The Week in Public Finance: Funding Pensions, Puerto Rico’s Crisis and Dropping Debt

A roundup of money (and other) news governments can use.
by | June 26, 2015

Getting Better About Funding Pensions

U.S. pension plans got healthier over the past year as governments got better about putting in the payments to keep the plans financially healthy. The average percentage of required contribution paid by governments in 2014 was 88 percent, according to a new report released this week by the Boston College Center for Retirement Research. It’s not perfect, of course, but it’s a big jump from the roughly 82 percent average of the past few years. The required contribution amounts are determined by pension fund actuaries and reflect what governments should be paying in each year to keep the plan 100 percent funded. While some governments are very good about putting in the full amount or close to it every year, many pay in varying amounts each year and some recently put in little-to-none of what’s recommended.

About three-quarters of the governments surveyed paid between 60 percent and 99 percent of the required contribution last year. A few -- 6 percent -- paid their full contribution while the remaining fifth paid about half their payment or less. “Hopefully, this trend will continue as the economy improves,” the CRR analysis said, “mirroring the pattern of decline and recovery evident in the wake of the bursting of the dot.com bubble at the turn of the century.”

These funding habits play a major role in the overall health of a pension plan, even more than swings in the stock market and investment returns, as Governing reported in an analysis late last year. Pension plans’ overall funded status is also improving and inched up from 72 percent to 74 percent of the money needed to pay out promised pensions to retirees and current employees.

Showtime in Puerto Rico

Remember during the recession when California’s finances were so bad it had to issue IOUs to taxpayers? Puerto Rico wishes it had that problem.

To say the island territory is facing a cash crunch is putting it mildly. It has been in a recession for nearly a decade and it has racked up debt of about $72 billion. It has less than $1 billion in cash. Meanwhile, its lawmakers are struggling to pass a budget, the chairman of its Government Development Bank resigned this week for “personal reasons” and its governor is talking with creditors in New York about restructuring $9 billion in power utility debt as a bond payment looms. The utility, the Puerto Rico Electric Power Authority (PREPA), has a debt service payment of approximately $415 million due July 1 and Moody’s Investor’s Service predicted this week “that some form of default will occur on that date.” The agency, which rates the utility (and Puerto Rico’s general obligation debt) at junk status, added that if PREPA defaulted on its debt, recovery prospects for bondholders would likely range between 65 percent and 80 percent.

Dropping Debt

For the first time in nearly three decades, state debt levels have declined, according to a new Moody’s analysis released this week. The development shows states are reluctant to take on new debt, despite all-time low interest rates.

Net tax-supported debt fell by about $900 million to $509.6 billion, Moody’s said. It is the first decline in the 28 years the ratings agency has aggregated these debt medians. In other measures, the 50 states’ median for net tax-supported debt per capita dropped to $1,012 and is the third year of decline. Net tax-supported debt as a percentage of income fell to 2.5 percent, the second decline in a row.

“Debt levels will stay flat in 2015,” Moody’s predicted. “Many states are reluctant to take on new debt service amid moderate revenue growth and tight operating budgets. But eventually states will increase their debt due to a rising demand in infrastructure needs.”