The Week in Public Finance: Expensive Retirees, State Spending Redux and Following the Rules

A roundup of money (and other) news governments can use.
by | November 21, 2014
North Riverside, Ill., plans to privatize its fire department, switching employees that choose to stay with the department over to 401(k)s. David Kidd/Governing

So you think your pensions are pricey

New Jersey’s mounting pension woes are headline news but it turns out they have nothing on the state’s obligations for retiree healthcare. The state’s total liability for retirees’ so-called “other postemployment benefits” (OPEB) is a whopping $66.8 billion, second only to New York’s $68.2 billion, according to Standard & Poor’s annual OPEB report released Nov. 17. (New Jersey has about $50 billion in unfunded pension liabilities between its three main pension funds.) Unlike pensions, neither state sets aside money in advance for OPEB so those burdens are the same as their unfunded liability. New Jersey is also among the states that saw the biggest year-over-year increase in its OPEB liability with nearly a $3 billion jump. Texas had the highest increase of $5 billion.

As a whole, however, S&P said that U.S. state OPEB funding has stabilized in recent years. The liabilities are still astronomical -- now totaling $529.8 billion. But that’s actually just a 0.1 percent change from last year’s total. There is also divergence among states, with some making positive moves toward reducing liabilities by changing plan designs or eligibility requirements or establishing OPEB trusts, S&P said. North Carolina, Michigan and Hawaii were all leaders in reducing liabilities this year.

And end-around the pension problem

An Illinois Policy Institute article this week proposed an interesting way for Illinois cities to get around the state’s inability to fix its (and thus, their) pension problems. Pointing to the Chicago suburb of North Riverside’s planned privatization of its fire department, the institute said such moves are the best way for Illinois cities to get around waiting on the state to pass pension reform. Privatization would basically switch those employees that chose to stay with the now-privately-run department of service over to 401(k)s. (The article makes no mention of the huge objections brought on by the local firefighters union, but nobody’s perfect.)

The move to a private provider of fire protection services would reduce the village’s $1.9 million budget deficit by nearly 40 percent, the foundation said. Most of the savings are due to pension cost savings. “This reform would allow North Riverside to maintain its current level of public safety,” the article said. “North Riverside firefighters will be able to keep their current jobs, their salaries will be maintained, their already earned pension benefits will be protected and going forward they’ll be given ownership and control over their own retirement accounts with 401(k)-style contracts through the private provider.” Still, unions' main objection to the reform is that it would take away the financial stability offered to employees under a traditional defined benefit pension plan.

Spending like it’s 2008?

Total state spending grew at its fastest pace since before the recession, according to the latest State Expenditure Report, released this week by the National Association of State Budget Officers (NASBO). Overall, total state expenditures (which includes all state funds, bonds and federal funds) increased by 5.7 percent in fiscal 2014. That’s up from a spending increase of 2.2 percent last year and a reduction in spending by about 1 percent in fiscal 2012. But it’s not as rich as it looks -- NASBO said the sharper rise in total state spending was largely due to an increase in federal Medicaid funds flowing to the many states that opted to expand Medicaid under the Affordable Care Act. In fiscal 2014, federal Medicaid funds increased 17.8 percent; overall federal funds to states increased 7.6 percent this year.

Meanwhile, the income states get from their own sources (like taxes) have only increased slightly due to modest economic growth said NASBO Executive Director Scott Pattison in the organization's press release. "So,” he added, "states don’t actually have a lot of additional money to fund other priorities like education or infrastructure."

Rules, rules, rules

The Municipal Securities Rulemaking Board (MSRB) this week filed a proposed rule change with the Securities and Exchange Commission (SEC) to create new professional standards for municipal advisors. The SEC released its definition of who constitutes a muni advisor late last year. The MSRB is responsible for developing professional standards for the new class of financial advisors.

The board is proposing to establish two classifications of municipal advisor professionals: representative and principal. A representative is someone who actually is a municipal advisor and works with government clients; a municipal advisor principal would essentially be that person’s manager or supervisor. Firms would be required to designate at least one principal to oversee the municipal advisory activities of the firm and each municipal advisor representative and principal would have to take and pass a qualification test. (The board is currently developing the content outline for the test and plans to administer a pilot exam in 2015.) The MSRB has already submitted supervision and compliance obligations for municipal advisors to the SEC.