reports that Governor Chris Christie will be signing the pension and health-benefit reform law today. This is an important step for the health of New Jersey’s pension plans, and Governor Christie should be lauded for his accomplishment.

The state’s 2010 Debt Report (page 15) said that they have $87.5 billion in unfunded liabilities as of June 30, 2009 and that the rate of increase has gone up substantially in recent years:

$30.7 billion for the seven major state pension funds $56.7 billion in unfunded post retirement health benefits

Unfortunately Governor Christie has skipped payments of $5.5 billion over the last two years and compounded these unfunded liabilities. One of these skipped payments was used to claim a “balanced budget.” Your household budget is not really “balanced” if you skip your car loan payment for a year.

Now the Wall Street Journal is reporting that New Jersey must take an emergency $2 billion loan from JP Morgan because they haven’t properly projected their future revenues. The terms of borrowing will surely be higher than if they borrowed through the municipal bond market. It’s really like going to a payday lender.

Skipping payments and using payday lenders are not good signs of fiscal prudence. Maybe New Jersey is not making such big strides after all.

Greening the city

Many cities took a big step forward for clean air when they adopted buses fueled by natural gas. But there are other important projects that will make getting around easier, quieter and less polluting. New York City is getting ready to take a big step. From American City:

New York City has the potential to take those [bike sharing] concepts and scale them up to a size unseen on this side of the Atlantic. Mayor Michael Bloomberg, a man the transportation community has a complicated relationship with, has been dangling a transformative bike sharing program in front of alternative transportation advocates since 2009 when New York’s city planners issued an “exhaustive proposal” that included a 10,000 strong fleet of safety-equipped, GPS-ready bikes.

Economically, the deal is a victory for innovative financing because it fully absorbs the burden of maintenance, damage, and —as this is a city— theft, vandalism, and “artistic destruction.” New Yorkers would buy their memberships on weekly, monthly, or yearly bases and get an unlimited number of free rides that take less than 30 minutes; ride a little longer, pay a little more. New York has decided that an initial burst of capital will serve their purposes the best not least because of their uniqueness among American cities in terms of density and population.

According to the credit rating agencies and the bond markets, these are the 8 states with the weakest credit profiles. These states may be weak because their debts are too big, because their economy is flagging or because they haven’t adequately funded the retirement of their employees. If this were a school, these would be the students sitting in the back of the class. Maybe it’s time for these states to do a little more homework.

We start with the weakest Puerto Rico, a United States commonwealth. #1 – Puerto Rico

#2 – Illinois

#3 – California

#4 – Michigan

#5 – Nevada

#6 – New Jersey

#7 – District of Columbia

#8 – Rhode Island

The ever-shrinking welfare rolls

Stateline has done some very good reporting on the decline of the welfare rolls. Welfare funding was switched to block grants in 1996, and the funding level has remained the same since then. From Stateline:

Welfare is not a big budget item for most states, taking up less than 2 percent of all state spending, according to the National Association of State Budget Officers (NASBO)…

…When Congress overhauled that system in 1996, it changed welfare from an “entitlement program” guaranteeing coverage to everyone who was eligible and instead created the Temporary Assistance for Needy Families (TANF) block grant that hands out lump-sum payments for welfare. States are essentially given a set amount of money and allowed to use it as they wish. The amount has stayed level since 1996.

Public workers have been protesting against the reduction of their benefits in several states. It got a more than a little testy in Wisconsin this winter, which has led to several recall elections for legislators there.

It is the right of public workers to push back when they believe they have been treated unfairly. But it is also the responsibility of public workers, and especially their union leaders, to help create a realistic, sustainable benefit scheme for themselves. Too often union leaders insisted on more and more benefits and lower contributions while ignoring the damage done to the viability of their pension plans.

Maybe they didn’t worry because they knew that taxpayers would have to make up shortfalls in underfunded pension plans. Maybe the guaranteed taxpayer backup is the root of our fiscal problems. It has placed all the responsibility for fiscal prudence on elected officials who often are easily swayed by well-organized constituent demands.

Lisa Pollack of Markit in London sent over some interesting charts of U.S. municipal swaps. I put up this one which shows the market perception that risk is increasing again for some states, particularly Illinois and California. It is important to remember that these markets are thinly traded and that there is a large block of muni CDS written on California that is coming to market from the bankruptcy of Lehman Brothers.

National Totals of State Tax Revenue, by Type of Tax

The U.S. Census brings us these figures for taxes collected at the state level for 2010. You can see the substantial reliance on individual income and sales taxes (I left off some categories to fit the table in. Click through to the Census document to see more data): Quarter Total tax Individual income Corporate income Property tax State sales tax 2010 4Q $ 177B $ 61B $ 9B $ 4B $ 57B 2010 3Q $ 168B $ 57B $ 7B $ 3B $ 56B 2010 2Q $ 204B $ 72B $ 14B $ 3B $ 54B 2010 1Q $ 163B $ 52B $ 8B $ 8B $ 54B

New Jersey municipal employees to pay more for benefits

The Wall Street Journal is reporting that New Jersey Governor Chris Christie and the state Democratic leadership have reached agreement on reducing employee benefits:

In the face of heavy opposition from unions, the Democratic leadership of the New Jersey legislature and Gov. Chris Christie reached an agreement on major cuts to public-worker pensions and benefits…

…Democrats worked into Wednesday evening to get union support, offering weaker proposals, to no avail, a person familiar with the negotiations said. Instead, top lawmakers went ahead with a comprehensive bill submitted earlier this week that requires workers to pay more toward their pensions and new hires to work longer to reach retirement age, while eliminating annual cost-of-living increases for current and future retirees, among a slew of other changes.

Chris Christie, the Republican governor of New Jersey who has consistently been championed as a “fiscal conservative,” has a real soft spot for several of his state’s “too big to fail” private projects. These projects include the massive retail/entertainment/sports/dining complex at the Meadowlands and the Revel casino project in Atlantic City. Governor Christie has made his state, which is in perilous financial condition, equity partners in the two projects.

Meanwhile a court order is forcing Governor Christie to increase the state’s contribution to public schools:

The New Jersey Supreme Court ordered the Christie administration on Tuesday to increase state education aid by $500 million in the coming school year, saying it had failed to meet its constitutional obligation to provide adequate educational resources for poor and minority children…

Investing in shared infrastructure

My favorite article this week is by William Alden of the Huffington Post. He brings out an element of the municipal bond market that I’ve long believed could be the future of muniland: the propensity of people to invest in projects and entities that they have a first-hand experience or a connection to.

War bonds, issued to pay for World War I and II, are a case in which investors moved their savings to particular investment products for emotional, social or patriotic reasons.

Alden highlights a new retail bond program I hadn’t heard of yet (emphasis mine):

Fitch Ratings goes “negative” on New Jersey

New Jersey is a wealthy state with lots of industry, excellent higher education institutions and is a “bedroom community” for New York City. But still it faces substantial fiscal problems.

Dow Jones reports that Fitch Ratings has cracked the whip and put the state on “negative” watch. This is the same move that Standard & Poors made on the debt of the United States. Think of it as a shot across the bow. Generally within six months a rating agency will downgrade the issuer or remove the “negative” designation.

From Dow Jones:

Fitch Ratings lowered its outlook on New Jersey’s bonds to negative, citing concern regarding the state’s mounting budgetary pressure amid a significant and growing unfunded pension liabilities, particularly in the context of an already high debt burden.