MuniLand

“Intergovernmental downloading”

Lisa Lambert of Reuters writes about a report issued by Fitch Ratings. From the Fitch report:

As has been the case in past times of financial strain, states are rethinking the size, cost, and role of their governments as they develop solutions to budgetary shortfalls. In many cases, this process has resulted in decreased local government funding. The extent to which local governments will feel the impact of these actions varies based on how dependent they are on state funding.

As such, Fitch Ratings believes school districts and counties will experience the greatest funding reductions. This report addresses the relationship between state and local government issuer ratings and discusses some of the main ways in which state actions can affect local government finances.

Lambert hones in on school districts and counties:

Fitch Ratings said in a report on Friday that school districts and counties will face their greatest funding reductions from states.

It said cuts in aid can result in “intergovernmental downloading,” where the financial burden for a service is shifted from a higher level of government to a lower level.

Unfunded municipal pension liabilities are getting all the attention now, but it’s the burden of Medicaid and health-care expenses that are really crushing state and county budgets. In California, for example, the state will make a $2.4 billion pension contribution to Calpers and spend approximately $16 billion on Medicaid. The federal government kicks in an additional $25 billion.

I first understood this when I listened to the governors of Vermont and Wisconsin testify to the House Oversight Committee on April 14.  Governor Peter Shumlin of Vermont explained his approach to bringing his state budget into balance:

This crisis is the result of the greatest recession in history. I didn’t start with changes to collective bargaining and pensions. Our first problem is that health care costs have doubled. Our second cost driver is that corrections have doubled in 10 years.

Deficits at state-pension funds are the real monsters threatening municipal stability. Estimates of shortfalls at these funds range from $1 trillion from the Pew Center on the States to $3 trillion from Orin Kramer, the former chairman of New Jersey’s State Investment Council.

There are numerous strategies that individual pension-plan sponsors are using to stabilize their funds, including:

Reducing benefits Increasing employee contributions Making additional public contributions to “top up” the fund Trying to increase returns for the fundby increasing investment risk Changing to a defined contribution plans

The excellent graphic above, provided by the Pew Center on the States, shows how many states are adopting the first and second strategies listed above. The upside of these methods is they stabilize fund assets immediately.

Happy Friday all!

Illinois passes landmark education reform

The Chicago Sun-Times reports that the Illinois state legislature has passed a substantial education reform bill. The legislation severely restrains the power of the teachers’ unions:

The measure continues to allow unions to strike in Chicago and the suburbs, but it imposes a requirement that school boards and unions take longer to negotiate and publicly disclose their bargaining positions before a strike can be launched.

In Chicago, no strikes could occur until as long as 120 days after the dispute goes to a special panel — and then, only if the Chicago Teachers Union has given a 10-day notice of a strike and has 75 percent of its bargaining unit members in agreement. Currently, a strike only requires a simple majority of everyone who votes.

Professor John Coffee of Columbia Law School, who is considered one of the foremost legal scholars in the securities area, discusses the effect of the conviction of Galleon Group co-founder Raj Rajaratnam on insider trading:

“People learn deterrence from actual vivid examples of people going to prison.  And that is what it takes in every generation to overcome the tremendous temptation to make tens of millions of dollars.”

What about the municipal market? Are there instances where dealers are receiving inside information and trading on it ahead of others?

Mayors take out the pitchforks

William Alden of Huffington Post writes about a “testy” encounter between mayors and federal officials. The federal dollars for municipalities from the American Recovery Act have basically ended and revenues for state and local governments remain weak. We should expect to see more of this.

The federal officials on stage were speaking in broad, theoretical terms. But the mayors wouldn’t stand for that. They knew what needed to get done, they said. What they wanted from Washington was the dollars to do it.

“We should not be expecting or depending on top-down permission from the White House or Washington to have us advocate for this stuff,” said R. T. Rybak, mayor of Minneapolis, who stood up and addressed the other mayors. Earlier, [Philadelphia] Mayor [William] Nutter had complained about the seeming hypocrisy of federal lawmakers who go to ribbon-cuttings and ground-breakings, even if they never supported the legislation for those projects. Rybak heartily commiserated.

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.

Fiscal kabuki is frightening. From the Washington Post’s Ezra Klein:

“If the president doesn’t get serious about the need to address our fiscal nightmare, yeah, there’s a chance it could not happen,” John Boehner told Politico.

“It,” in this case, isn’t a golf game, or a bipartisan potluck. It’s a vote on the debt ceiling before the Treasury runs out of room to cover our debts.

Properly understood, what Boehner actually said is “if the president doesn’t get serious about the need to do what the Republican Party wants on fiscal policy” — note that allowing the Bush tax cuts to elapse would cut the deficit substantially, but wouldn’t calm Boehner — “yeah, there’s a chance I am prepared to trigger a fiscal nightmare.”

It’s an important week  for the fixed income markets: Ben Bernanke, the chairman of the Federal Reserve, will hold his first press conference on Wednesday.

Bernanke joins his European Central Bank counterpart Jean Claude Trichet in the practice of fielding questions after the central bank announces its policy stance.

Pundits and bloggers are weighing in with questions and Reuters reporter Kristina Cooke (twitter handle @kristinacooke) is encouraging her followers to tweet her questions for the chairman.

There are two sides to the municipal pension equation.

One side is the outflow or the payments made to retirees from the pension fund.

This outstanding map from the Pew Center on the States illustrates how each state is adjusting the payments or outflows from their funds. (If you click through to Pew’s site you can see how states have addressed this from 2001-2010.)

The other side of the equation is the revenue or inflow side of the equation. This side is comprised of worker and employer contributions and the gains made from the investments held in the pension fund.

Lisa Lambert and Edith Honan of Reuters wrote an excellent article today about the most important issue on the inflow side. This is the question of what rate to estimate investment returns to the pension funds.