Week in Public Finance

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The Week in Public Finance: A New Pension Trend, a Last-Ditch Effort to Hold Lenders Accountable and More

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A roundup of money (and other) news governments can use.
BY  | MAY 6, 2016

A New Trend in Pension Funding?

Oklahoma Gov. Mary Fallin signed a bill into law this week that establishes a rainy day fund for the state’s pension system. Called the Pension Improvement Act, the law creates a fund that the state can use to help with its annual pension costs. There are no rules for when to put money in the fund, but the law does say money can only come out via legislative appropriation. It also says that money can only be used to help the state pay its full pension bill in tough economic years or to help fund cost-of-living increases for public employees.

Oklahoma isn’t the only state this year to create a separate fund to help with pension costs. Last month, Kentucky lawmakers started a $125 million permanent fund, which is similarly expected to help the state afford its annual pension payment. The state has asked for independent audits to help determine when the fund should be tapped.

The takeaway: Many states have rainy day funds to help supplement their budgets in years when revenues fall short. Theoretically, those funds could also help with paying a state’s pension bill. But the reality is that pension payments are often the target of cuts in tough economic times. What's more, pensions also lose money from investment losses during economic contractions.

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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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The Week in Public Finance: CalPERS' Rethinks Tobacco Divestment, Fact-Checking Illinois' Exodus and Income Recoveries

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

Smoking or Non-Smoking?

The California Public Employees’ Retirement System (CalPERS) struck a controversial note this week when its board announced it would study whether to get back into the tobacco industry. The nation’s largest pension fund divested from tobacco companies in 2001 on the premise that making money off a product known to cause cancer was in conflict with the fund’s social responsibility.

But a study by a consulting firm showed that CalPERS forfeited an estimated $3 billion in investment profits since 2001 because of that decision. The board will take its time -- two years -- reconsidering its decision, citing its fiduciary duty to make the best investment choices possible for retirees.

The announcement has already drawn fire from those who say CalPERS would violate its role as a health insurer by getting back into tobacco. State Treasurer John Chiang, who sits on the board and voted against the majority, said in a statement that investing in tobacco companies is harmful to public health and to the fund’s fiscal bottom line.

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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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The Week in Public Finance: Court Strikes Down Chicago Pension Reforms, Pennsylvania Ends Budget Standoff and More

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A roundup of money (and other) news governments can use.
BY  | MARCH 24, 2016

What Will Chicago Do Now?

The Illinois Supreme Court on Thursday ruled unconstitutional Chicago’s attempt to reduce its massive pension liabilities.

The decision, which affirms lower court rulings, doesn't come as a big surprise given that the state's highest court issued a similar ruling 10 months ago regarding Illinois’ proposed pension cuts. Still, it’s a blow to Chicago and its mayor, Rahm Emanuel, who had hoped the cuts would save the city hundreds of millions of dollars. Chicago is short $20 billion across five pension plans (including public schools), and the poor financial health of the retirement system has resulted in downgrades from credit ratings agencies.

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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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The Week in Public Finance: Pension Buyouts, a New Way to Pay for Family Leave and More

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A roundup of money (and other) news governments can use.
BY  | MARCH 11, 2016

San Jose’s Never-Ending Pension Battle

A former San Jose, Calif., councilman who was instrumental in convincing voters to approve pension changes in that city four years ago is now filing papers in court to protect his legislation.

Pete Constant, who's now a senior fellow with the libertarian-leaning Reason Foundation, is challenging San Jose officials’ request pending before a judge to strike down Measure B. City officials are now in talks with unions to abandon it in favor of other changes they're negotiating that wouldn't require voter approval.

By doing so, Constant said in a press release Wednesday, the city will “abandon its obligation to defend Measure B and is poised to sell-out the voters.”

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The Week in Public Finance: School Shutdowns, Trading Munis and Small Business Lending

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

Education Opens Closes Doors

One of states' top spending items is education. When lawmakers can’t agree on a budget -- or they decide to make severe cuts -- higher education often gets hurt. Sometimes, even K-12 spending takes a hit. In Illinois and Pennsylvania, ongoing stalemates over the current fiscal year’s budget may lead to school closures. In Louisiana, potential major cuts have students protesting.

Let’s start in Illinois, where three state universities have taken severe hits. Last Friday, Chicago State University sent layoff notices to all 900 of its employees. The school is making plans to end its semester early unless the state makes good on funding promises. That alarming news came after Western Illinois University announced it would cut $20 million from its budget over the next two years, while laying off 100 employees. Southern Illinois University is contemplating $40 million in cuts and has already started closing programs, such as men’s tennis and women’s golf. Most recently, Eastern Illinois University, which saw its credit rating downgraded to junk status last month, laid off nearly 200 employees, although the school president offered assurances that the university was not closing.

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The Week in Public Finance: States Dare Online Retailers to Sue, a Local Government Shutdown Threat and More

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A roundup of money (and other) news governments can use.
BY  | FEBRUARY 26, 2016

Don't Like It? Sue Me

Tired of waiting for Congress to approve a tax on Internet sales, more than a dozen states -- including Alabama, South Dakota and Utah -- are moving to pass bills or change regulations in ways that deliberately invite lawsuits from Internet retailers. The goal? Landing the issue before the U.S. Supreme Court.

Alabama, for its part, will start enforcing an old law it says allows it to tax out-of-state sellers. The state will audit companies that don’t file returns.

“We’re confident that some remote sellers will not comply and therefore it will lead to litigation,” Alabama Deputy Revenue Commissioner Joe Garrett told The Wall Street Journal. “We have been very open about what we’re doing.”

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The Week in Public Finance: Atlantic City’s Intervention, New Pay-for-Success Projects and Arizona's Pension Reform

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A roundup of money (and other) news governments can use.
BY  | FEBRUARY 19, 2016

Intervention in Atlantic City

Top New Jersey lawmakers have finally announced details of their plan to take over Atlantic City’s finances.The proposal was unveiled this week in a state Senate bill that gives more power to state financial overseers.

Atlantic City’s tax revenues have dropped dramatically in recent years as multiple casino closures have dried up the city’s main industry and revenue source.

"The intervention plan will enable the state and the city to work together to accomplish what Atlantic City can't do on its own," said Senate President Stephen Sweeney, a co-sponsor of the bill. "The city's fiscal crisis is severe and immediate. ... The state has to take a more direct role."

The bill would expand the role of the state's Local Finance Board chief so that they could not only renegotiate the struggling city's debt but also dissolve or consolidate city agencies and departments, share services with Atlantic County and sell city assets.

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The Week in Public Finance: Contradictory Pension Reports, Brewing Pension Battles and Recession Worries

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A roundup of money (and other) news governments can use.
BY  | FEBRUARY 12, 2016

Contradictory Pension Reports

Two groups published studies this week looking at whether traditional pensions or 401(k) plans are better for teachers and came up with … exactly opposite conclusions.The University of California at Berkeley looked at the state’s teacher pension system (CalSTRS) and found that for the “vast majority” of California teachers (six out of seven), a defined-benefit pension provides more secure retirement income than a 401(k)-style plan.

The study also concluded that pensions reduce teacher turnover, “which is better for students, reduces costly and time-consuming training, and increases teacher effectiveness.” It portrayed 401(k) and cash balance plans as bad for teachers because they place more risk on the retiree as their final benefit is not defined. Such plans also decrease the incentive for early and mid-career teachers to stay on the job, the report said.

Separately, TeacherPensions.org ran an analysis of teacher pensions in Illinois. It found that traditional pensions are not a good deal for teachers because they disproportionately favor those who stick around for 30 or 35 years, “at the expense of everyone else.

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The Week in Public Finance: A Muni Bond Victory in Congress and a Ukraine-Inspired Idea to Restructure Puerto Rico

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A roundup of money (and other) news governments can use.
BY  | FEBRUARY 5, 2016

Preparing -- or Not -- for a Slowdown

The financial outlook for states and localities over the next few years, simply put, isn’t as rosy as it’s been for the past couple of years. (If you even want to call the last couple of years rosy.)

Last week, we reported that states other than oil-dependent ones are dealing with mid-year spending cuts. Looking ahead, state budget forecasters are expecting tepid sales and income tax revenue growth for both 2016 and 2017. If spending continues to grow faster than revenues, the next few years could be challenging for government budgets.

“States still haven’t made up for a lot of the cutting that got done in the last six to eight years,” said Bill Pound, the executive director of the National Conference of State Legislatures. In particular, states are still trying to restore education funding while implementing higher standards, he said.

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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.