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Moody pension blues

Moody’s Investors Service released its annual valuation of pension liabilities of the 50 largest local governments and -- no surprise here -- the agency ranks Chicago as the worst big city in the country. Moody’s uses a slightly different and more conservative valuation method than pension plan actuaries use to come up with its annual Adjusted Net Pension Liabilities (ANPL). The agency then ranked the local governments based on how the total liability compared to the government’s operating budget.

The Moody’s pension liabilities increased for 31 local governments in fiscal year 2013. The median liability was about two times the median operating revenue. But Chicago’s ANPL is equal to seven times the city’s annual operating budget, while Dallas’ liability is five times its budget. Houston, Los Angeles and Jacksonville, Fla., all have liabilities at least four times their annual operating budgets.

Still, annual pension costs aren’t a big burden for many of the largest local governments -- Moody’s estimated they amount to less than 5 percent of revenues for 14 out of the 50 cities. These figures also come from 2013. The following year was a very good one for pension plan returns. The top 50 local governments with the lowest ANPLs for fiscal 2013 were Washington, D.C., Cypress-Fairbanks Independent School District, Tex., and Mecklenburg County, N.C, all with liabilities at about one-quarter of their operating revenues.

Sneaky hedge funds

The folks at the Wells Fargo research desk looked at who’s buying municipal bonds and stumbled across a somewhat troubling realization: there’s no good way to see how much hedge funds are becoming buyers in the $3.6 trillion municipal market. The largest group of buyers is still households (also called retail buyers) but that share has declined over the years from a little more than half of muni bonds to 42 percent. Mutual funds (26 percent) and insurance funds (12 percent) make up the two other biggest buyers.

But where are hedge funds? Anecdotally, we know more hedge funds have entered the market -- they were the biggest buyers of cash-strapped Puerto Rico’s $3.5 billion bond offering a year ago. But, “sadly,” noted researchers Natalie Cohen and Roy Eappen, the Federal Reserve includes both non-profit organizations and hedge funds in the household category of bond holders. While holdings of non-profits are likely too small to make a difference, Cohen and Eappen suspects alternative investors are not. A Bond Buyer tally in 2013 estimated hedge funds accounted for about $166 billion of the market and the new Wells Fargo report estimated these investments have grown to about $200 billion of the $1.55 trillion household sector.

With the rise of hedge fund holdings and the decline of overall household holdings, Cohen and Eappen estimated that means the “true” individual retail investor has reduced holdings about 25 percent since 2011. That’s potentially a major shift in who holds municipal bonds. “Such a reduction in retail holdings makes sense,” said Cohen and Eappen, given the concerns back in 2013 when the Fed threatened to raise interest rates, the Detroit bankruptcy filing and the awareness of Puerto Rico’s severe fiscal problems since that time.

Retirement insecurity

The National Institute on Retirement Security has released a new retirement security analysis that found Americans in nearly every state will fall far short in meeting their economic needs in retirement. States whose retirees are in the most trouble are:

  • California due to low potential retirement income, low workplace retirement plan access and high retiree costs.
  • Florida due to high retiree costs, low wages for older workers and low workplace retirement plan access.
  • South Carolina due to low potential retirement income and low labor market scores.

Called State Financial Security Scorecards, they are available for all 50 states and the District of Columbia and gauge the retirement readiness of future retirees in three key areas: anticipated retirement income; major retirement costs like housing and healthcare; and labor market conditions for older workers. The research balances this against trends in retirement plan participation rates in each state, average savings levels in individual retirement accounts in relation to median income and current poverty levels.

The report found that the highest-ranking states were Wyoming, Alaska, Minnesota and North Dakota due to their relatively strong labor markets and lower retiree costs.