MuniLand Snaps: July 23
Watch States Plagued by Fiscal Problems, Pension Payments on PBS. See more from PBS NewsHour.
Here’s a deep dive on the fiscal problems of the states and the Volcker-Ravitch report on the state budget crisis from PBS.
Good Links
Stateline: Report: Without major overhauls, state budget crises will linger
Pew Center on the States: Data visualization on the widening gap of pension funding
Fiscal Times: U.S. cities get fleeced in Libor scandal
States hold sway over their cities in bankruptcy matters
Bloomberg View’s Josh Barro wrote an interesting piece Thursday urging Scranton, Pennsylvania to declare Chapter 9 bankruptcy. Scranton has achieved national attention after the mayor reduced all city workers’ pay to minimum wage last week because the city could no longer afford paying their full salaries, a powerful image of how little cash Scranton has left.
The problem with Barro’s proposal is that Scranton cannot file for Chapter 9 without the consent of Pennsylvania’s state government. Chapter 9 bankruptcy is a part of the federal bankruptcy code, and it gives individual states the authority to decide whether their cities can go bankrupt:
States play a key role as gatekeepers or guardians in that, by virtue of [bankruptcy code] amendments codified in 1994, they have to specifically authorize their municipalities to file for Chapter 9. Silence on the matter is taken as a prohibition on filing.
If you watched the fiscal crisis unfold in Pennsylvania’s state capital of Harrisburg over the last two years, you saw how many obstacles the state imposed on its cities to prevent them from filing for bankruptcy. Pennsylvania’s Act 47 prescribes how the state can manage its fiscally distressed cities. My Reuters colleague Hilary Russ wrote an excellent story on the weaknesses of Act 47, including the fact that it requires no hard deadlines on cities to devise and implement a recovery plan. Scranton has been in the state’s distressed city program for 20 years.
Act 47 does allow for the appointment of an outside receiver with significant powers to negotiate with creditors and seek court approval to force a city to raise taxes. This is what’s happening in Harrisburg right now and could be considered equivalent to a state-level bankruptcy process.
Bankruptcy can be a very useful process for cities seeking to reduce debts. But cities also need to consider cutting the number of employees they have, stopping automatic pay increases, lowering pension costs and raising taxes and fees to generate more revenue. Chapter 9 bankruptcy does have a stigma that will significantly raise borrowing costs once a city regains access to the markets.
Further:
MuniLand Snaps: July 20
The bottom line on #SanBernardino cash flow projections for July-Sept. is all red ink. #SBbankruptcy twitter.com/InlandBizz/sta… — Andrew Edwards (@InlandBizz) July 19, 2012
San Bernardino, California voted to declare fiscal emergency and move to file Chapter 9 bankruptcy on Wednesday.
Good Links
Reuters: Kansas Republicans war over “Ryan plan”-style tax cuts
Reuters: Washington state first to launch Facebook voter registration
Detroit News: Bing imposes cuts to Detroit union pay and benefits after Council rejection
Fox Business News: North Las Vegas city leaders declare state of fiscal emergency
Moody’s muniland blacklist
Moody’s this week published a Special Comment (subscription required) that crystallizes a lot of the discussion regarding bankruptcies and defaults that has been going around muniland lately:
Recent decisions to seek bankruptcy protection by two large California cities – Stockton and San Bernardino – provide some indication that willingness to pay debt obligations may be eroding in the US municipal market. Although many municipalities have faced severe fiscal pressures since the start of financial crisis, only a handful of municipalities have chosen not to pay their debt.
Most of these municipalities have defaulted due to exposure to failing enterprises, such as a convention center, sports arena, or other project that was backed by a government until the project and related debt were left to falter. In contrast, Stockton and San Bernardino’s pursuit of bankruptcy are different and potentially more significant given that these defaults emanate not from enterprise risk but instead from stress on core government operations, notably high pension and other compensation costs and debt service.
Moody’s is saying that defaults in this space typically come from municipalities collapsing from the weight of some public project whose cash flow was never enough to cover its expenses and debt service. These are projects that were either never vetted properly or were undertaken by municipalities with insufficient professional expertise to manage them. Some were outright boondoggles.
With the recent moves by San Bernardino and Stockton, Moody’s says that there is a developing trend of cities using bankruptcy to cleanse themselves of liabilities, including those to debtholders, rather than raising taxes or pursuing other sources of revenue. The audience for Moody’s commentary is bondholders, so it makes sense for them to view this as an alarming trend. But as a citizen I think of these moves toward bankruptcy as a positive for communities that are groaning under the weight of bloated labor contracts and pensions for public safety workers. I think in many cases adjustments to labor contracts, which for most municipalities make up 50 to 80 percent of general fund expenses, can only happen in a setting where municipal leaders have the right to throw them out. That only happens in bankruptcy court.
Moody’s does not rate all municipal bond issuers, but they do rate 8,100 local governments. Out of that pool they provide a list of the handful of places where they see high default risk. I thought it would be interesting to determine whether the problems these local governments face came from enterprise debt – such as airports, sport stadiums, etc. – or from this emerging trend of general fiscal weakness. Here is what I found:
Since Stockton’s and San Bernardino’s bankruptcies were announced, we’ve had an outburst of weak municipalities coming forward to air their dirty laundry. Many of these likely have falling revenues and bloated expenses. The jury is still out on how widespread this new trend may be, and it’s likely we will see more analysis like Moody’s published soon.
hi Kate,
I’m glad that it is Moody’s spreading the ‘alternative lie’ that has been used extensively for the last 40 years that I know of: combination blame of pension & labor expense to sensationally mislead in the press all the typical past, present, & future financial MANAGEMENT problems.
I do like your summary: “Many of these likely have falling revenues and bloated expenses.” which squarely rests the blame on MISMANAGEMENT.
wild;)
Republicans’ jobs plan: The war machine
Although Republicans have been insisting on cuts to federal spending, they are fighting to keep the defense budget off limits. They agreed to make cuts to military spending as part of last year’s sequester agreement, but there is a full-court press in progress to derail the cuts as the date on which they are set to take effect nears. This well organized campaign involves members of Congress, governors, mayors and military contractors. Here is what is involved, according to the House Armed Services Committee:
If sequestration takes effect in January, the defense budget would be cut an additional $55 billion per year from the levels established in Budget Control Act. That would mean an additional $492 billion in cuts on top of the $487 billion already being implemented [over ten years]. In total, over $1 trillion would be cut over the next ten years with disastrous consequences for soldiers, veterans, national security, and the economy.
This amounts to a reduction of around 14 percent to the defense budget. Even with the cuts, the U.S. will remain the biggest military spender in the world by far. In its pitch to put off the cuts, the House Armed Services Committee invoked the threat of job losses:
Cuts to spending for the acquisition of military equipment alone would lead to the loss of over 1,000,000 private sector jobs. These cuts could push unemployment back up to 9%. Cuts to active-duty and DOD civilian personnel would amount to over 350,000 jobs lost.
The impact will be borne disproportionately by some states. The ten states that will feel the largest pain as a percentage of the state economy are Virginia, Connecticut, Alabama, Arizona, Maryland, Alaska, Hawaii, Wisconsin, Massachusetts, and Missouri.
Virginia stands to take the biggest hit to its economy, because almost 10 percent of the state’s GDP comes from military procurement revenues, according to the U.S. Census (page 10). Virginia’s Republican governor and the House majority leader are leading the charge on Capitol Hill to block the cuts:
Virginia Gov. Bob McDonnell is hitting Capitol Hill on Wednesday to talk about sequestration … McDonnell, oft-mentioned as a potential running mate for Mitt Romney, will be flanked by House Majority Leader Eric Cantor (R-Va.) and other congressional Republicans from the Old Dominion to talk about the impact that the automatic spending cuts will wreak on their home state.
The state of Virginia would be among the hardest hit if the spending cuts – which are split between defense and domestic programs — went into effect on Jan. 2, 2013. According to a study released Tuesday, the state could sustain more than 207,500 job losses next year due to sequestration, due to its heavy military presence and significant numbers of federal workers.
The State Budget Crisis Task Force weighs in
Much as the Simpson-Bowles report aspired to be the foremost guide to reducing the federal deficit, the Volcker-Ravitch report on the state budget crisis that was released yesterday hopes to serve a similar purpose for state government spending. Paul Volcker, the former Fed chairman, and Richard Ravitch, who helped New York City work itself out of bankruptcy, led the State Budget Crisis Task Force, the group that produced this report. The task force also included two former U.S. Treasury Secretaries as members. The bottom line of the report is that there is less money to go around and that states should become better managers of the shrinking economic pie:
The United States Constitution leaves to states the responsibility for most domestic governmental functions: states and their localities largely finance and build public infrastructure, educate our children, maintain public safety, and implement the social safety net. State and local governments spend $2.5 trillion annually and employ over 19 million workers – 15 percent of the national total and 6 times as many workers as the federal government…
…States are grappling with unprecedented fiscal crises. Even before the 2008 financial collapse, many states faced long-term structural problems. Many economists believe that in the aftermath of the crisis, the economy will grow sluggishly for years as it works off the excesses of the credit and real estate bubbles and endures slow employment growth. Tax revenues are recovering slowly and remain well below their pre-crisis trends.
Basically states, once flush with revenues, have overpromised benefits to their retirees, set aside too little in reserves to cover their liabilities, mismanaged their books and sat idly by while their tax base eroded as a result of changes in consumer behavior. The two big issues for state budgets are public pensions and Medicaid, both of which are somewhat out of the states’ control. Although states assume about half the cost of Medicaid, decisions about the program are made at the federal level. States must apply to Washington for an exemption to make changes to their program. Pension benefits are enshrined in contracts and are generally governed by a state’s constitution. Making changes to pensions, outside of bankruptcy, is either impossible or would require constitutional amendments.
The report is a landmark for recognizing that the decades-long expansion of state and local governments must come to an end. Harsh economic conditions have collided with gross structural imbalances, and the report highlights the dimensions of the wreckage.
If you are a muniland watcher, you know that the report’s recommendations are much too idealistic for most states to adopt verbatim. The messy business of state politics generally trumps common sense as politicians who hope to get re-elected tend to resort to bestowing public largesse on special interest groups. Few state politicians have successfully stayed in office with a platform of downsizing government or going after public-worker benefits. This report is an attempt to persuade the public to support, or at least not actively resist, the fiscal downsizing that state and local governments must endure.
Governors, mayors, state legislatures and city councils fight these battles every day as they contend with unsteady and shrinking revenues and increasing demand for services. It’s the wider public that has had little understanding of the depth of these problems. Voters will face two choices: reduced services or increased taxes. Having an understanding of what the problems are is helpful, but hard decisions lie ahead.
MuniLand Snaps: July 18
Interesting map from the Tax Foundation on state income tax brackets.
Good Links
Hamilton Place: A Storify of Ben Bernanke’s testimony yesterday
Davis Polk: Dodd-Frank Two-Year Anniversary Progress Report
State Budget Crisis Task Force: Report on the state budget crisis
Bond Buyer: MSRB’s Polsky, but no SEC official, to testify at House panel muni hearing
Stockton wants to end generous healthcare benefits for its retirees
Some residents of Stockton, California are upset over the city’s decision to eliminate free healthcare benefits for public retirees. Michael Fitzgerald, a columnist for the Record, Stockton’s newspaper, wrote last week about the policy change:
The lavish perk that did the most to bankrupt Stockton is free lifetime medical care for some retired city employees and spouses. Now retirees are suing to keep it free.
And a commenter said in response:
You just wrote that retirees are the most responsible for the bankruptcy. The most? Really? Not an arena or a marina that has no fuel for boats or all the money the state raided to continue its programs, or……? About all that is left is retirees. And “unfunded liability.” Who even knew that arcane term before the City Manager started throwing it around, along with his other favorite, the Ponzi Scheme?
Of the 300,000 residents of Stockton, about 1,100 municipal retirees receive this generous benefit. The city, with very short notice, informed the retirees that those with less than 10 years of service would have to pay for healthcare benefits themselves immediately, while those with more than 10 years of employment would receive a stipend for a year then be required to cover themselves. The retirees have filed suit to stop the city from changing their coverage.
The city began in 1980 to give free healthcare benefits to police retirees and their spouses (or dependents) until age 62, or for a maximum of seven years. This benefit expanded over the years to cover all municipal employees and their spouses (or dependents), regardless of their length of employment. Between 1985 and 1998, the benefit was extended again to grant lifetime coverage for all classes of city employees. I haven’t been able to confirm how much this benefit costs the city, but after looking at the number of retirees there and the monthly premium, I estimate that it costs Stockton about $11.2 million per year. If correct, that would be an enormous drain on the city’s budget.
Retirees and their supporters have every reason to be outraged over this move. But ultimately a court must decide how retiree benefits which are part of ”OPEBs” (or other post-employment benefits) should be treated. The “other” refers to the fact that they are not pensions but benefits accrued through employment. Municipal pension benefits and OPEBs enjoy few rights in bankruptcy. James Spiotto, an expert on municipal bankruptcy at the law firm of Chapman and Cutler wrote this about OPEB liabilities in 2006:
MuniLand Snaps: July 17
Daniel Solender of Lord Abbott gives a good overview of the municipal bond market.
Good Links
Rockefeller Institute: The impact of the Great Recession on local property taxes
GFOA: Recovery from financial distress and fiscal first aid
Pew Center on the States: City vs. metro population growth visualized
USA Today: Where the states stand on healthcare
MuniLand Snaps: July 16
Public service announcement from the New York City Department of Transportation: Come take part in the fifth annual Summer Streets! On Aug. 4, 11 and 18 from 7 a.m. to 1 p.m., nearly seven miles of New York City’s streets will be opened up for everyone to play, run, walk and bike.
Good Links
IMF: Great Recession and fiscal squeeze at U.S. subnational government level
NYT: Calculated deal in a rate-rigging inquiry
Bloomberg: U.S. municipal bond trading volume falls by 10.4 percent in first half
Houston Chronicle: Local agencies in Texas could “deal directly with the feds to expand Medicaid”
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