The Week in Public Finance: Moody About Ratings, the Worst-Funded Pension and Data Disappointment

A roundup of money (and other) news governments can use.
by | May 22, 2015
Why did Moody's downgrade Chicago's but not Illinois' rating after a ruling on the state's pension law? (David Kidd)

For past editions of The Week in Public Finance column, click here.

Moody’s explains itself

Last week, a court ruling struck down Illinois’ pension changes, and days later, Moody’s Investors Service downgraded the Chicago's (but not Illinois') debt to junk status. Moody's phones must have been ringing off the hook. So this week, in an unusual move, it released an FAQ regarding the downgrade of the city and not the state.

Moody’s said in the May 18 document that it didn't downgrade the state because Illinois has more flexibility and isn't in as tight a financial predicament as Chicago. Illinois had not yet enacted its pension law so it wasn't incorporated into its credit rating. Chicago's pension law, which cuts retiree benefits, is also tied up in a legal battle and has yet to be enacted, but Moody's said the recent state-level ruling will lead to a reversal of that law. That, Moody's said, leaves the Windy City left only with the option of increasing its payments into the pension plan to keep it solvent -- a feat that will require considerable cash for a city that's already heavily leveraged. Illinois, on the other hand, has potentially other options, Moody's said. The agency added that the Supreme Court could have ruled more narrowly and said that benefit modifications are permissible under certain circumstances, which would have been more favorable for Chicago’s own hopes at reducing its pension liabilities.

“Instead, our interpretation of the court’s opinion is that benefit modifications are impermissible under any circumstances.” Moody’s said. “Given the stridency of the court’s opinion, we believe that the opportunities for benefit reform are now significantly more limited.”

Moody’s also said that while Chicago has a strong economy, immense tax base ($187 billion) and population (2.7 million), its “overall debt and unfunded pension liabilities are very high compared to other major U.S. cities.” Any future ratings changes for Chicago -- for better or worse -- will “largely reflect city officials’ actions on pension contributions and, ultimately, the growth of debt and pension leverage on the city’s balance sheet.” The agency also clarified it doesn't think Chicago is at risk of defaulting on debt or declaring bankruptcy.

If you thought Illinois was in rough shape…

Illinois’ troubled pension system seems to get all the headlines, but it’s not actually the worst-funded state retirement system in the country. That honor (of sorts) falls to Kentucky.

Governing has reported that the state’s Employees Retirement System was 25 percent funded in 2014. That's worse than the state employee plans of Illinois and New Jersey -- both of which use lower investment return assumptions than Kentucky and have more trouble balancing their budgets. All states have a history of skipping their pension contributions.

Now, a new audit conducted by the independent firm R.V. Kuhns (RVK) on behalf of Kentucky Retirement Systems says that the system is in even more dire straits. It's currently 22 percent funded, meaning it has less than one-quarter of the money it will ultimately need to pay out all its retirement paychecks to current and future retirees. And, the audit adds, it’s going to get worse before it gets better:

“As assets grow each and every year without exception at the assumed rate of return (7.50%), the funding ratio on a market value basis is expected to gradually increase to approximately 32% by 2034 from the current value of 22%," the report said. "However, please note that before the funding ratio begins to increase, it is likely to decline to roughly 15% between 2020 and 2025.”

RVK concludes that the low funding level means that the pension plan can't take as much investment risk as other better-funded plans in the name of going for big portfolio returns. Instead, “positive outcomes are extremely dependent on the contribution policy.” The state passed a pension law that requires the legislature to start fully funding the plan, and it's set aside the money for the current and next fiscal year. But many are concerned that future legislatures won’t be able to follow through. In New Jersey, for example, unions sued Gov. Chris Christie -- and won -- for not following through on a similar pension funding promise.

Mad about MADOFF

Earlier this month, I reported on expected federal legislation that would seek to standardize how government financial data is reported at the federal, state and local level. Now, sadly, the super-cool “MADOFF” acronym (a nod to the infamous Ponzi-scheming Bernie Madoff) was nixed from the title.

Now called the Financial Transparency Act of 2015, the bill was introduced May 20 by U.S. Rep. Darrell Issa of California and several bipartisan cosponsors. It would require federal financial regulators to adopt consistent data standards for information they collect under the securities, commodities and banking laws. According to this summary by the Data Coalition, the bill directs the Treasury Department's Office of Financial Research to set data standards for the whole financial regulatory sector. It also directs the eight other agency members of the Financial Stability Oversight Council, including the Securities and Exchange Commission and Commodity Futures Trading Commission, to adopt data standards for the regulatory information they collect.

CORRECTION: A previous version of this article incorrectly stated that the Financial Transparency Act of 2015 would exempt state and local government data.