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Most Pensions Falling Behind

A new analysis of state public pension plans this week shows that only one in three states are actually on a path to reduce their unfunded liabilities.

The report, by the Pew Charitable Trusts, used a new metric called net amortization, which essentially measures whether a pension plan’s accounting assumptions and payment schedule are holding up over time. Only 15 states are achieving positive amortization, according to Pew. In other words, they're following contribution policies that are sufficient to pay down pension debt. The remaining 35 states are facing negative amortization, or are following contribution policies that allow the funding gap to continue to grow.

Based on the measure, the plans in the worst shape are, in order: Kentucky, New Jersey, Illinois, Pennsylvania and California. The report does note that Pennsylvania has committed to large contribution increases and is projected to reach positive amortization by 2018. The top five plans in the best shape are West Virginia, New York, Indiana, South Dakota and Louisiana.

The Takeaway: This metric gets at the true health of a pension plan better than the annual funding status because it tells us in which direction a pension plan is going. Net amortization supplies the long view, which seems appropriate when talking about a program that’s supposed to last for generations.

Case in point: 40 states reported decreased unfunded liabilities in 2014 thanks to stronger-than-expected investment returns. This is great news for the short term, But, according to the report, only a small number met the positive amortization benchmark. “Investment returns vary widely over time,” the report said, “and most governments that sponsor pension plans made contributions that were not large enough to reduce debt based on expected long-term rates of return.”

The measure helps explain why some plans -- such as Houston’s or the state of Alabama’s -- haven’t made up ground even though governments have paid their full pension bills.

A Threat to City Fees?

The Minnesota Supreme Court this week ruled that fees St. Paul was charging property owners for street maintenance amounted to a tax and therefore should be subject to the city’s constitutional limits on taxing authority.

The case was brought by two churches who argued they were asked to pay for a service that benefitted the public, not just the property owner. The fee applied to routine street services including street sweeping, snow plowing, streetlight maintenance and litter pick-up. It affects more than 81,000 St. Paul homes, churches, nonprofits, universities and businesses.

St. Paul’s city attorney framed the loss as a technical one, telling the Twin Cities Pioneer Press that “it’s not a question of if the city can collect assessments but how it goes about doing so.”

The Takeaway: This case is more than a technical debate. St. Paul is like many cities and counties across the country in that it's seen an increasing share of its budgeted income come from fees rather than taxes in recent decades. Simply put, it’s easier to raise a fee -- or create a new one -- than it is to raise a tax.

It’s important to note that this ruling only immediately applies to St. Paul. But it could spark copycat suits in other municipalities. At a minimum, it might give municipalities pause when instituting a new fee -- to consider whether they are actually charging for an individual service or a public good.

Pennsylvania Borrows Huge Amount. From Itself.

Earlier this month, the Pennsylvania Treasury Department loaned out $2.5 billion to the state’s general fund to help it through the next several months. While Pennsylvania is no stranger to such internal borrowing, the amount is the largest transfer yet for the state.

By law, the general fund has to pay back the Treasury before the end of the fiscal year (June 2017). The state should have no trouble doing so, thanks to new taxes that should bring in more revenue than in previous years.

This month’s transfer is essentially Pennsylvania’s simpler version of a tax anticipation note, which is when governments issue short-term bonds to stay afloat until revenue comes in.

The Takeaway: It may seem huge but compared to other states, the size of this transfer is pretty run-of-the-mill. According to Moody’s Investors Service, the $2.5 billion borrowing equals around 7 percent of Pennsylvania's annual general fund revenues. Recently, Oregon issued a $600 million tax anticipation note equal to 6.5 percent of receipts, and Idaho issued a $500 million tax anticipation note equal to 15 percent of receipts.

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