Category: Public Finance

Will the OPEB Ostriches Ever Run Out of Excuses?

Mary Pat Campbell

Link:https://www.governing.com/finance/will-the-opeb-ostriches-ever-run-out-of-excuses

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As one stalwart finance officer once told me, “Our pension funds basically sucked up all the new revenue we’d been hoping to set aside to properly fund OPEB.” Those and other priorities for spending each incremental revenue dollar continued to crowd out the opportunity to institute consistent actuarial funding for OPEB benefits; the path of least resistance for policymakers who lack foresight and a sense of fiscal responsibility has been to keep kicking the can.

So it is that between 2015 and 2019, the state and local sector had clearly sorted itself into three classes of employers: (1) those who had trimmed or modified their OPEB commitments and liabilities to sustainable levels, (2) those who had begun actuarial funding of an OPEB trust fund, and (3) those doing nothing and leaving the problem to their successors and future taxpayers.

Author(s): Girard Miller

Publication Date: 18 Jan 2022

Publication Site: Governing

Illinois downstate/suburban public safety pension gap increases

Mary Pat Campbell

Link: https://fixedincome.fidelity.com/ftgw/fi/FINewsArticle?id=202112211317SM______BNDBUYER_0000017d-ddd5-d418-a97d-fffffcde0000_110.1#new_tab

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The unfunded liabilities of Illinois? suburban and downstate public safety pensions rose to $13 billion in the last year of compiled results reported to the state, continuing a 29-year climb that underscores the deep strains on local government budgets.

The unfunded tab for the 295 firefighter funds and 352 police funds outside of Chicago grew to $13 billion in fiscal 2019 from $12.3 billion in 2018 and $11.5 billion in 2017. Police accounted for $7.5 billion of the total and firefighters for $5.5 billion, according to a new report from the state legislature?s Commission on Government Forecasting and Accountability.

The rising tab could help the Illinois Municipal League?s case in arguing for lawmakers during their 2022 session to loosen funding requirements.

The League wants a re-amortization of the funding schedule that would extend the target date for achieving 90% funding beyond fiscal 2040, and lower the funding target to 80% from 90%. While both would ease the burdens on governments market participants have warned they are Band-Aid fixes that don?t solve the underlying funding strains.

Author(s): Yvette Shields

Publication Date: 21 Dec 2021

Publication Site: Fidelity Fixed Income

Three subtle ways inflation helps state and local government coffers

Mary Pat Campbell

Link: https://lizfarmer.substack.com/p/inflation-impact-local-governments

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If inflation pushes up interest rates and accelerates wage growth, that could take some of the pressure off of public pension plan performance. Since the Great Recession, pension plans have been steadily lowering their assumed annual rate of return to better match the low-interest rate environment. Pension plan actuaries factor that rate when in calculating a government’s annual pension bill. Lowering that rate results in a higher bill because governments have to make up the difference. 

More stable returns. Rising inflation can result in higher returns from a pension plan’s fixed-income assets. Unlike the volatile equities market, the nice steady investment return from fixed-income securities is much nicer to rely on from a planning perspective. In fact, bonds used to be pensions’ bread and butter until interest rates began falling in the 1990s.

The National Association of State Retirement Administrators’ research director Keith Brainard told me this week that if inflation is sustained, governments could decide to stop lowering their investment return assumptions and some could even start raising them again. 

That could result in lower pension bills for governments with healthy plans. Or in the case of struggling plans like Chicago or Kentucky, it could at least slow the pace of their rising pension bills.

Higher worker contributions. What’s more, noted Brainard, accelerated wage growth also means those workers paying into pension plans will be contributing slightly more. “What wages will do when inflation is 2% is a lot different than when it’s 6%,” he said.

Author(s): Liz Farmer

Publication Date: 15 Dec 2021

Publication Site: Long Story Short at substack

HOW HAVE STATES USED THEIR DIRECT COVID RELIEF FUNDS?

Mary Pat Campbell

Link: https://www.pgpf.org/blog/2022/01/how-have-states-used-their-direct-covid-relief-funds

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The federal government provided $512 billion in direct financial assistance to help state and local governments cover their expenditures and revenue losses associated with the coronavirus (COVID-19) pandemic. So far, about $400 billion of that total has been disbursed. Here are some notable trends showing how lower levels of government have spent some of their relief funds using a database compiled by the National Conference of State Legislatures (NCSL).

Publication Date: 14 Jan 2022

Publication Site: Peter G. Peterson Foundation

What Illinois didn’t tell you about its celebrated early payment of federal loan – Wirepoints

Mary Pat Campbell

Link: https://wirepoints.org/what-illinois-didnt-tell-you-about-its-celebrated-early-payment-of-federal-loan-wirepoints/

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In fact, the state originally did intend to pay off the Federal Reserve loan with other federal bailout money from ARPA, the American Rescue Plan Act, according to The Bond Buyer. But the “Treasury threw a wrench in repayment prospects” when the initial federal guidance barred the use of ARPA aid for debt repayment. “The state lobbied for a change in a letter to Treasury Secretary Janet Yellen. But as state tax collections turned rosier, state leaders opted instead to cover repayment with tax collections,” says The Bond Buyer.

The bottom line is that all of us, as federal taxpayers, will bear the cost of the federal bailout, for Illinois and other states, whether through higher taxes to repay the Treasury or inflation created by Federal Reserve money creation. And Illinois will be worse off because only Illinois borrowed extra and incurred interest costs.

So, no, Governor Pritzker, paying back this loan ahead of schedule doesn’t mean Illinois achieved a “level of fiscal prudence not seen in our state for decades.”

Author(s): Mark Glennon

Publication Date: 7 Jan 2022

Publication Site: Wirepoints

This Local Pennsylvania Police Pension Fund Is About to Run Out of Benefits. How Did That Happen?

Mary Pat Campbell

Link:https://www.ai-cio.com/news/this-local-pennsylvania-police-pension-fund-is-about-to-run-out-of-benefits-how-did-that-happen/

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But of all the struggling pension funds in Pennsylvania, the pension system in the city of Chester was shown to be the most underfunded municipal public pension plan in the entire state in 2019. And now, that situation has gone from bad to worse.

Reports say the pension will run out of money in less than four months, according to Philadelphia’s PBS station, WHYY. One of the primary reasons for this situation appears to date back to 2009, when the pension board adjusted the pension calculation procedure. These adjustments seem to have made it easier for some police officers to spike their pensions.

Under the 2009 change, police officer pensions in Chester were calculated using the salary of the final year of service, which may have encouraged some officers to work overtime as much as possible in their final year in order to inflate their pensions, according to the state’s appointed receiver. In October 2021, this rule was changed so that calculations will now be based upon the last three years of service. 

This one-year policy, combined with the practice of spiking among approximately 80 police officers, appears to be the cause of the pension system’s lack of funding. Officials are hoping to recoup some of the overpayments to retirees, and they are expecting future payments to be reduced significantly.  

Author(s): Anna Gordon

Publication Date: 10 Jan 2022

Publication Site: ai-CIO

Americans Moved to Low-Tax States in 2021

Mary Pat Campbell

Link: https://taxfoundation.org/state-population-change-2021/

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Nationally, the U.S. population only grew by 0.1 percent between July 2020 and July 2021, the lowest rate since the nation’s founding. Pandemic-induced excess deaths, virtually nonexistent international in-migration, and an already-declining birth rate yielded an almost flat population trend nationwide. This, however, belies state-level and regional differences. Whereas the District of Columbia’s population shrunk by 2.8 percent between April 2020 (roughly the start of the pandemic) to July 2021, New York lost 1.8 percent of its population, and Illinois, Hawaii, and California rounded out the top five jurisdictions for population loss, Idaho was gaining 3.4 percent, while Utah, Montana, Arizona, South Carolina, Delaware, Texas, Nevada, Florida, and North Carolina all saw population gains of 1 percent or more.

The picture painted by this population shift is a clear one of people leaving high-tax, high-cost states for lower-tax, lower-cost alternatives. The individual income tax is only one component of overall tax burdens, but it is often highly salient, and is illustrative here. If we include the District of Columbia, then in the top one-third of states for population growth since the start of the pandemic (April 2020 to July 2021 data), the average combined top marginal state and local income tax rate is 3.5 percent, while in the bottom third of states, it is about 7.3 percent.

Author(s): Jared Walczak

Publication Date: 4 Jan 2022

Publication Site: Tax Foundation

How High Will California’s Taxes Go Before There’s No One Left To Tax?

Mary Pat Campbell

Link: https://reason.com/2022/01/11/how-high-will-californias-taxes-go-before-theres-no-one-left-to-tax/

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It’s hard to say which of these is the “worst,” but the 2.3 percent gross receipts tax sticks out. That gross receipts taxes are an awful way to structure a business tax is one of the few things that tax policy experts across the political spectrum almost universally agree on. That’s because they make no allowance for the large variance in profit margins that different types of businesses make—whether a business has a profit margin of 0.1 percent or 10 percent, it would still have to pay the same percentage of its total revenues.

That’s a problem with any gross receipts tax, but California’s proposed tax would exacerbate this inherent problem with a rate that is three times the level of the nation’s current highest. The higher the gross receipts tax rate, the more low-margin businesses that could be put in a position where operating in California would lose them money.

Almost as bad is the proposal to institute a payroll tax on businesses with 50 or more employees. Not only are payroll taxes a regressive tax (even if the tax is imposed on the employer, it would be passed on to employees in the form of lower wages), but the 50-employee threshold would create an obvious disincentive for businesses to hire their 50th employee.

Author(s): JOE BISHOP-HENCHMAN AND ANDREW WILFORD

Publication Date: 11 Jan 2022

Publication Site: Reason

ILLINOIS SPENT 6% MORE THAN IT TOOK IN FOR 15 YEARS, SO COVID-19 HIT IT HARDER

Mary Pat Campbell

Link: https://www.illinoispolicy.org/illinois-spent-6-more-than-it-took-in-for-15-years-so-covid-19-hit-it-harder/

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From 2005-2019, Illinois revenues totaled just 94% of expenses. The state ran deficits in each of the 15 years prior to the COVID-19 pandemic. Only New Jersey overspent more.

Illinois was one of only eight states to see spending outpace its revenues from 2005-2019, leaving it fiscally ill-prepared to deal with the tumultuous COVID-19 pandemic, according to new data from The Pew Charitable Trusts.

Illinois ranked No. 2 for overspending.

According to the report, Illinois took in just 94.1% of the revenues it needed to cover its expenses from 2005-2019. That number was second worst in the nation, coming in just ahead of similarly troubled New Jersey.

Author(s): Justin Carlson

Publication Date: 12 Jan 2022

Publication Site: Illinois Policy Institute

Milwaukee pension debt clouds Wisconsin’s otherwise positive retirement system picture

Mary Pat Campbell

Link:https://reason.org/commentary/milwaukee-pension-debt-clouds-wisconsins-otherwise-positive-retirement-system-picture/

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According to its most recent actuarial report, the Milwaukee County Employees’ Retirement System (ERS) had a funded ratio of 75.3% and unfunded liabilities of $569 million. The county also has separate retirement plans for mass transit employees and temporary employees, but these plans have relatively small unfunded liabilities.

Milwaukee County ERS’ liabilities grew, in part, because the county did not make its full actuarially determined contributions between 2012 and 2016, according to its most recent Annual Comprehensive Financial Report. During that five-year period, the county’s contributions fell $12 million short of recommended levels.

Since 2015, Milwaukee County’s contributions to ERS have tripled from $19 million to $57 million, as it began to meet and then exceed actuarial recommendations. These contributions exclude debt service the county pays on pension obligation bonds it issued in 2009 and 2013.

Author(s):Marc Joffe

Publication Date:13 Jan 2022

Publication Site: Reason

Chicago school district finds buyers after offering higher yields

Mary Pat Campbell

Link: https://fixedincome.fidelity.com/ftgw/fi/FINewsArticle?id=202201141507SM______BNDBUYER_0000017e-59c7-de0b-a77f-dbef44d30001_110.1#new_tab

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Chicago Public Schools’ $872 million of junk-rated paper met with a more fickle high-yield audience this week, underscoring the district?s vulnerability to market volatility even as it inches closer to investment grade status.

At attractive spreads that offered a healthy yield kick with many maturities offering 4% coupons, the bonds were 2.2 times oversubscribed, CPS said in a statement. More than 40 institutional investors placed orders including some in excess of $150 million each.

The district will pay a true interest cost of 3.51% that ranks among the lowest paid by the Chicago Board of Education over the last two decades. The sale provides $500 million of new money for capital projects and the remainder refunds 2011 bonds.

Author(s): Yvette Shields

Publication Date: 14 Jan 2022

Publication Site: Fidelity Fixed Income

Vietnam adds private pension as silver tide rises

Mary Pat Campbell

Link:https://asia.nikkei.com/Economy/Vietnam-adds-private-pension-as-silver-tide-rises

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When communist Vietnam recently introduced private retirement funds, it was taking a step not only closer to capitalism, but also toward changing a young pension system that some worry may buckle if citizens get old before getting rich.

Last year marked the first time workers could put part of their paychecks into private retirement accounts, on top of the share contributed to the state pension. But analysts say bigger, systemic change is needed to enable retirement for all, even as the International Labor Organization says the state fund is robust. 

….

Retirees would seem to be the envy of the neighborhood, receiving payouts worth 75% of their prior wages — the fifth-highest among 70 countries in the Allianz Global Pension Report 2020.

But Vietnam’s system covers just 40% of the elderly, which explains why women keep working longer there than in all but five other countries, the report shows.

Author(s): LIEN HOANG

Publication Date: 17 Jan 2022

Publication Site: Nikkei Asia