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The Week in Public Finance: Debt Limit, Moodiness and Dire Straits

This week's roundup of money (and other) news governments can use.

Governing's weekly roundup of money (and other) news governments can use touches on the U.S. debt limit, the Volcker Rule and the 1980s' wishful thinking.

This debt limit best enjoyed by Feb. 7

The U.S. debt limit technically expired at the end of last week but for now, the country can still pay its bills. Still, Treasury Secretary Jack Lew continued to warn Congress that the extraordinary measures taken to make that possible will be exhausted later this month. Such measures include (but are not limited to) suspending sales of non-marketable state and local government securities, receiving an extra dividend from Freddie Mac and suspending daily reinvestment of Treasury securities. Lew is again urging lawmakers to raise the debt limit now—and with no strings attached.

House Speaker John Boehner has said that they won't default but members still seem undecided on what they will ask for in return. So much for no strings attached. In any case, Hill watchers say they’d be shocked if a lawmakers created another crisis like the partial government shutdown in October last year for this particular extension.

Love me tender (option bonds)

In addition to being a great candidate for the “before and after” category on Wheel of Fortune, the title of this blurb refers to the Volcker Rule’s impact on what are called Tender Option Bonds, or TOBs. The Volcker Rule, which took effect this year, limits banks' investments in hedge funds and other high risk vehicles, including TOBs. Fitch Ratings agency last week said the rule may cause market players to restructure their traditional TOB programs.

What’s a TOB, you ask? Good question. These bonds represent a small fraction of the municipal market (about $75 billion of the $3.7 trillion market) and are used to cover long term investments. Banks and hedge funds will get cash from a money market fund (a short term borrow) then turn around and invest that in a municipal bond. Because short term borrowing has typically yielded very low interest rates while rates on longer-term bonds has been higher, banks hope to pocket the difference between the two rates as profit. 

Fitch says that investors in these bonds will have to “restructure existing TOB programs or find alternative structures that are feasible under the Volcker Rule, as the availability of short-term paper is crucial to liquidity in the municipal market and as a key investment for the money market funds.” This could also result in an increase in supply in the  municipal bond market, Fitch adds, because investors may seek to sell off their municipal bonds as part of the restructuring.

Still ‘Moody’ about pension pressure

Moody’s Investors Service has issued a new pension report on local governments that says 2013 marked “some improvements” in pension liabilities, but plan costs will continue to be high this year and will actually grow for many municipalities. Pluses for pensions investment funds last year included strong returns and rising interest rates. Contribution requirements for local governments continued to be high and are rising. Still, Moody’s notes a single year of positive news makes only a little dent in the larger problem – we’ll really be getting somewhere only after several years of good mojo.

“Because of the timing of actuarial reports and a common lag between actuarial valuations and budgetary contributions, positive 2013 market performance will not immediately benefit local government budgets,” says Moody’s Analyst Tom Aaron, who wrote the report.

And, P.S., let’s not forget that pension reforms can also be influenced by pending court cases including bankruptcy and various challenges to pension reforms. Detroit’s bankruptcy judge, for example, ruled that pension payments to retirees could be cut if a government is in bankruptcy. In addition to that ruling, Moody’s notes that there “are likely to be rulings and reform measures that could set precedent on whether benefits can be curtailed for future work by current employees [and on] protections of cost of living adjustments.”

That ain’t workin’, that’s the way you do it

If only we got our money for nothing. But sadly, Dire Straits’ 1985 vision was not to be. Securities and Exchange Commissioner Luis A. Aguilar reminded us of that last week when he highlighted a report that noted many retirees expect to find some other job in their retirement. Speaking to the American Retirement Initiative’s Winter 2014 Summit in Washington, D.C., Aguilar said many Americans facing retirement figure they’d find something interesting to keep them occupied during retirement—and earn some extra money.

“Unfortunately,” he said, “the data shows that this is just not the case. In reality, many retirees who anticipated working in retirement did not work.” 

The report he’s referring to was published last year by the Society of Actuaries. The paper, called Survey of the Risks and Process of Retirement, provides insights into how Americans decide to retire, how they perceive post-retirement risks and how they manage financial resources in retirement. Among the report’s conclusions was that many people retire involuntarily and that “not enough people engage in long-term planning.” 

Liz Farmer, a former Governing staff writer covering fiscal policy, helps lead the Pew Charitable Trusts’ state fiscal health project’s Fiscal 50 online resource.
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