municipal market

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The Week in Public Finance: Alaska Avoids Its Problems, More Health-Care Pain and Municipal Defaults Are Up

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BY  | JUNE 30, 2017The Alaska State Capitol in Juneau
The Alaska State Capitol, right, sits near the water in Juneau. (Flickr/Jasperdo)

Alaska Avoids Fixing Its Budget Problem (Again)

Facing a $2.5 billion budget gap, Alaska lawmakers have sent Gov. Bill Walker a budget that once again relies on one-time fixes and a massive withdrawal from the state’s rainy day fund.

Walker had proposed a compromise fiscal package that included a combination of revenue-raising measures and spending cuts, reforms to the state’s oil and gas tax credit program, modifications to the income tax, and reductions to residents’ annual dividend payments from the state's Permanent Fund. Instead, the $4.1 billion general fund spending plan passed by lawmakers caps Permanent Fund payments to $1,100 and relies on a $2.4 billion withdrawal from the state’s once-robust rainy day fund.

Walker has repeatedly warned lawmakers that they can't keep relying on the state’s reserves to fund its annual spending plans. But lawmakers have consistently done so anyway, making multibillion-dollar withdrawals for the past three budgets.

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Is Illinois on the Brink of a Financial Armageddon?

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The state's lawmakers have until the end of the week to pass a budget -- something they haven't been able to do in years. If they don't, the consequences are dire.
BY  | JUNE 28, 2017
Illinois State Comptroller Susana Mendoza sitting at her desk.
“Doomsday is right around the corner,” says Illinois State Comptroller Susana Mendoza. (AP/G-Jun Yam)

For two years, Illinois has managed to operate without a budget. Unless lawmakers pass one by the end of the week, the state is likely staring at an unprecedented credit rating downgrade to junk status. But that's just the beginning of its financial Armageddon: Illinois is also projected to not have enough cash this summer to fund all of its basic services like schools.

According to State Comptroller Susana Mendoza, Illinois' flagging revenues and shrinking liquidity likely mean the state will soon be $185 million short on meeting even its basic, court-ordered obligations. “Doomsday is right around the corner,” she says. “It means any number of things: road projects stopping, pension [payments] being skipped, employees not getting paid -- which will likely make people not show up to work.”

Mendoza is not alone in voicing her concerns.

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The Week in Public Finance: Bleak Pension Forecasts, Down on Stadium Debt and More

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BY  | JUNE 23, 2017
The 49ers stadium. (Flickr/Travis Wise)

Pensions: Best Case, Worst Case

In the best-case scenario, governments' pension costs will significantly increase over the next two years, concludes a new report by Moody's Investors Service. The report, which analyzes 56 state and local pension plans with liabilities totaling more than $778 billion, finds that under the best circumstances governments' pension bills would increase by 17 percent assuming investment returns totaling about 25 percent over three years.

Meanwhile, total unfunded liabilities would remain relatively flat, shrinking by about 1 percent. The paltry progress is in part due to some major pension plans changing their accounting assumptions which have increased their reported liabilities.

In the worst-case scenario, pension plan returns would continue to look a lot like they have in the past two years. That is, eking out a little more than a 2 percent return between 2016 and 2019. If that were the case, Moody's predicts unfunded liabilities could go up by nearly 60 percent and governments' bills would swell by roughly half.

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The Week in Public Finance: A Rate Hike, Unpredictable Taxpayers and Stress-Testing Budgets

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BY  | JUNE 16, 2017
The Federal Reserve headquarters in Washington, D.C.
The Federal Reserve headquarters in Washington, D.C. (Shutterstock)

A Rate Hike

The Federal Reserve announced this week that it's raising interest rates by one quarter of a percentage point, which is its second short-term increase of the year. The move was widely expected but comes amid expectations that inflation is running well below the central bank’s 2 percent target for 2017.

The Fed also released more details on how it plans to unwind its $4.5 trillion portfolio of bonds that includes Treasurys, mortgage-backed securities and state and local government debt. Each month, the Fed receives billions in principal payments from its various holdings, and much of that repayment is then reinvested in more bonds and other securities. Now, the Federal Open Market Committee -- which is part of the Federal Reserve -- said it intends to gradually reduce the Fed’s securities holdings by decreasing its reinvestment of its monthly principal payments it receives.

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The Week in Public Finance: Kansas' Experiment Ends, Alaska Still Has No Budget and Keeping Track of Debt

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BY  | JUNE 9, 2017

Kansas is rolling back its controversial 2012 income tax cuts after the Republican-controlled legislature this week succeeded in overriding a veto by GOP Gov. Sam Brownback.

The state is facing a $900 million budget shortfall and has struggled under budget deficits since the tax cuts went into effect. With the new legislation, the state’s income taxes will increase, although most tax rates will still be lower than they were before the 2012 cuts. The increases are expected to generate more than $1.2 billion for the state over the next two years. Opponents of the action call it a $1.2 billion take hike on Kansans.

On Thursday, the ratings agency Moody's Investors Service applauded the legislature's move, calling it "a significant step" toward achieving a sustainable budget.The action comes four months after lawmakers failed to override another Brownback veto preserving a tax loophole that lets scores of business owners pay no income tax.

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The Week in Public Finance: Pension Reform in Texas, Fitch Lowers Expectations and Illinois Downgraded Again

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BY  | JUNE 2, 2017 

Even the Pension Deals are Big in Texas

There has been a big break in Houston's and Dallas' pension crises over the past week: The Texas Legislature approved reforms that require all sides to pony up big.

In Houston, the changes will cut the city’s $8 billion unfunded liability in half. Municipal and public safety unions agreed to $2.8 billion in benefits cuts. Meanwhile, Houston will issue $1 billion in pension bonds to boost the system’s balance. It will also stick to a payment plan -- that includes capping the city's future pension costs -- to pay off the remaining unfunded liability over 30 years.

Similarly, Dallas’ police and fire workers will shoulder $1.4 billion in benefit cuts over the next 30 years and more than $1 billion in additional contributions from their pay. For its part, the city will be required to significantly boost its annual payments into the fund, starting with more than $150 million next year. Mayor Mike Rawlings will also get to pick six of the 11 trustees on the currently union-dominated pension board, whose poor investments contributed to more than $1 billion in losses.

The Takeaway: The common theme to these reforms is shared sacrifice. While unions and officials are happy to have a plan in place, no one is pleased about what comes next. "This is not a time to high-five," Dallas Police Association Vice President Frederick Frazier told the Dallas Morning News. "This is a time to pull the boots up and get back to work."

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The Week in Public Finance: Recalculating Pension Debt, Hartford Discusses the 'B' Word and Prudent Rainy Day Policies

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BY  | MAY 19, 2017

A new analysis by Josh Rauh at Stanford University's Hoover Institution says state and local governments’ collective unfunded pension liabilities are actually about three times the amount they claim. Rauh, a finance professor who has long been a critic of public pension accounting, arrived at his figure by assigning pension plans a much lower assumed investment rate of return.

Pension plans in 2015 collectively reported about $1.3 trillion in unfunded liabilities. In other words, they have about 72 percent of the assets they need to meet their estimated total liabilities. That figure assumes plans will earn an average of 7.4 percent each year on their investments.

Rauh, pointing to the wild swings of the stock market and the fact that pensions are putting more of their assets into volatile, alternative investments, says that assumption is too risky. He argues it's more responsible to consider a rate of return closer to what long-term bonds earn: slightly less than 3 percent. Under those assumptions, Rauh says unfunded U.S. public pension liabilities would roughly triple to $3.8 trillion, or less than half-funded.

Fresh Off Another Downgrade, Connecticut Has a Plan to Lower Borrowing Costs

But observers disagree about whether it will work.
BY  | MAY 17, 2017

Besieged by budget shortfalls, Connecticut's credit rating was downgraded in recent days by Fitch Ratings and Moody’s Investors Service. The downgrades were the state’s fourth and fifth in the past year alone. But if State Treasurer Denise Nappier gets her way, that credit hit might not matter the next time Connecticut goes to sell bonds.

Nappier wants the state to start offering investors revenue bonds that are paid back directly from the state’s income tax revenues. Called tax-secured revenue bonds, these new bonds would be offered in place of general obligation bonds, which are backed by the state’s general revenue collections. Nappier’s office believes the dedicated income stream would mean the bonds would fetch ratings as high as AAA, resulting in a better interest rate and lower debt service costs.

The idea has received mixed reviews.While some observers call it a product that will offer comfort to bondholders wary of Connecticut’s troubles, others say it’s a “financial engineering gamble” designed to game the market. “To create something out of nothing -- they’re not being more fiscally responsible by doing it this way,” says Municipal Market Analytics’ Lisa Washburn.

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The Week in Public Finance: Revenue Relief in 2018, Good GDP News and the Debt-Shy

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BY  | MAY 12, 2017

A Revenue Pick-Me-Up?

For the past two fiscal years, tax revenue has lagged. A new analysis, though, predicts states may soon see some relief.

A report this week by S&P Global Ratings says the climate may be right for “a revenue rebound” in fiscal 2018. A big reason, writes analyst Gabe Petek, is that investors may have held out in 2016 on cashing out stocks because they hoped a Trump presidency would give them a more favorable tax climate for their capital gains. With tax reform now looking like it’ll take longer, investors are more likely to cash out sooner. Petek says job growth and recent interest rate hikes will also benefit state income and sales tax growth in fiscal 2018.

That's good news given that a new analysis by the Nelson A. Rockefeller Institute of Government found that state tax revenue last year grew just 1.2 percent and actually declined by one-tenth of a percent after adjusting for inflation. It’s the weakest performance since 2010 and a major drop from 4.7 percent growth in fiscal 2015.

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The Week in Public Finance: Ballmer's Data Trove, Grading Pension Health and a New Muni Bond Threat

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BY  | APRIL 21, 2017

This Goes Way Beyond Open Data

You might not peg former Microsoft CEO and current owner of the NBA’s Los Angeles Clippers as a government data geek. But Steven Ballmer stepped into that role in a grand scale this week when he unveiled his privately funded, years-long project to help citizens easily track how government spends their money.

Called USAFacts, the website contains federal, state and local aggregated data on revenue and spending, as well as on debt, population, employment and pensions. Want to know about pension debt? Two quick searches reveal that unfunded liabilities in state and local retirement systems have more than quadrupled since 2000. At the same time, the median age in the country has increased by 2.5 years.

As a businessman used to the corporate world, Ballmer wants to make government financial reports more readable. To that end, the site has introduced the first government "10-K report" -- the private sector's version of an annual financial report. It aggregates data from all U.S. governments and gives progress reports on government programs, provides financial balance sheets and gives data on key economic indicators.

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How Refinancing Debt Can Help Pensions

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North Carolina wants to use existing low rates to shore up retiree pensions and health-care debt.
BY  | MARCH 8, 2017

In the low interest rate environment, states and localities have been saving billions by refinancing old debt. In most cases, the savings have benefited the general fund balance. But in North Carolina, State Treasurer Dale Folwell is making a push to instead use those savings to pay down pension and retiree health-care debt.

Starting this spring, Folwell plans to refinance “every dollar we possibly can.” He'll ask the General Assembly to divert the savings to the treasurer’s office, where he'll then divvy up the extra dollars: 15 percent goes into the pension fund and 85 percent goes toward retiree health-care debt, which has a larger unfunded liability.

The approach has garnered rave reviews, but some question just how big a dent any such savings can make in an unfunded liability that in North Carolina totals nearly $38 billion between retiree pensions and health care.

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The Week in Public Finance: States Vulnerable to NAFTA Changes, New Amazon Taxes and a Credit Ratings Spat

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BY  | FEBRUARY 3, 2017

 

Where a Change to NAFTA Could Hurt the Most

When it comes to trade, a handful of states rely heavily on Canada. That relationship could significantly change if President Trump follows through on his intention to renegotiate the North American Free Trade Agreement (NAFTA).

In an analysis, RBC Capital Markets’ Chris Mauro looks at which states are the most exposed to changes. As it turns out, half of Canada’s exports wind up in the U.S., and 35 states have Canada as their top export destination. Michigan and Illinois are the top destinations, absorbing 16 percent and 11 percent, respectively. Meanwhile, more than two-thirds of North Dakota’s goods land in Canada and nearly half of Maine, Michigan and Ohio’s exports are sent there.

The Takeaway: Trump has called NAFTA a bad deal for the U.S. Although no specifics have been outlined, it’s safe to assume that he would promote more protectionist policies. In his analysis, Mauro warns that “the risk that Canada implements countervailing duties or that the U.S dollar appreciates significantly would severely affect the competitiveness of these U.S. states.”

Startups Seek to Democratize the Muni Market

They're bringing in new investors, big and small, to disperse the power and lower interest rates. It's already paying off for some governments.
BY  | DECEMBER 15, 2016

For all the post-recession financial market reforms, few ultimately made their way to the municipal bond market. For the most part, the muni market remains a low-tech place by Wall Street standards, and one that's still largely controlled by the same group of big investors.

"The muni market has a lot to do with relationships, power and influence," said Rob Novembre, a former trader who has spearheaded a new alternative bond trading system. "The bigger you are as an account, the more attention you get from sellers. If you buy bigger blocks [of bonds], that gets you more power."

Thanks to Novembre's new startup and another in San Francisco, though, that's starting to change. The two companies are not only set to give the market a tech update but also to bring it more buyers. The idea is that more buyers will increase demand for municipal bonds and, in turn, will net governments lower interest rates on their debt.

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The Week in Public Finance: Federal Budget Chaos, a Bankruptcy Win and Pension Portfolios

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BY  | DECEMBER 9, 2016
Chaos on Capitol Hill ... and in Statehouses

As state lawmakers begin preparing for their fiscal 2018 budgets, their biggest challenge is in the unknown. With Donald Trump’s election, the future for key state and local funding is almost anybody’s guess.

With Trump in the White House next year, Stan Collender, author of The Guide to The Federal Budget, predicts that a Republican-controlled Congress will move quickly on making major changes before the 2018 midterm elections. But after this unpredictable election, few are willing to predict what exactly those changes will be. All we know now is what’s on the table.

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The Week in Public Finance: A Run on Pensions in Dallas, Connecticut's Warning and a Threat to Muni Bonds

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BY  | DECEMBER 2, 2016

Dallas' Pension Problem

Dallas Mayor Mike Rawlings is calling on pension officials this week to halt what is amounting to a bank run on the fire and police pension fund. The run, which Rawlings testified has totaled $500 million withdrawn in 2016, is spurred in part by concerns the pension plan’s value is being inflated. Roughly half of the withdrawals have come in a recent six-week span.

Rawlings has asked that pension fund officials suspend so-called DROP payments, which are retirees’ own savings invested in the fund and are separate from their fund-administered pension payments.

For their part, pension fund officials blame the mayor for the run in the first place. Pension Board Chairman Sam Friar noted that Rawlings and other city leaders had refused the fund’s earlier requests to make public statements designed to boost confidence in the fund. “Had they done that, most of this money would not be gone. Simple, simple solution," Friar told the local television station KXAS. “But they refused to do that.”

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The Week in Public Finance: Trump's Impact on Muni Bonds, Panning Social Investing and More

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BY  | NOVEMBER 18, 2016

2 Takes on Trump's Impact on Muni Bonds

 President-elect Donald Trump’s proposed policies could partially change the landscape of the municipal bond market for investors in two primary ways.

First, his election could put Build America Bonds (BABs) -- or a program like it -- back on the table for government issuers. BABs were introduced in 2009 and 2010 by the Obama administration as a way to stimulate the economy and create jobs. Republicans on Capitol Hill killed the program, but Trump has spoken favorably about it. He's interested in stimulating more investment in infrastructure.

Unlike regular municipal bonds, BABs aren’t tax exempt, making them more appealing to investors such as international bondholders or institutional investors who aren’t eligible to claim an exemption. Thus, they broaden the municipal bond market.

Second, an analysis by the Court Street Group Research (CSGR) says Trump’s income tax plan could affect the municipal market because it would eliminate or reduce the tax exemption for municipal bondholders. “The CSGR approaches the reality of a Trump administration with some trepidation as it applies to municipal bonds,” the analysis said.

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The Week in Public Finance: What a Trump Presidency Could Mean for State and Local Finances and More

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BY  | NOVEMBER 11, 2016

What a Trump Presidency Could Mean for State and Local Finances

An early review of Donald Trump's health-care and trade policies reveals some potentially bad news for state and local governments. According to Fitch Ratings, Trump's proposals would "significantly lower federal transfers to state budgets and could negatively affect economic growth and revenues."

Specifically, Trump has proposed converting Medicaid funding into a block grant program, which Fitch says would lead to much lower federal funding for the states. A Congressional Budget Office (CBO) assessment of earlier Medicaid block grant proposals projected declines of between 4 and 23 percent in federal funding over 10 years.

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The Week in Public Finance: School Funding's Lost Decade, Teacher Pension Pressures and More

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BY  | OCTOBER 21, 2016

A Lost Decade for Public School Kids

New data this week shows that nearly half of all states are providing less in per-pupil funding today than they were before the recession in 2008. Taking inflation into account, eight of the 23 states have cut funding per student by about 10 percent or more, according to a report by the Center on Budget and Policy Priorities (CBPP).

What's more, five of those eight -- Arizona, Kansas, North Carolina, Oklahoma, and Wisconsin -- have cut education funding while also cutting income taxes, resulting in tens or hundreds of millions of dollars in lost revenue each year.

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The Week in Public Finance: Troublesome Sports Arenas, Buying Muni Bonds and California's Tenuous Recovery

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BY  | SEPTEMBER 23, 2016

Nebraska Town Hit With 'Superdowngrade'

The tiny town of Ralston, Neb., was surprised by a seven-notch "superdowngrade" this week when its arena bonds were sent hurdling into junk rating territory. S&P Global Ratings said it moved the rating from A+ to BB because of the financial strain the building is placing on the city of roughly 6,000 people.

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The Week in Public Finance: Pensionomics, Hidden Bank Loans and Private Equity Fees

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BY  | SEPTEMBER 16, 2016

Do Pensions Help the Economy?

A new study on how pensioners spend their money will likely give a boost to those who want to keep traditional, defined benefit pension plans in the public sector.

Published this week by the nonprofit National Institute on Retirement Security (NIRS), the analysis on pension retiree spending in 2014 estimates it resulted in $1.2 trillion in total economic output. The total is based on about a half-trillion in benefits paid to public and private pensioners in 2014. State and local pension benefits account for about half ($253 billion) of those benefits.