pensions

Pension Plans Had a Great Year, But Retirees Likely Won't Benefit From It

One good investment year isn't enough to fix struggling systems' problems.
BY  | AUGUST 3, 2017
A trader works on the floor of the New York Stock Exchange.
A trader working on the floor of the New York Stock Exchange. (AP/Richard Drew)

Public pension plans are reporting double-digit investment returns, and some are even finishing with record highs this year.

The high earnings are due to a robust stock market and are welcome news after two straight years of below-average returns for most pension plans. But finance experts say the investment boost likely won’t translate into an equally impressive reduction in pension debt because of the increasing cost of pensions.

"Government contributions tend to be insufficient to reduce unfunded liabilities -- even if the plans meet their target," says Tom Aaron, vice president and senior analyst at Moody's Investors Service.

Pension plans rely heavily on investment earnings because annual payments from current employees and governments aren’t enough to cover yearly payouts to retirees. As it stands, roughly 80 cents on every dollar paid out to retirees comes from investment income.

States Get Creative on Pension Funding

The latest plans in California and New Jersey have observers asking: creative solution or accounting gimmick?
BY  | JULY 19, 2017
New Jersey Gov. Chris Christie
Gov. Chris Christie has hailed the lottery legislation as a foolproof way to immediately boost the health of the pension fund. (AP/Seth Wenig)
 

Most states have enacted some type of reform over the past decade to shore up their pension funds for the future. But such changes have typically done little to make a dent in the liabilities that governments already have on the books.

As those liabilities increase, states and localities are turning to more creative solutions to ease the burden.

California and New Jersey are moving forward with plans that would boost respective pension assets, dramatically decrease unfunded liabilities and reduce payouts for the immediate future. But critics of the plans say the two states are doing nothing more than moving numbers around on paper.

In New Jersey, the state is pledging its lottery -- which an outside analysis determined was valued at $13.5 billion -- as an asset to state pension funds. The action would reduce the pension system's $49 billion unfunded liability and improve its funded ratio from 45 percent to about 60 percent, according to State Treasurer Ford Scudder. The roughly $1 billion in annual lottery proceeds, which currently go to education and human services, among other programs, will now be divvied up among state pension funds. The largest share -- nearly 78 percent -- will go to the teachers' pension fund.

Although unions grumbled about the plan, it passed with little public debate as lawmakers were preoccupied by budget negotiations. Gov. Chris Christie and Scudder have hailed the lottery legislation as a foolproof way to immediately boost the health of the pension fund. But others have been less enthusiastic about the plan.

Municipal Market Analytics' Matt Fabian dubbed it an accounting scheme, noting it also places a roughly $970 million burden on New Jersey's general fund budget to pay for the programs formerly covered by the annual lottery proceeds. "We believe that, at best," Fabian wrote, "this transaction delays honestly confronting the pension liability problem."

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The Week in Public Finance: Late Budgets, Illinois' First in Years and Risky Pension Investments

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BY  | JULY 7, 2017
New Jersey Gov. Chris Christie walks from the podium following a news conference about the government shutdown that had closed state parks and beaches to the public. (AP/Mel Evans)

Better Late Than Never

They may be late, but both Maine and New Jersey finally have budgets for fiscal 2018 after shutting down their respective governments for three days.

Early Tuesday, New Jersey Gov. Chris Christie signed a $34.7 billion budget agreement and ended a shutdown. That same day, Maine’s shutdown wrapped up when Gov. Paul LePage signed a $7.1 billion budget. The deal eliminated a lodging tax increase opposed by LePage in exchange for allocating an additional $162 million to public education.

Delaware also reached a budget deal early Sunday morning. Gov. John Carney signed a $4.1 billion budget that preserved funding for nonprofits, public health programs and schools by raising taxes on real estate transfers, tobacco and alcohol.

The Takeaway: A whopping 11 states started their fiscal 2018 this month without a budget deal, an unusually high number that reflects the growing divisiveness of tax and fiscal policy. Be it dealing with budget deficits or juggling a demand to bring funding for services back to pre-recession levels, more and more of these conflicts are resulting in statehouse stalemates.

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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: 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.

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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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The Week in Public Finance: Pay to Play, High Investment Fees and the Small Business Credit Crunch

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BY  | APRIL 14, 2017

Pay to Play? Hardly.

Pennsylvania is going with passive funds. That was the message this week from State Treasurer Joe Torsella, who says he plans to move the state’s $1 billion in actively managed public equity (stock) funds over to index funds within six months.

Index, or passive, funds are known for their lower fees and lower volatility. Rather than managed by a trader, these funds are built using computer models that are designed to mimic the performance of stock indexes like the S&P 500. Torsella expects the shift to save at least $5 million a year in fees.

The treasurer’s announcement is part of an effort to return faith in the office after his predecessor left in disgrace amid a pay-to-play scandal. Former Treasurer Rob McCord pleaded guilty in 2015 to federal charges that he used his office to influence future investment deals and other contracts as a way raise cash for a failed gubernatorial bid.

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The Week in Public Finance: Detroit's Big Pension Plan, Debating the Pension Crisis and Counties Under the Gun

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BY  | MARCH 24, 2017

Detroit Hops on Pension Bandwagon

Detroit is joining Oklahoma and Kentucky in establishing a pension reserve fund. The fund essentially acts like a savings account; it's a place for governments to set aside money to help with increasing pension costs. In Detroit’s case, the fund will help the city plan for 2024, when pension costs are expected to skyrocket from $20 million annually to $200 million a year.

Thanks to Detroit's exit plan from bankruptcy in 2014, the city isn't paying the full cost of its pensions right now. A charitable foundation and the city's water and sewer system are shouldering much of those costs until 2023.

The Takeaway:  Pension reserve funds are still largely experimental. The idea is that they will help buffer a pension system from reduced government payments during times of fiscal stress. Of course, a lot depends on how these reserve funds are cultivated. To be truly effective, they must grow to total much more than the government’s annual pension payment.

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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: Pensions Protest Bathroom Bills, a Billion-Dollar Showdown in Kansas and More

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BY  | FEBRUARY 24, 2017

Pension Funds Mess With Texas

The country’s largest public pension systems and investors are pressuring Texas officials not to approve a so-called bathroom bill introduced in January. The legislation targets transgender individuals by requiring them to use the public restroom that aligns with the gender on their birth certificate.

Pointing to North Carolina, which lost hundreds of millions in business from canceled sporting events, concerts and conventions after its bathroom bill became law last year, the group warned in a letter that Texas could meet the same fate. Already, the National Football League and the NCAA have said that the siting of future events in Texas would be jeopardized if lawmakers move forward.

The more than 30 signatories on the letter include comptrollers, controllers and treasurers of California, Connecticut, New York, Oregon, Rhode Island and Vermont, as well as major firms such as BlackRock and T. Rowe Price. Collectively, the group represents more than $11 trillion in assets.

The Takeaway: Threats like these aren't new. Called social divesting, stewards of major pensions have increasingly urged corporate boards in recent years to make policy changes, such as pressuring energy companies to move away from fossil fuels.

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

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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.

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The Week in Public Finance: Trump's Infrastructure Plan, Risky Pensions and NYC's Surprising Fiscal Health

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A roundup of money (and other) news governments can use.
BY  | JANUARY 13, 2017

How Will Trump's Infrastructure Plan Affect the Economy?

Economic impact estimates are all over the map when it comes to how much of an affect President-elect Donald Trump’s 10-year $1 trillion infrastructure proposal will have on the economy. To that end, two reports came out this week that come to completely different conclusions.

The first, by Georgetown University, says that Trump's plan could create as many as 11 million jobs. However, it cautions, the additional spending in combination with proposed tax cuts and other economic policy shifts could “overheat the economy” by increasing inflation and setting the stage for further interest rate hikes.

The Tax Foundation had a much more modest take. This is partly because the report assessed the varying degrees of economic impact the proposal would have depending on what other policy measures are implemented. The foundation looked at the impact of a theoretical $500 billion investment by the federal government through five funding mechanisms: borrowing, cutting government spending, raising excise taxes, raising the top tax rate on individual income and raising the corporate income tax.

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The Week in Public Finance: Repealing Obamacare, How a California Ruling Threatens Pensions and More

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A roundup of money (and other) news governments can use.
BY  | JANUARY 6, 2017

How Much Will Dismantling Obamacare Cost?

As leaders in Congress kick off the 115th session by assuring the public they will repeal the Affordable Care Act (ACA) in full by the end of this year, a newly released estimate puts the cost of a total repeal at roughly $350 billion through 2027.

According to the nonpartisan Committee for a Responsible Federal Budget, repealing the law's Medicare-related cuts and its tax increases -- such as the "Cadillac tax" on high-cost insurance plans -- could cost the government more than if it left the ACA in place.

But the report found that lawmakers could save money if they just repeal parts of the law. For example, if Congress only does away with the ACA's coverage provisions (mainly the Medicaid expansion), it could save $1.55 trillion through 2027.

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5 Hot Topics Hitting Public Finance in 2017

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BY  | DECEMBER 29, 2016

In what could be a tumultuous year for state and local finances, these five issues are likely to take center stage.

Tax Reform

Many Capitol Hill watchers expect federal tax reform to roll forward in some fashion in 2017 now that a Republican will be in the White House. There are two major proposals on the table that could directly result in higher costs for states.

For starters, many in Congress have been supportive of limiting the tax-exempt status of municipal bonds. Removing this tax perk for bond investors would force governments to offer higher interest rates on the debt, thus increasing their cost of paying off that debt.

It’s hard to overstate the potential impact of such a move. One estimate pegged the current tax perk savings for state and local governments at about $714 billion from 2000 to 2014. For its part, the federal government estimates it loses as much as $30 billion in potential income tax revenue each year as a result of the perk.

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The Week in Public Finance: What the Rate Hike Means, a Legal Win for Online Sales Taxes and More

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A roundup of money (and other) news governments can use.
BY  | DECEMBER 16, 2016

Movin' On Up

The Federal Reserve announced a short-term interest rate hike on Wednesday, the first one in a year and a move that was largely expected. But what wasn’t on the radar was the Fed's announcement that it plans to raise rates three more times in 2017, up from previous expectations of two rate hikes.

Given the reticence to move rates for most of the last decade, the faster pace for next year has municipal analyst Chris Mauro calling the decision a “rather splashy hawkish surprise.”

The rate hike will move the target interest rate on short-term debt up one-quarter of a percent -- to a range of 0.5 to 0.75 percent. The Fed's previous rate hike was a year ago, and that was the first one in nine years.

The Takeaway: The Fed's plan to raise rates signals that economic growth is accelerating.

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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: NYC's $3 Billion in Giveaways, Weak Revenues and Jacksonville's Pension Fix

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A roundup of money (and other) news governments can use.
BY  | NOVEMBER 4, 2016

Why New York City Gave Up $3 Billion in 2016

New York City is the first major government this year to release what it gives up in economic development-related tax incentives to corporations, following new financial reporting requirements. In its annual financial report, the city disclosed that it waived more than $3 billion in potential tax revenue in 2016 alone, mostly in uncollected property taxes.

The tax abatements represent a little under 4 percent of the city’s nearly $80 billion in general fund revenue in fiscal 2016, which ended on June 30.

The most expensive abatement was for the commercial conversion program, which cost nearly $1.3 billion in forgone revenue last year. The program encourages new housing in the city by offering a property tax discount on new construction or on commercial space that was converted into residential housing. Developments have to meet certain requirements, like reserving one-fifth of the units for affordable housing.