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    Tuesday
    Apr052016

    Municipal Bond Market Faces New Pressure

    A new federal rule could make it more expensive for governments to issue debt in a financial crisis.
    BY  APRIL 5, 2016

    Selling government bonds could become more difficult during the next credit crunch, thanks to a new federal rule outlining the kind of liquid assets that banks must hold in case of an emergency.

    The rule, issued Friday, greatly limits the kinds of municipal bonds that qualify in a big bank’s investment portfolio as "highly liquid" -- in other words, assets that can be sold quickly for cash. The new regulation was issued by the U.S. Federal Reserve, and is a modification of its previous proposal with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation.

    There's no immediate negative effect for government issuers. But if and when the next credit crunch hits, it could become more expensive for states and localities to issue debt. That's because if fewer bonds qualify as highly liquid, there would be less market demand for them. And lower demand would mean higher interest rates for governments.

    “As long as munis continue to have a good risk-adjusted return for banks, they’ll continue to invest," said Chris Mauro, who leads RBC Capital Markets’ municipal strategy team. “It’s really when you’re entering a liquidity crisis and banks are running up against their limit: Unfortunately they may liquidate some of their municipal [bonds] as a result. And they’ll use those proceeds to buy highly liquid assets.”

    Click to read more ...

    Thursday
    Mar312016

    A Missing Opportunity to Fix Government Finances

    Most places focus on pensions for cost-cutting. But a new study argues it would be easier for governments to reduce the collective $1 trillion they owe in retiree health care.
    BY  MARCH 31, 2016

    Pension liabilities have been a high-profile issue in recent years, and they remain a major budget burden for state and local governments. States and cities have tried to rein in expenses by issuing less bond debt, and they've tried to mitigate further increases in their pension liabilities.

    But a new study released Thursday says governments are missing a key opportunity to reclaim billions in annual revenue by not making severe cuts to retiree health care, commonly referred to as other post-employment benefits, or OPEB.

    “There continues to be a lot of emphasis on pensions, and rightly so,” said Stephen Eide, a co-author of the report produced by the Manhattan Institute. “But we wrote this report to say it might make more sense to focus more on OPEB reform than pensions -- the simple reason being, legally speaking, you’re more likely to get further in bringing down OPEB costs than pension costs.”

    In other words, states have more flexibility in restructuring retiree health-care benefits, and doing so could save hundreds of billions of dollars.

    Eide and co-author Daniel DiSalvo argue that retiree health-care costs are just as big a culprit for crowding out other government priorities as pension costs have been, although the latter has received much more of the blame.

    Click to read more ...

    Tuesday
    Mar292016

    As Pension Prospects Worsen, Kentucky Lawmakers Spar Over Worst-Funded Plan

    Nowhere are the problems with pension funding more evident than in Kentucky, where the state lost millions because of the stock market. Lawmakers are now debating how to recover.
    BY  MARCH 29, 2016

    Amid new predictions that public pensions are facing another downturn, at least one pension plan may be heading toward life support.

    Since several plans' fiscal year started last July, the stock market has been extremely volatile. As a result, Moody’s Investors Service predicts pension plans are likely to report 10 to 50 percent increases in liabilities when they close out their 2016 fiscal years on June 30.

    The bad forecast comes just after most plans reported meager investment returns in fiscal 2015. The two-year hit, warned Moody’s, will effectively wipe out the funding progress that many plans made in 2013 and 2014.

    The situation could force governments to put in more money over the next few years than was previously forecast. That notion, in turn, could trigger lawmakers to discuss other solutions for funding pensions or ways to control future pension costs.

    Nowhere is this more evident than in Kentucky, where the state lost nearly $53 million in investments during the last six months of 2015 because of the stock market dip and lawmakers are now debating how to recover.

    For years, lawmakers have shorted the state's annual payment into the Kentucky Employees Retirement System (KERS). That's played a big part in turning the state employee plan into the worst-funded among the 50 states. As of last summer, it reported holding just 19 percent of the assets it needs to meet nearly $12.4 billion in total liabilities.

    Click to read more ...

    Monday
    Mar282016

    As Pension Prospects Worsen, Kentucky Lawmakers Spar Over Worst-Funded Plan

    Nowhere are the problems with pension funding more evident than in Kentucky, where the state lost millions because of the stock market. Lawmakers are now debating how to recover.
    BY  MARCH 29, 2016

    Amid new predictions that public pensions are facing another downturn, at least one pension plan may be heading toward life support.

    Since several plans' fiscal year started last July, the stock market has been extremely volatile. As a result, Moody’s Investors Service predicts pension plans are likely to report 10 to 50 percent increases in liabilities when they close out their 2016 fiscal years on June 30.

    The bad forecast comes just after most plans reported meager investment returns in fiscal 2015. The two-year hit, warned Moody’s, will effectively wipe out the funding progress that many plans made in 2013 and 2014.

    The situation could force governments to put in more money over the next few years than was previously forecast. That notion, in turn, could trigger lawmakers to discuss other solutions for funding pensions or ways to control future pension costs.

    Nowhere is this more evident than in Kentucky, where the state lost nearly $53 million in investments during the last six months of 2015 because of the stock market dip and lawmakers are now debating how to recover.

    For years, lawmakers have shorted the state's annual payment into the Kentucky Employees Retirement System (KERS). That's played a big part in turning the state employee plan into the worst-funded among the 50 states. As of last summer, it reported holding just 19 percent of the assets it needs to meet nearly $12.4 billion in total liabilities.

    Click to read more ...

    Friday
    Mar252016

    Chicago’s Shockingly Bad Finances

    You’ve probably read about the Windy City’s money problems. But chances are they're worse than you thought, and a recent ruling didn't help.
    BY  MARCH 25, 2016

    You’ve probably read headlines about the Windy City’s financial woes. About how Chicago’s years of borrowing to pay for its operations has finally caught up to it. About how inadequate funding of its pensions has saddled it with huge annual payments.

    But unless you’ve been paying close attention, chances are Chicago is worse off than you think.

    The numbers are staggering. The city has about $34 billion in outstanding debt, with roughly $20 billion of that coming from its five pension plans. That’s compared with a little more than $9 billion total annual budget. The teachers’ retirement fund is short about $9.6 billion and owes an additional $6 billion to bondholders. The outstanding bonds alone exceed the system’s annual $5.8 billion budget. Overall, Chicago Public Schools has struggled to sell enough bond debt to get through the current year, and the system is even facing a possible state takeover. Both the city and the school system’s credit ratings have been downgraded to junk status.

    Click to read more ...