The Week in Public Finance: Oklahoma's Pension, Jilted Bondholders and State Debt Loads
A roundup of money (and other) news that governments can use.
401(k)s in OK?
The Sooner State is getting closer to passing major pension plan changes that would close off the state’s current defined benefit plan for new hires and force them into 401(k)-style retirement plans. HB 2630 passed the Oklahoma House by a vote of 58 to 33. It now heads to the State Senate. Gov. Mary Fallin issued a statement on May 20 applauding the House passage and saying that a new model for “future hires will make Oklahoma better able to recruit and hire qualified employees for state government by giving them more portable and flexible retirement benefits.”
Shutting off the state’s current plan wouldn't change its $1.6 billion unfunded liability. It still owes what it promised to pay to its retirees and current employees. But a defined contribution plan for new hires is expected to help control future liability growth because the investment risk would be shared between the employer and the employee (versus the state assuming all the risk). The Oklahoma Public Employee Retirement System's state employee plan is 82 percent funded, according to its most recent annual report, and the state has been making more than its required contribution since 2012. (It was only putting in about two-thirds of what it was supposed to between 2008 and 2011.) The plan is projected to be fully funded in 14 years.
If passed, the bill would require new hires to contribute at least 3 percent of their salaries to one of the new plans, and the state would match contributions up to 7 percent. The legislation does not apply to educators, firefighters, law enforcement officers or members of the judiciary, groups that have their own retirement plans.
One bitten, twice shy
Moody’s issued a new report about state debt levels. It found that governments continued to be wary of going into more debt. Overall debt growth was less than 1 percent in 2013. About half the states experienced a decline in outstanding debt. The average annual growth rate over the last decade was 6.5 percent and 2013’s stats marked the slowest debt growth rate in 20 years.
Moody’s predicts that the debt load in 2014 will remain low. “Despite the need for large investments after years of low capital spending, sentiment about debt remains conservative,” the report said. “Uncertainties about the strength of economic recovery and the course of federal fiscal policy, while not as acute as in 2013, also linger.”
Some of the reasons for that uncertainty include sequestration, last year’s government shutdown and continued threats to the municipal bond tax exemption. Those factors caused some states to put off issuing new debt, Moody’s said. Additionally, “states were reluctant to take on new debt service obligations, given that future economic growth and thus revenue growth could be jeopardized by federal inaction.”
Unfaithful in Detroit
This week’s Municipal Market Advisors (MMA) brief singled out the Michigan Municipal League for its noticeable silence on how Detroit’s reorganization plan treats bondholders. WIPF (Week in Public Finance) previously noted the credit market’s concern for the way limited-tax general obligations (LTGO) bondholders are receiving pennies on the dollar while the city’s pensioners are treated far better. This week saw some push back with Ambac Assurance Corp., which insures most of Detroit's LTGO debt, filing an objection to Detroit’s Plan of Adjustment. Blackrock, which owns a fair amount of the uninsured LTGO debt, joined the insurer in the challenge. The Securities Industry and Financial Markets Association also filed an Amicus Brief that blasts the treatment of the bonds.
MMA’s take on the situation includes wondering “why, for example, the Michigan Municipal League has remained silent on an issue with such enormous implications to its members. Their lack of protest implies an underlying context of un-willingness to repay bondholders or, at a minimum, complicity in re-casting [LTGO] bonds as no stronger than lease-appropriation securities so as to protect other municipal stakeholders. This is, increasingly, an unfavorable precedent for the [Michigan] bond market.”
Schools revenues hit historic decline
The U.S. Census Bureau announced that 2012 marked the first time in 35 years that public elementary and secondary education revenue declined. (The bureau began collecting public education finance data on an annual basis in 1977.) School systems received $594.5 billion in total revenue (or funding) in fiscal year 2012, down $4.9 billion (0.8 percent) from fiscal year 2011, the bureau reported. State governments led, collecting $270.4 billion for school funding. Local revenue was $264.6 billion, with about two-thirds coming from property taxes. Public school systems also received $59.5 billion in revenue from the federal government, a decrease of about 20 percent. Experts say the decrease in funding reflects the new reduced revenue structure in the absence of federal stimulus dollars that helped prop up the system during the Great Recession.
The top spenders per pupil were New York ($19,552), the District of Columbia ($17,468), Alaska ($17,390), New Jersey ($17,266) and Connecticut ($16,274).