Finance

The Week in Public Finance

This week's roundup of money (and other) news that governments can use touches on retirement security, ridiculously cold weather, superdowngrades and more.
by | February 3, 2014
Vice President Joe Biden and House Speaker John Boehner listen as President Obama gives his 2014 State of the Union address.
Vice President Joe Biden and House Speaker John Boehner listen as President Obama gives his 2014 State of the Union address. AP/Charles Dharapak

Governing's roundup of money news governments can use touches this week on retirement security, ridiculously cold weather, superdowngrades and more.

Phrase of the week: retirement security

President Barack Obama highlighted retirement security in his State of the Union address last week, drawing applause from the public pension community and prompting the re-introduction of a Senate bill that would create a private retirement plan to supplement 401(k)s and pensions. Why retirement “security”? Because while a lot of people do save something, more than half of Americans reaching retirement age don’t have enough saved to even remotely maintain their standard of living, according to the Boston College Center for Retirement Research.

Obama has directed the Department of Treasury to create a plan called MyRA, which would allow employees without access to a retirement plan opt to take money out of their paychecks to invest in government bonds. Obama also called on Congress to create a program that would automatically enroll people in a retirement program since, as research shows, that’s the best way to encourage participation. So, just two days later, Iowa Sen. Tom Harkin trotted out an old proposal of his: the USA Retirement Fund, which would be available to everyone and automatically enrolls workers at a contribution rate of 6 percent per year (workers can later opt out or change the rate themselves). The assets would be pooled and professionally managed.

Here’s the kicker: the program would be structured to provide lifetime payments, similar to pensions. The proposal has so far drawn kudos from, not surprisingly, the National Public Pension Coalition, the National Institute on Retirement Security and others.

“I'm all for savings, but you need that retirement system,” Harkin said at a press conference announcing the bill. “People need something that will be there when they retire, and they won't outlive it.”

Funny you should mention pensions…

Moody’s Investor Services reminded us all that pensions also have their problems with the release of its pension medians report. Moody’s found that adjusted net pension liabilities (ANPL) widened for most states in fiscal 2012 as a result of minimal investment returns and a decrease in the interest rate index Moody’s uses to calculate the liabilities. It’s important to note that the liabilities Moody’s uses are not calculated the same way pension fund actuaries calculate liabilities. Moody’s uses an adjusted rate of return ranging between 4 and 6 percent, depending on the health of the plan, while pension actuaries use returns ranging between 7 and 8.5 percent. So Moody's calculation results in a greater pension liability than pension fund actuaries calculate.

That said, the report rightly points out states that are struggling with out-sized unfunded liabilities. Namely Illinois, Connecticut and Kentucky have liability that range from three to four times their annual governmental revenues. The healthiest states, according to Moody’s, are New York, Wisconsin and Nebraska.

The big chill

Fitch Ratings Agency is warning that the polar vortex tormenting much of the nation this winter could have a negative impact on airport revenue. Snow and ice removal are costly but “passenger-generated revenue from terminal concessions, on-airport parking, and car rental are most at risk to changing conditions,” said Seth Lehman, Fitch’s senior director. “All together, these revenues can contribute 40 – 60 percent of total airport operating revenues and quickly impact total non-aeronautical revenue generation.”

So far this season, more than 40,000 flights have been cancelled and 180,000 delayed, according to some estimates.

Superdowngrades: it could happen to you

In this week’s issuer brief, Municipal Market Advisors warns issuers who have not sold bonds in recent years that they could be at risk of a superdowngrade this year if they decide to go to the market. (A superdowngrade is having your current rating lowered by at least three levels.) Thanks to methodology changes credit ratings agencies have imposed since the financial crisis, MMA says that many issuers who are applying for a rating for the first time in many years “can be negatively affected.” And in case that hasn’t spooked anyone, MMA also warns that “reconsiderations by the rating agencies of pension obligations and lack of robust issuer practices could trigger more of this activity” for local governments. On the bright side, the number of superdowngrades fell by 50 percent last year to 125 total.

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