The Week in Public Finance: Chris Christie, Waterworks and the Miracle on Ice
A roundup of money (and other) news that governments can use.
Yo, governor. What were you thinking?!?!?
Loyal readers may remember last week’s issue, which suggested that the state of New Jersey might not be the best savior for the city of Newark’s troubled finances because, well, it also doesn't have a balanced budget. This week the story got better. Or worse, rather.
This week revealed that Gov. Chris Christie’s $94 million reduction in pension spending in order to “balance” this year’s budget isn’t just going to be a one-time deal. He has retroactively changed the formula that pension fund actuaries use to calculate the state’s annual contribution in order to keep the fund solvent. But the fund isn't in any better financial shape this year. In fact, its $51 billion unfunded liability exists largely because New Jersey has not been keeping up its payments.
Christie’s formula change increases the state’s unfunded liability by 10 percent over 30 years, according to the fund’s actuaries. The move has largely been panned by observers as one that will exacerbate New Jersey’s precarious financial situation. Moody’s Analyst Baye Larsen notes that while the revised formula is still within the minimum legislative requirements, “the need to retroactively recalculate the amounts indicates that the state’s financial position is weaker than expected and that more typical budget balancing solutions have already been exhausted. Additionally,” Larsen continues, “while the changes provide budgetary relief through fiscal 2018, pension costs will be higher in later years than they would have been without the adjustment.”
When it rains…
Two water-related items hit public finance this week. In California, the ongoing drought has prompted Fitch to join other credit agencies in warning that water utilities in the Golden State could suffer big time as usage drops this year. Two key factors will affect water agencies’ ratings: 1) whether they have the ability to raise rates, and 2) how much margins and agencies’ reserves will be affected by declining usage.
In Detroit, which has many problems, including its water and sewer system, Standard & Poor’s rating agency downgraded the city’s water and sewer revenue bonds to CCC from BB-. The rating already stood at junk status but getting downgraded five whole notches and to a lower tier sends a big signal to the municipal market about the shaky status of this investment even as the bonds are classified as secure debt in the city’s bankruptcy case. Detroit is proposing that the city’s creditors holding General Obligation bonds, which has been classified as unsecured debt, get back just 20 cents on the dollar. Meanwhile water and sewer bond debt is secured because bond holders are supposed to be paid directly from the revenue generated by the Detroit Water and Sewer Authority. The problem? Given the precarious revenue flow at the authority, reimbursement isn’t a guarantee.
"We lowered our rating because we view the obligations as currently vulnerable to nonpayment,” S&P Credit Analyst Scott Garrigan said in a statement. “We view such an exchange as tantamount to a default.”
Do you believe in miracles? Nope!
Anyone who’s seen the movie “Miracle,” Disney’s heartwarming retelling of the U.S. 1980 Olympic hockey team’s improbable victory over Russia, will remember the postscript text lamenting the fact that in 1988 professional hockey players (among other athletes) were allowed to compete in the Olympics. This meant that another tale like the miracle on ice, where upstart college kids take on burly Soviet machines, was pretty unlikely.
Now, the National Collegiate Athletic Association is facing a similar threat and, of all things, credit agencies are lamenting the potential effects. Moody’s has issued a note warning that recent legal developments that seek to financially favor college players threaten the NCAA’s standard of amateurism and hurts colleges’ and universities’ bottom lines. Most recently, a National Labor Relations Board ruling in Chicago allowed Northwestern University football players’ right to unionize. Earlier in March sports attorney Jeffrey Kessler, filed a class action suit against the NCAA challenging the scholarship limits for student athletes. Why should schools be afraid of Kessler? For one, he’s represented players in all Big Four professional American sports leagues. And he won the National Football League players’ case that ushered in the modern version of a little thing called free agency. This guy isn't messing around.
Moody’s notes that most athletic departments named in the Kessler suit receive a subsidy from their schools; for the public universities in that list, the median subsidy is around $7 million. “In the absence of amateurism, players would likely gain additional compensation, greatly increasing the need for subsidization,” Analyst Dennis Gephardt writes. And, he adds, “a market regime with no limits on player benefits,” would create vast disparity in schools’ abilities to compete for top players, and ultimately competitiveness and parity in the NCAA overall would suffer.
Join the Discussion
After you comment, click Post. You can enter an anonymous Display Name or connect to a social profile.
LATEST FINANCE HEADLINES
Planned Parenthood Wins Battle to Block Mississippi Law2 hours ago
The Week in Public Finance: School Funding's Lost Decade, Teacher Pension Pressures and More12 minutes ago
In Need of Education Funding, States Look to Customers and Corporations5 hours ago
California Launches Criminal Investigation Into Wells Fargo22 hours ago
Princeton Settles Nonprofit Tax Lawsuit1 day ago
Nevada Raises Taxes to Build an NFL Stadium for a Team That May Not Play There2 days ago