Top 10 Public Finance Stories in 2013
After years of declining revenue, the money began slowly tricking back in for states and localities in 2013. But there still was still a huge mess left to clean up.
After years of declining revenue, the money began slowly tricking back in for states and localities in 2013. But there still was still a huge mess left to clean up from the turmoil of the last decade. Here’s a list of the highs and lows of 2013:
1. Fiscal cliff and sequestration
Public officials from states and localities were relieved on Jan. 1, 2013 when Congress and the president reached a fiscal cliff deal that extended the budget and tax rates and delayed sequestration cuts slated to start at the beginning of the year. But as 2013 was also a year marked by stalemates on Capitol Hill (noteably a 16-day government shutdown in October), lawmakers failed to reach a similar last-minute deal to stop sequestration from going into effect in March.
The cuts hit states that have a large federal presence (like Maryland and Virginia) the hardest but unaccounted for consequences sent lawmakers scrambling this spring to make quick fixes to the legislation. One such example was allowing more funding to the Transportation Security Administration to alleviate long delays at airport security checkpoints.
2. SEC enforcement
The Securities and Exchange Commission stepped up its enforcement actions this year with two big settlements related to securities fraud. One was against the state of Illinois, which the SEC accused of misleading investors about the condition of its public pension program. The settlement cited Illinois for insufficient pension funding, including sometimes just taking breaks from funding its retirement system at all. The SEC said that Illinois issued $2.2 billion worth of municipal bonds that were marketed under false pretenses.
The second big action was against fiscally beleaguered Harrisburg, Pa., which regulators accused of issuing misleading financial statements. Between 2009 and 2011 the city of Harrisburg failed to provide ongoing financial information and audited financial statements for investors who held hundreds of millions of dollars in bonds issued or guaranteed by the city.
The actions came three years after the creation of the SEC Enforcement Division’s Municipal Securities and Public Pensions Unit.
3. Detroit and San Bernardino enter bankruptcy
City bankruptcy is rare enough to make any top 10 list but these two cases hold significance beyond their borders. Both have experts predicting that the question of whether pensions can take a haircut alongside bondholders in Chapter 9 cases will eventually be answered on a national basis. A judge ruled San Bernardino eligible for Chapter 9 protection this summer over the objection of the state pension system CalPERS. The lone objector, CalPERS argued the city did not qualify because it ignored years of warnings about a looming financial crisis and was filing for bankruptcy merely out of convenience.
In December, a judge ruled Detroit was eligible for Chapter 9 protection and went a step further by saying the city could include its pension debt among its liabilities to be cut in its restructuring plan. The American Federal of State, County and Municipal Employees has appealed that decision. Many expect the pension issue to make its way to the Supreme Court via one of these two cases.
4. Jefferson County emerges from bankruptcy
After more than two years, Jefferson County, Ala. emerged from bankruptcy after selling $1.8 billion in new sewer debt in December. (The sale was a refinance of the county’s $3.1 billion in sewer debt.) The sale also marked a turning point for the municipal market in that it was a successful sale by a municipality with a weak financial history, which suggests that there is an appetite for riskier investments.
(On a related note: Harrisburg, Pa., is also closer to getting out of bankruptcy after it released its Harrisburg Strong plan this fall. And Stockton, Calif., has submitted its plan of adjustment to bankruptcy court after voters approved a key tax increase. That city is also looking close to emerging from Chapter 9 next year.)
5. Tapering: Will they or won’t they?
This summer, Federal Reserve Chairman Ben Bernanke said that U.S. growth was strong enough to slow bond purchases, which then prompted a spike in interest rates in the municipal market. It was enough of a reaction to keep talk of tapering the stimulus diminished for a time. But after a new budget deal was reached in Congress, speculation on the Fed backing out of the municipal market started up again and this time it was for real: Last week, the Fed announced a $10 billion reduction in its bond-buying program to $75 billion a month. (It will also cut mortgage bond-buying to $35 billion from $40 billion and Treasury purchases will go to $40 billion a month from $45 billion.) This means a controlled rise of interest rates in the municipal market, which will make it a little more expensive for municipalities (and individual people, for that matter) to borrow money.
6. The return of revenue
This fall, states were able to collectively get above water for the first time since the recession hit in 2008. Aided by healthier growth and federal funding (even with sequestration), spending levels rebounded for 41 states in fiscal 2013. Twenty-two states recorded an annual increase of at least 3 percent, led by Wyoming (42.9 percent), Nevada (16.7 percent) and Idaho (15.6 percent).
In all, total state spending climbed 4.7 percent for the fiscal year.
7. Congress: let’s make a (budget) deal!
In more good news, a two-year budget deal announced this month will shift planned spending cuts and alleviate some of the funding uncertainties that have plagued state and local governments. The Bipartisan Budget Act of 2013 will free up $63 billion for spending over two years, split evenly between defense and non-defense programs. Defense programs were slated to take most of the planned spending cuts for fiscal year 2014, which began on Oct. 1. The deal also scored feel-good points for being reached far ahead of the Jan. 15 deadline – a nice change after more than a year of last-minute deals and extensions.
8. Municipal advisers get official definition
What has been a source of frustration in the area of protecting issuers finally got resolved this fall when the SEC released its Dodd-Frank mandated definition for municipal advisers (the companies that municipalities pay to help them navigate Wall Street). Finishing the new rules was a top priority for John Cross, who took over as head of the SEC’s new Office of Municipal Securities a year ago. Now the Municipal Securities Rulemaking Board can write rules guiding these advisers, which should help to further protect inexperienced issuers from risky deals.
9. California and Illinois swap places
California stepped out of the unseemly spot of being the worst-rated state earlier this year when Standard & Poor’s Agency upgraded the state’s credit rating as tax increases brightened California’s fiscal outlook. Taking over that notorious spot was Illinois – its credit rating was downgraded after lawmakers failed last winter to pass pension reform. Illinois did pass reforms this fall that aim to cut the state’s massive unfunded liability but ratings agencies are still holding out on an upgrade until more hard data comes in.
10. A bad moon rising in Puerto Rico
Puerto Rico’s mounting debt situation has only worsened this year, even with the passage of pension reform. This month, Moody’s Investor Services announced it could lower the commonwealth’s rating below investment grade (also called junk status). The announcement came as Puerto Rico’s November revenues fell short of projections.
Now the Caribbean island’s interest rates, already the highest of any major issuer, could jump to even higher yields – a dangerous situation for a government already racked with debt.