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.
The Takeaway: The worst-case scenario may sound far-fetched, but it’s already happened to some extent. Moody’s notes that the aggregate net pension liability of $778 billion in 2016 represents a 30 percent increase from 2015, primarily due to poor investment returns and lower-than-required contributions.
The report warns that the scenarios show the “potential downside from investment losses remains very significant and somewhat likely” for governments. “Exposure to unfunded pension liabilities on state and local government balance sheets is already at or near all-time highs for many,” the report says. “Similarly, cost burdens have also never been higher and are slated to continue increasing for the foreseeable future.”
Stadium Bonds on the Chopping Block
A bipartisan bill introduced this month in Congress would ban using any tax exempt municipal bond proceeds to finance new sports facilities. Democratic Sen. Cory Booker of New Jersey and Republican James Lankford of Oklahoma unveiled the proposal, calling the perk a federal tax break for "multimillion-dollar businesses." It mirrors a House version introduced in March by Republican Rep. Steve Russell of Oklahoma.The senators added in a press release that their bill “unties the hands of local governments to finance their stadium subsidies with taxes on tickets and in-stadium purchases -- in other words, allowing states to target taxes on the people who actually use and benefit from the subsidy.”
The Takeaway: Following the stadium and arena building boom in the 1990s and 2000s, public opinion regarding publicly financed stadiums has soured. Moreover, studies have been inconsistent about whether taxpayers ever see a return on their investment with new sports facilities.
Municipal Market Analytics' Matt Fabian notes that removing that perk could be a drag on some public finance operations. "The bill would likely be a positive for the municipal industry at large," he says, adding that's because "in removing a small but problematic corner of our market, it would help legitimize the remainder."
Still, the bill's passage looks unlikely as the Trump administration and Republican Congress are pushing for a broadening of these types of bond tax exemptions.
A Disclosures Diet
It’s been nearly a year since the Securities and Exchange Commission (SEC) pressured governments to be more timely with their financial disclosures to investors.Unfortunately, the effort hasn’t been resulted in much improvement. In fact, says the National Federation of Municipal Analysts’ Anne Ross, financial disclosures have become “a bit thin” since the SEC concluded the Municipalities Continuing Disclosure Cooperation Initiative (MCDC).The federation hopes to help remedy this surprising trend with a newly released set of best practices for local governments, which include making certain information readily available in existing financial statements, such as whether the locality is eligible for any state financial oversight programs and whether its state imposes any restrictions on its ability to file for Chapter 9 bankruptcy. The federation also encourages disclosing financial information on a interim basis instead of just annually.
The recommendations were made with the input of all municipal market participants, including issuers. The federation is taking comments on the document through Sept. 30.
The Takeaway: The federation's recommendations are based around the idea that more information is better and that analysts don’t like to be surprised by information long after the fact. “We are not asking issuers to reinvent the wheel,” says Ross. “Just disclosure of things like your budget cash flow or interim tax statements that you already produce for yourself. That will be invaluable.”
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