The Week in Public Finance: Uh Oh in Illinois, DC Water Puns and Cautious About State Income
A roundup of money (and other) news governments can use.
Retirees win big in Illinois
An Illinois Supreme Court ruling this month that overturned the state’s effort to cut retiree health care costs casts doubt on Illinois’ pending pension reform. This could potentially hurt its credit rating, a new note by Moody’s Investors Service said. In a note released July 11, Moody’s placed the state’s credit rating on a negative watch and said that the majority of the justices “expressed views that run counter to the rationale used in recent pension reform legislation for certain city and state plans. We therefore perceive increased risk that the Illinois Supreme Court will rule the pension reform legislation unconstitutional, which would jeopardize $32.7 billion of pension liability reduction.”
In its 6-1 ruling, the court overturned a lower court ruling and found that Illinois’ constitutional pension protections are not just limited to core pension earnings, but extend to other benefits provided under the retirement systems. The ruling wiped out changes Illinois made in 2012 that allowed the state to force retirees, including those who retired prior to enactment of the law, to pay higher health insurance premiums. The move provided annual savings of approximately $90 million, according to the state.
Here’s why Moody’s is concerned that the opinion places pension reform in jeopardy: The majority opinion states, “Where there is any question as to legislative intent and the clarity of the language of a pension statute, it must be liberally construed in favor of the rights of the pensioner.” This and other sections of the ruling “signal how the court could side with pensioners when it eventually addresses the constitutionality of recent state pension reforms, which have already been challenged, as well as Chicago’s pension reforms, which we expect will be challenged,” Moody’s said.
In December, Illinois passed reform that reduced cost-of-living adjustments (COLAs) for employees and retirees in four of the five state pension systems. (As a concession, the legislation also increased state contribution requirements and reduced employee contribution rates.) Moody’s estimated that these and other changes reduced accrued liabilities of the three largest pension systems by approximately $32.7 billion combined, or 17 percent.
D.C. Water makes (groan) waves
After proposing the idea this spring, the DC Water and Sewer Authority this week became the nation’s first public utility to issue a century bond. Thanks to high demand, the sale on July 10 of $350 million in taxable bonds is $50 million higher than the utility had initially planned on offering.
Sold at an interest rate of 4.8 percent, the bonds mature in 2114 and will go toward financing a $2.6 billion tunnel project. The unique characteristics of the project, which will catch overflow and prevent flooding during heavy rainstorms, is a key reason why the utility is considering such a long-term bond in the first place. Thanks to innovative engineering and the fact that the tunnel will technically be empty of water most of the time, it’s designed not to need significant maintenance for at least 100 years.
“This issuance enables DC Water to spread the costs of the project over the minimum expected life of the tunnels and be supported by future ratepayers who will also benefit,” DC Water General Manager George Hawkins said in a statement announcing the sale. “With more than $1 billion in market interest, investors clearly understand that DC Water will continue to provide water and wastewater services in an environmentally sustainable manner for more than a century and beyond."
Thanks for the cash, Uncle Sam
Income growth across the 50 states was stronger during the first three months of 2014 than it was at the close of 2013, but still not anything to brag about, a new analysis by RBC Capital Markets’ Chris Mauro indicated. Income growth (wages, capital gains and other income) averaged 0.8 percent during the first quarter of 2014, an improvement over the 0.5 percent gain during the fourth quarter of 2013. However the increase over the previous quarter was entirely driven by outsized federal government transfer payments: a 1.5 percent Social Security cost-of-living adjustment, expanded Medicaid coverage under the Affordable Care Act and the payment of ACA health insurance premium subsidies.
“We continue to be encouraged by the personal income growth in the states beyond the ‘resource belt,’ [center of the country] but remain disappointed by the lack of momentum in this measure across all of the states,” Mauro writes. “Personal income is a significant driver of state tax revenues and as such, has a material impact on state budgets. In this regard, we think caution will continue to be the watchword in state budget offices until more meaningful growth in personal income materializes.”
In total, four states (Nebraska, Arkansas, North Dakota and South Dakota) saw outright declines in personal income compared with the end of 2013, and just 15 states posted gains of 1 percent or higher. West Virginia, Washington and Vermont had the highest quarterly growth in personal income at 1.4 percent.