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    « Despite Budget Shortfalls, Some Governors Call for Tax Cuts | Main | The Week in Public Finance: Trump's Infrastructure Plan, Risky Pensions and NYC's Surprising Fiscal Health »
    Friday
    Jan202017

    The Week in Public Finance: Hartford in Crisis, Pension Rates Move Down and More

    A roundup of money (and other) news governments can use.

    BY  JANUARY 20, 2017

    Bad News for Hartford, Conn.

    A report from the Yankee Institute this week warned Connecticut’s capital is careening toward insolvency. “Hartford will likely face bankruptcy unless the state intervenes in the coming months,” wrote Stephen Eide, a senior fellow at the Manhattan Institute who authored the report.

    Connecticut has repeatedly struggled with slow growth and state budget deficits, but that economic imbalance is even more exaggerated with its urban centers. The report warns that Bridgeport, Waterbury and New Haven also have declining tax bases and rising pension obligations -- just not to the extent that Hartford does.

    More than one-third of Hartford residents live in poverty, the highest rate in the nation in cities larger than 100,000. What's more, the city has increased its debt and structural budget deficit to stay afloat. Between 2016 and 2018, Hartford’s debt service expenses are projected to increase from $23 million to $45 million, and then reach $60 million in fiscal 2021.

    The Takeaway: In general -- and this is applicable to other struggling pockets of the country -- the report says that Connecticut’s persistently weak urban economy means that state and local leaders should focus more directly on fiscal, rather than economic, policy. “Government has far more control over employee salaries and benefits than middle-class jobs and outside investment,” Eide said. In other words, officials should pursue policies that reduce rising costs like retirement benefits and other debt.

    To that end, Eide advises a state intervention in Hartford. “For the time being, Waterbury and Bridgeport, and most likely also New Haven, can continue to muddle through without the need for extraordinary support from the state,” the report said. “The same cannot be said for Hartford.”

    Down They Go

    More pension plans are sharply lowering their assumed rates of return -- and it’s about time, Fitch Ratings said this week.

    Last month, California Public Employees' Retirement System (CalPERS) voted to reduce its investment return assumption to 7 percent from 7.5 percent over the course of three years. The action replaces a previous plan that would have triggered incremental declines in the return assumption in boom years when actual performance exceeded expectations.

    Similarly, Hawaii's Employees Retirement System abandoned a gradual plan in favor of simply dropping its assumption to 7 percent from 7.65 percent. Connecticut and Oklahoma have also lowered their rates.

    Fitch called the new trend “an exceptionally slow recognition by pension decision-makers that high targeted returns are unlikely to materialize in the current investment environment.” The rating company also predicted that many other systems are likely to "follow suit as pension managers confront persistent challenges to achieving investment targets."

    The Takeaway: These are big steps down when you consider that in nearly a decade, the average plan’s assumed rate of return has gone from 8 percent to 7.66 percent. But the decisions are coming after pension plans have missed their return assumptions by wide margins for two years straight. That largely wiped out the funding progress pensions made in 2013 and 2014.

    As I wrote about last week, a higher expected rate of return increases the likelihood that governments will be hit with a big pension bill down the road. That kind of volatility is plain scary when you’re talking about millions of workers’ retirement security.

    Pension plans have previously resisted large shifts downward in investment assumptions because it means higher bills from contributing governments to make up the difference. For example, California’s contribution to CalPERS in fiscal 2018 increases by $172 million -- $105 million of which is from the general fund as a result of the lower assumed rate.

    Young vs. Old Spending

    Texas’ young population is one of the primary drivers behind the state's decision to increase its bond issuance in 2016. Last year, the amount of bonds outstanding for all Texas issuers rose by $13.8 billion, or a 4.5 percent increase. Only three states and Guam saw larger increases, according to data compiled by Municipal Market Analytics.

    Meanwhile, Texas added approximately 433,000 residents in 2016, making it the second most populous state at nearly 28 million. The state is also one of the youngest states at an average age of around 34, and has a strong birth rate of 70.7 per 1,000 women.

    On the other end, Vermont -- home to many older residents -- saw its total outstanding debt decrease by nearly 12 percent in 2016. The drop was the largest in the country. The small state's 600,000 population also declined by 1,500 residents, and Vermont’s average population age of 40 years old is among the oldest in the U.S.

    The Takeaway: The data says a lot about how demographics can drive bond issuance. Texas’ population, noted Municipal Market Analytics' Matt Fabian, spurs borrowing for education, transportation and other public investment in the state to address needs. “Not surprisingly,” he wrote, “the school district, general obligation and higher education sectors led the issuance growth in the state.”

    But in Vermont, hospitals rivaled education in new investment.

    To read this regularly, subscribe to "The Week in Public Finance" newsletter for free.

    *CORRECTION: A previous version of this story incorrectly cited the Manhattan Institute as the organization that commissioned the Yankee Institute report.

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