Finance

The Week in Public Finance: Detroit's Bigger Pension Problem, Games on the Hill and a Win for Munis

A roundup of money (and other) news governments can use.
by | July 18, 2014
Senate Majority Leader Harry Reid on the Senate floor.
Senate Majority Leader Harry Reid bypassed the committee process altogether and brought the Marketplace and Internet Tax Fairness Act straight to the Senate floor. AP

Still liable in Detroit

A new Moody’s Investors Service analysis of Detroit’s plan of recovery broke down the differences between what bondholders will get and what pensioners will get. Both were treated as creditors but retirees will get a far better deal than many of the city’s bond holders. Retirees will see pension payments cut by about one-quarter and they'll no longer receive cost-of-living pension increases. But some bondholders will get back less than 34 cents on the dollar in their investment.  But even with that imbalance, Moody’s noted that Motown is still taking on risk with its plan for pensioners as it will not entirely rid the city of its unfunded liabilities.

In fact, by 2023, the city’s unfunded liabilities could be as much as $3.4 billion, assuming a less-than 5 percent rate of return on investment, Moody’s said. That figure is roughly the unfunded pension liability with which Detroit entered bankruptcy. (Even using the city’s 6.75 percent rate of return, the unfunded liability would total $1.4 billion.) The liability figures even took into account the benefits reductions that Detroit plans to make to current retiree pensions and to current employee plans. Moody’s estimated that, starting in 2023, Detroit would have to start paying as much as $103 million into its pension each year.

Dueling tax bills on the Hill

This week it was business as usual in Congress, where both parties never seem to miss an opportunity to play partisan politics. This time, the Internet sales tax -- a top issue for states -- is caught in the middle. On July 16, the House passed the Permanent Internet Tax Freedom Act (H.R. 3086), sponsored by House Judiciary Committee Chairman Bob Goodlatte (R-Va.). The bill would permanently ban states from taxing Internet access, a temporary measure that has been extended by Congress since the late 1990s. Meanwhile, Senate Majority Leader Harry Reid (D-Nev.) bypassed the committee process altogether and brought the Marketplace and Internet Tax Fairness Act straight to the Senate floor. The new bill tacked the Marketplace Fairness Act (S. 743), which would allow states to collect sales taxes from certain out-of-state sellers where there is no direct nexus or physical presence, on to the Senate version (S. 1431) of the House’s tax freedom act.

Seeing as the GOP-led House has not looked favorably on the Internet sales tax idea, attaching it to a relatively non-controversial measure is sure to set up a showdown between both houses. The current extension of the Internet access tax exemption expires in November.

Muni rates -- get ‘em while they’re hot

Even as the economy improves, short-term interest rates have stayed at historic lows and that’s been a boon for municipalities, according to a Moody’s report. Governments have been able to do things like manage construction costs and bridge cash-flow gaps at record-low costs. Most Moody’s-rated short-term bonding instruments have sold in fiscal year 2014 at interest rates below 0.5 percent, “indicating strong access to short-term funds and affordable interest costs,” Moody’s said.

The drop has been part of a long-term trend as interest rates on popular types of short-term bond notes have declined every year for seven consecutive years. But all good things must come to an end and Moody’s warns that “eventually... rates will increase, and these benefits will diminish or disappear.” But unless your name is Janet Yellen, when exactly that will be is anybody’s guess.

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