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Not as scary as pensions

Moody’s Investors Service just caused a ruckus in Chicago after it downgraded the city’s credit rating based most on inaction by the city's government to address its looming pension liability. Moody’s has placed a greater emphasis on pension liabilities in recent years. But in a report released this week, the ratings agency noted the very different approach it takes to evaluating other post-retirement benefits (OPEB). Moody’s said focuses “on OPEBs more as a current budgetary expense, although the long-term obligation of unfunded liabilities is also important to our analysis.” And, the agency noted in its March 5 report that the year-to-year payouts by governments for those benefits are not breaking budgets. In fact, Moody’s said OPEBs are not an outsized budgetary burden for most of the governments it rates. For the vast majority of the 50 issuers surveyed, OPEB costs totaled a median of 1.5 percent of operating revenues.

There are outliers, of course. Buffalo’s OPEB costs are gobbling up 8.5 percent of operating revenues while that figure is 8.1 percent in Honolulu. In 2013, Detroit’s OPEB burden was the highest, at 12.8 percent of operating revenues, although this changed in bankruptcy. The report did note, however, that OPEB payments “will rise in the future due to healthcare inflation and growing retiree populations, and as more governments move from pay-as-you-go funding to a prefunding approach.” And though OPEB plans generally have weaker legal protections and lower cost certainty than pensions and have fared poorly in bankruptcies, the liabilities are not always easy to reform.

It keeps getting worse in New Jersey

Municipal Market Analytics’ Matt Fabian believes another downgrade is in store for the financially beleaguered New Jersey. In his analysis this week, Fabian noted that New Jersey bonds are still trading at interest rates far lower than those on Illinois bonds “yet its fiscal problems are no less challenging. This implies that there is far more downside risk to holding NJ paper.” New Jersey’s credit rating has dropped three notches in four years from AA in 2011 to A.

The state has routinely faced budget shortfalls in recent years and has often closed the gap with one-time fixes. More notably, Gov. Chris Christie shrunk planned pension contributions from the 2014 and 2015 budgets to fill gaps, a move that got him sued by the state’s labor unions for violating a 2011 law that said the state will fulfill pension payment obligations. Now, writes Fabian, “it appears that the state has run out of options that allow it to defer difficult decisions.” Thanks to a recent court ruling in favor of the unions suing Christie, the state must find a way to fund its pensions. If that ruling is upheld, it will blow a $1.57 billion hole in the current year’s $32.5 billion budget. And, Fabian continued, Christie’s $33.8 billion proposed budget for 2016 “fails to adequately address two of the state’s largest problems: pension and infrastructure funding. The Governor plans to continue to underfund pensions (and grow the unfunded liability) and is silent on how to replenish the state’s infrastructure spending vehicle, the Transportation Trust Fund.” Instead the proposal “relies on non‐recurring revenues and hopes for dramatic reforms to benefits for public employees and retirees.”

A win for transparency

Finally. Seven years after the launch of EMMA, the online database that publishes municipal market data and disclosures, Moody’s is allowing its public finance ratings to be included in the database. After the relatively new ratings agency Kroll agreed last year to release its public finance ratings on EMMA, Moody’s was the lone holdout. (Fitch Ratings and Standard & Poor’s are already on EMMA.) And as one of the top two largest ratings agencies, Moody’s absence was very noticed. Particularly for the health field as advisor HFA Partners noted that Moody's owns close to 40 percent of the market for healthcare ratings.

And, given that the mission of the Municipal Securities Rulemaking Board (MSRB), which manages EMMA, is to promote transparency, this latest development is important for credibility too. “By providing data from another municipal credit ratings agency,” stated MSRB Executive Director Lynnette Kelly, “the EMMA website will soon be an even more powerful tool for investors and other municipal market participants.”