<i>The Week in Public Finance</i>: A Run on Pensions in Dallas, Connecticut's Warning and a Threat to Muni Bonds

A roundup of money (and other) news governments can use.

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Dallas' Pension Problem

Dallas Mayor Mike Rawlings is calling on pension officials this week to halt what is amounting to a bank run on the fire and police pension fund. The run, which Rawlings testified has totaled $500 million withdrawn in 2016, is spurred in part by concerns the pension plan’s value is being inflated. Roughly half of the withdrawals have come in a recent six-week span.

Rawlings has asked that pension fund officials suspend so-called DROP payments, which are retirees’ own savings invested in the fund and are separate from their fund-administered pension payments.

For their part, pension fund officials blame the mayor for the run in the first place. Pension Board Chairman Sam Friar noted that Rawlings and other city leaders had refused the fund’s earlier requests to make public statements designed to boost confidence in the fund. “Had they done that, most of this money would not be gone. Simple, simple solution," Friar told the local television station
KXAS. “But they refused to do that.”

The pension was already troubled. Now, the plan’s officials are asking the city for a one-time infusion of $1.1 billion to help steady the ship. But that amount is unrealistic -- it’s equivalent to the city’s entire general fund budget. City officials say the situation could place Dallas on the brink of bankruptcy.

The Takeaway:
The back and forth in Dallas is typical pension politics. Before any viable solution is reached, it seems to be a prerequisite in every city for both sides to sit around and blame each other until things really get bad. Dallas’ pension fund is projected to become insolvent within 15 years--yet that’s not inspired the two sides to put politics aside and get to work.

The pension plan’s members also aren’t totally convinced of an emergency. In November, the plan’s roughly 10,000 members began voting on voluntary pension benefit cuts but that process was halted when five of them sued.

About 240 miles south in Houston, leaders also face many of the same revenue-raising restrictions and pension concerns as Dallas. But officials are moving forward with a multipronged approach to pension reform. The plan includes pension cuts approved by plan members, pension obligation bonds to infuse the system and guaranteed pension payments by the city. When officials get around to finding a solution in Dallas, chances are, it’ll look a lot like this one.

Connecticut, You've Been Warned

S&P Global Ratings slapped Connecticut with a warning this week, lowering its rating outlook to negative. The change signifies a downgrade could be in store if the state’s financial situation doesn’t improve.

The warning was driven largely by the fact that Connecticut’s legacy costs of pensions and retiree health-care, as well as its outstanding bond debt, are creating less and less flexibility in the state’s budget. Connecticut projects that debt service, pensions and other post-employment benefit costs will eat up a whooping one-third of its general fund revenue in the next budget year, a level S&P sees as “high and that will potentially increase in future years.”

In recent years, the state has routinely struggled with budget gaps. The frequency is mainly because revenues are falling short of projections and lawmakers have been solving the gaps with one-time solutions. Currently the state is facing an $82 million deficit. But the legislature’s nonpartisan Office of Fiscal Analysis estimates that its finances will run a $1.5 billion in deficit in the 2018 fiscal year.

The Takeaway: Connecticut’s situation is a great example of what happens when lawmakers kick the budget can down the road. As Municipal Market Analytics’ Matt Fabian noted recently in his weekly analysis, “Like other fiscally stressed states, resolution of growing structural gaps is becoming more challenging with each year.”

A reason all this can-kicking is particularly troubling is that it’s happening during a time of national economic expansion. States like Connecticut that have routinely struggled to balance their income with their expenses during this time include Illinois, Kansas, Louisiana, New Jersey and Pennsylvania. When looking at these states, it begs the question: If they are struggling during supposedly good times, what happens during the next downturn?

For Connecticut, that outlook isn't good. Lawmakers have raided its budget reserve to plug previous shortfalls and the fund is now down to $248.5 million, or roughly about 1.3 percent of appropriations. “With little hope of adding significantly to this fund in the coming years,” Fabian wrote, “Connecticut lacks a meaningful reserve fund to buffer the effects of an economic downturn.”

Battle for Muni Bonds Heating Up

A panel of state and local officials warned Capitol Hill this week that eliminating the tax exemption benefit for municipal bonds would cost governments big time increases in borrowing costs. The panel said that over a nine-year period, the tax exemption for muni bonds saved states and localities roughly $500 billion in additional borrowing costs. Another estimate, which I wrote about last year, pegged the savings even higher at an estimated $714 billion in extra interest payments from 2000 to 2014 alone.

The Takeaway: The panel event is likely a preview of what's to come in terms of lobbying by state and local government organizations next year. With a Republican soon to be in the White House, many believe the Republican-controlled Congress will start making big moves on federal tax reform. The plan so far does include nixing or at least limiting the tax-exempt status of municipal bonds.

The panel also came just one day before President-elect Donald Trump named Wall Street insider Steven Mnuchin his nominee to run the U.S. Treasury Department. Among Mnuchin’s first comments: A promise that Americans should expect” the largest tax change since Reagan.”

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Liz Farmer is a former GOVERNING fiscal policy writer.