Management

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The Week in Public Finance: Hot Munis, Cooling Off Creditors and Warming Up to Facebook

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A roundup of money (and other) news governments can use.
BY  | JULY 22, 2016

It’s July and Muni Bonds Are Hot

The municipal bond market could be off to its best start since 2010, when federal policies helped fuel new issuance. During the first six months of this year, a total of $221 billion in bonds have been brought to market by state and local governments, according to data from the Securities Industry and Financial Markets Association (SIFMA). The total includes new bonds and refinanced ones.

Most of that activity has come from the second quarter of the year, specifically in May and June when the volume of new bonds in each month was the highest since 2008, according to an analysis by RBC Capital Markets’ Chris Mauro. Even Puerto Rico’s recent default on a $2 billion debt payment has not appeared to phase investors or hurt interest rates.

The market is currently on pace to finish the year with over $430 billion in issuance. But with more than five months to go before the end of the year, anything could happen -- particularly with a volatile presidential contest underway. Last year, the pace cooled in the second half of the year, with the value of total bonds issued finishing just shy of $400 billion. Still, Mauro said he is increasing his original prediction of new bond volume to somewhere between $400 billion and $425 billion.

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Puerto Rico's Warning for States, Cities: You Might Be Next

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Gov. Alejandro Garcia Padilla said the island's rescue might simply be a harbinger of things to come on the mainland.
BY  | JULY 14, 2016

President Obama recently signed into law a highly anticipated -- and much debated -- rescue bill for debt-laden Puerto Rico. While the bill has its detractors, it marks a positive step toward the promise of recovery for the island. But the bill's impact could go far beyond the commonwealth's shores.

Puerto Rico, like states and many cities, can't legally declare bankruptcy. Saddled with $70 billion in debt, Gov. Alejandro Garcia Padilla's administration has spent the last few years unsuccessfully trying to reach an agreement with creditors. During that time, the commonwealth watched its tax base decline as residents fled stateside and Puerto Rican government entities defaulted on debt.

That's what life without bankruptcy protection is like for governments, Padilla said this week in a speech at the Brookings Institution in Washington, D.C. He went on to suggest that Puerto Rico, with its smaller economy and population size, might simply be farther along on a path other U.S. governments are also traveling. "We are only ahead of the curve -- the curve that looms for many states and municipalities," he said. "We are forced to try the route that others have not tried before, to knock on the doors that others may need to approach in the not-so-distant future."

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Who Should Police Municipal Markets?

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A questionable bond sale in Illinois has left some wondering why there's no one to stop financially troubled governments from borrowing.
BY  | JUNE 30, 2016

Borrowers have long assumed that banks and other traditional lenders will only loan them as much money as they can responsibly afford. Almost a decade ago, the subprime mortgage crisis shattered that belief. But it might still persist in the municipal market.

Take Illinois, whose fiscal woes are no secret. It has the lowest credit rating (BBB+) -- by far -- of all 50 states, its pensions are among the worst-funded in the country and it's entering its second fiscal year without a budget. Yet earlier this month, Illinois borrowed more than a half-billion dollars from municipal market investors with relative ease.

The state paid a higher interest rate for its troubles. But thanks to the high demand for municipal bonds these days, the rate was actually lower than the one Illinois paid on its last bond issuance in January.

"That's the biggest weakness of the municipal market," said Matt Fabian, managing director for Municipal Market Analytics. "We will help issuers borrow as much as they say they want, whether or not they can afford it."

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Things You Didn't Know About Detroit's Historic Bankruptcy

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Nathan Bomey, author of a new book on the largest Chapter 9 filing in U.S. history, reveals the unsung heroes and true timeline of the event.
BY  | JUNE 16, 2016

Nearly three years ago, Detroit's $18 billion bankruptcy -- the largest municipal Chapter 9 filing in American history -- captured the nation's attention. Detroit, like so many other Rust Belt cities, had suffered from decades of economic decline, as well as shrinking economic support from the state; mismanagement from city leaders that hurt the public trust and shattered finances; and the exodus of more affluent and generally white residents to the suburbs.

These effects and more are captured in the new book Detroit Resurrected. It's the first book to extensively chronicle the city's story into and out of bankruptcy, and it's written by journalist Nathan Bomey, who was the Detroit Free Press' lead reporter on the city's bankruptcy and is currently a writer at USA Today. Bomey, who spoke with Governing about the book, based it not only on his extensive reporting at the time but also on revealing and frank post-bankruptcy interviews with key players.

The following interview is edited for length and clarity.

I didn't know until reading your book that bankruptcy was being talked about in Detroit several years before 2013.

It was. In Detroit, the promises to retirees were actually broken many years before the bankruptcy process. I think the problem was [that by the time bankruptcy was considered], political leaders didn't really have the political will to make the tough decisions to avoid this type of process. So they put it off. And one factor in Detroit's bankruptcy that has been widely misunderstood is that the emergency manager law was uniquely tailored to make a bankruptcy go fast. Kevyn Orr got the job about four months before the city ultimately filed for bankruptcy. I think looking back on it, most people would agree that by the time he was installed, bankruptcy was probably inevitable.

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The Week in Public Finance: Punishment for Illinois, Budget Battles and New Jersey's Win

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A roundup of money (and other) news governments can use.
BY  | JUNE 10, 2016

A Battle Over Illinois’ Downgrade

Illinois was downgraded this week to two steps above junk status by Moody’s Investors Service. The downgrade is largely due to the state’s inability to pass a budget for the past year and a half. A political stalemate has crippled lawmaking in the state and Illinois -- already the lowest-rated state -- is being docked now with a Baa2 rating. The state’s current budget gap has only worsened over the past year. The structural budget deficit, including what Illinois is supposed be spending on pensions but isn’t, amounts to 15 percent of total general fund expenditures, Moody’s said. A day after the Moody's downgrade, Standard & Poor's also downgraded Illinois.

Apparently unperturbed by the fact that its overwhelming debt is what got it into this pickle, Illinois plans to borrow a half-billion in bonds later this month. The downgrade will likely increase the interest rate Illinois will have to pay on those bonds and impact the state’s outstanding $26 billion in debt.

Not long after the downgrade, the world’s largest money manager said investors should boycott Illinois’ upcoming sale.

“We as municipal market pa

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The Week in Public Finance: A Demand for Diversity in the Board Room, Bad Credit News and More

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A roundup of money (and other) news governments can use.
BY  | JUNE 3, 2016

A Demand for Diversity in the Board Room

State and local finance officers across the country got together this week to pressure corporations about the lack of diversity on their governing boards. The group, made up of 14 pension fund fiduciaries -- six of whom are women or minorities -- said boards “should cast wide nets in their search for the best talent and include nominees who are diverse in terms of race, gender and LGBT status.”

Board diversification in recent years has been slow -- or even nonexistent. In fact, the percentage of all-white boards has actually increased over the past decade from 10 to 14 percent. Overall, white directors hold 85 percent of the board seats at the 200 largest S&P 500 companies, and men occupy 80 percent.

“Maintaining leadership that is primarily white and male means these companies are potentially missing out on the many benefits diversity can bring to the board room," said San Diego County Treasurer-Tax Collector Dan McAllister.

The Takeaway: This isn't the first time public finance officials have used their power to advocate for change.

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The Fight for Jobs Intensifies Between Kansas and Missouri

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Nowhere are tax incentives more complicated -- and some say pointless -- than in Kansas City.
BY  | MAY 12, 2016

In major metropolitan areas, using tax incentives to lure businesses from one part of the region to another can sometimes seem like a big family fight. In the Washington, D.C., area, for instance, several jurisdictions are vying to become the new headquarters of the FBI, which is currently located in the district. If the FBI moves outside of D.C., Maryland or Virginia can claim "new" jobs. But the net gain to the metro area is negligible, save the temporary work created by new construction.

In nowhere does this chess match seem more futile than in Kansas City, which sits in both Kansas and Missouri. The two states have long competed with each other to woo businesses across the state line. AMC Theaters, Applebee's and JP Morgan Retirement are just a few businesses that have crossed the border in recent times. So much money is involved that the tax incentives battle has been dubbed the Kansas City Border War.

But recently there's been a concerted effort to call a cease fire. In 2014, the Missouri General Assembly passed a bill that effectively ended the state's tax incentive program in Kansas City after a group of 17 businesses in the two-state region lobbied both governors for it. For the law to go into effect, though, Kansas has to approve a similar bill. The state has until Aug. 28 to do so; otherwise, the "deal" is dead.

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The Week in Public Finance: Broke Puerto Rico, Slow Financial Disclosures and Trouble in Kansas

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A roundup of money (and other) news governments can use.
BY  | APRIL 29, 2016

Broke in Puerto Rico

Congress stalled this week on legislation that could help Puerto Rico restructure its debts. That leaves the financially strapped U.S. territory continuing to try and piece together agreements with its creditors.

The commonwealth’s next debt payment, which is nearly a half-billion dollars in securities, is due Monday, and it's expected to default. There are reports that Puerto Rico’s main financing arm is negotiating a deal with creditors to pay slightly less than half of what is owed. But even so, credit rating agencies still view such negotiated cuts as a default on debt.

Puerto Rico, however, won't get out of its jam with a series of deals. In total, the territory owes about $70 billion in debt that it can’t pay.

Congress is considering installing a federal oversight board, among other financial reforms, but lawmakers this week said they don’t expect to move on that legislation until July. Absent a federal oversight board, Puerto Rico is vulnerable to lawsuits from creditors. If that happens, that would likely drag down any restructuring process even further, according to an analysis this week by Moody’s Investors Service.

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Pension Envy: Lessons From Well-Managed Plans

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Bad press has blurred the fact that not all public pension plans are underfunded and overly generous.
BY  | APRIL 28, 2016

Public pension plans have gotten a lot of bad PR in recent years. And while some of that bad press is certainly warranted, it's wrong to assume they're all a failure. In fact, there are many plans across the country that are humming along fine.

Case in point: Missouri's Local Government Employees Retirement System, or LAGERS. Last year, a reporter for the Springfield News-Leader wanted to know why the city's pension plan was just 80 percent funded -- far below the fund's aggregate 94 percent funding level. LAGERS has the ability to compel payments from cities, so the reporter, Amos Bridges, wondered if the fund was letting Springfield off the hook.

As it turned out, LAGERS wasn't. The current funding level only reflected active employees; It was closer to 90 percent when incorporating retirees. Additionally, LAGERS had Springfield on a payment plan to get back to a fully funded status.

"Defeated in my search for a scandal, I had to admit: These LAGERS people seem to know what they're doing," Bridges wrote.

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The Week in Public Finance: Puerto Rico Drama and a Corn-y Kind of Tax Credit

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A roundup of money (and other) news governments can use.
BY  | APRIL 15, 2016

Beyond the Numbers in Puerto Rico

The drama over whether Congress should allow financially strapped Puerto Rico to restructure its debts has kicked up a notch after the recent announcement that the territory’s main financier was putting a moratorium on paying its debt, among other things. This week, a group called Main Street Bondholders launched an ad campaign calling the proposed federal legislation a “bailout” that “removes any incentive for Puerto Rico to remain at the table with bondholders.” The group says it represents the interest of retiree investors.

In response, House Speaker Paul Ryan issued a lengthy statement charging that “big-money interest groups on Wall Street” were dumping “a lot of money toward sabotaging this legislation in order to force a last-minute bailout upon Puerto Rico.” That would put U.S. taxpayers on the hook for creditors’ “bad loans,” Ryan said, which is what Congress is trying to avoid.

Anytime someone mentions “big-money interest groups on Wall Street,” it can be tempting to assume they're referring to Republican mega-donors Charles and David Koch. In this case, that's correct: The Main Street Bondholders were formed by the 60 Plus Association, a conservative small-government group that spent millions in the 2012 and 2014 election cycles to help elect conservative or Tea Party candidates. Much of its funding came from conservative groups with ties to the Koch Brothers. The group has been quiet until recently and no information is readily available yet on its funding and expenses this election cycle.

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The Week in Public Finance: Rating Downgrades, the War on Cities and More

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A roundup of money (and other) news governments can use.
BY  | APRIL 8, 2016

Downgrade Week

Louisiana and Atlantic City, N.J., were slapped with credit rating downgrades this week as both continue to struggle with revenue shortfalls and other budget problems.

In the Bayou State, lawmakers are still stuck with a $750 million budget gap for the 2017 fiscal year, which starts on July 1, even after approving some tax hikes this year. Fitch Ratings said the current budget deficit has been caused in part by “overly optimistic revenue expectations” and by not budgeting enough for Medicaid. The agency downgraded Louisiana’s rating from a AA to a AA-, noting the budget problem has only worsened thanks to a prolonged plunge in oil prices.

The rating downgrade affects nearly $4 billion in outstanding debt. It will also play a role in the interest rate the state gets later this month on about a half-billion in bonds it plans to refinance. The rating comes after Moody’s Investors Service downgraded Louisiana earlier this year, citing the state’s budget issues.

Gov. John Bel Edwards, who pushed for and won some tax hikes this year, largely laid blame with his predecessor Bobby Jindal and the state legislature. Edwards plans to call a special session to address the shortfall, the second in a year.

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A Missing Opportunity to Fix Government Finances

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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.

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Chicago’s Shockingly Bad Finances

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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.

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The Week in Public Finance: Good and Bad News for Pensions and for Atlantic City

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A roundup of money (and other) news governments can use.
BY  | MARCH 18, 2016

Pension Plan Peril

The stock market has been kind to pension plans in recent years. But that ended last year: Pension plan returns for fiscal 2015, which mostly closed on June 30, were meager. Many were below 5 percent, lower than their target rate of 7 or 8 percent. To make matters worse, that was before the stock market turmoil that began late last summer, which means that when most pensions close out fiscal 2016 at the end of June, their returns will again fall short.

The two-year hit will effectively wipe out the funding improvements seen in 2013 and 2014, predicts Moody’s Investors Service. In a report released Thursday, the agency analyzed 56 state and local government pension plans with total assets of more than $2 trillion. The report says that under the most optimistic scenario, where investment returns average 5 percent for the year, plans’ overall liabilities will still increase by 10 percent. This is because returns are falling short.

The most pessimistic scenario? That plans report an investment loss of 10 percent. In those cases, Moody’s says that could bump up liabilities by more than half, forcing governments to have to put in more money over the next few years than was previously forecast. With a number of governments already balking at their pension costs, that’s going to be a problem. A little over half of the plans Moody’s sampled already aren’t receiving their full payments from their contributing governments.

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Q&A With Gov. Bill Walker on Fixing Alaska’s Finances

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The former businessman talks about betting his political career on fixing the Last Frontier’s finances.
BY  | MARCH 10, 2016

Alaska Gov. Jay Hammond and others knew all the way back in the ‘70s the dangers of relying financially on a finite resource. So when oil money began flowing into state coffers, Hammond and the legislature created in 1976 the Permanent Fund, which gets a share of the state’s oil revenues every year. The fund was seen as a source of income for when the oil ran out. Lawmakers can’t touch the initial investments -- just the earnings, which get divvied up and distributed annually to every resident who receives about $2,000.

“You have to remove the money,” Hammond said in 1980. “Put it behind a rope where you cannot utilize it for flamboyant expenditures.

Today Alaska still relies on oil revenues to fund most of its day-to-day operations, but nearly two years ago, oil prices began steadily declining. Since then, the state has withdrawn more than $6 billion from its substantial reserves and cut $1 billion in spending to close budget gaps. Last week, Moody’s Investors Service became the second ratings agency this year to strip Alaska of its AAA rating.

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How Oil States Are Dealing With Sinking Prices and Revenue

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The states most dependent on oil tax revenues have different ways of dealing with the industry slowdown.
BY  | FEBRUARY 4, 2016

Oil prices are now at their lowest level in 12 years -- below $30 a barrel. That's great news for consumers, but not for the states that depend on oil tax revenues.

The falling price of oil, which has declined more than 60 percent since June 2014, has some states scrambling. With no end in sight, states that are more dependent on the industry simply can't replace the revenue by withdrawing from their substantial rainy day funds.

Oil, natural gas and mining account for about 10 percent or more of gross domestic product in eight states: Alaska, Louisiana, New Mexico, North Dakota, Oklahoma, Texas, West Virginia and Wyoming. Last year, total tax revenues in the eight states declined by 3.2 percent, according to a new analysis by the Nelson A. Rockefeller Institute of Government. In contrast, the remaining 42 states reported a 6.5 percent increase in total tax revenues.

Although most of these states tend to budget conservatively, the good years for oil had an impact on their finances.

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The Week in Public Finance: How Budgetless Illinois Still Runs, Spending Cuts Coming and St. Louis' Not-So-Big NFL Loss

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A roundup of money (and other) news governments can use.
BY  | JANUARY 29, 2016

Avoiding the Bill Collectors

Illinois is one of two states that still has no budget this year. How does it keep running? Partly, by letting its bills stack up.

Illinois law lets the state defer paying bills until the following fiscal year -- a tool the state has used liberally for years. Because of that, the state’s unpaid bills have now climbed to a total of $6.6 billion, a backlog equal to 19 percent of what the state spends from its general fund. “If the state fails to address its structural imbalance for subsequent years,” warned Moody's Investors Service, “the payment backlog will swell to $25 billion, or 64 percent of expenditures” over the next three years.

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Having a Rainy Day Fund, But Not Knowing How to Spend It

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Some states have millions in savings that they don't know when or how to use. A new report suggests ways to better manage their money.
BY  | JANUARY 28, 2016

As state lawmakers head into the budget-writing season, some will face the unpleasant task of figuring out how to fill projected shortfalls. In most cases, that conversation will include a debate on whether to withdraw cash from the state’s rainy day fund.

Some states count on their rainy day savings during recessions to limit budget cuts, while others strive to put away enough savings to avoid cuts altogether. But many states lack clear guidance about when to take money out of rainy day accounts, for what purposes and how much.

Rainy day funds have been around for decades. Among the 46 states that have them, only half have laws that clearly express what they're seeking to achieve with them, according to a recent Pew Charitable Trusts report. Two states -- Wyoming and Kentucky -- lack any statutory or constitutional direction about their purpose or proper use.

That means legislators have to argue each time finances become a problem.