Yes. No. I don’t know!
An Illinois circuit court struck down the state’s attempt at pension reform late last week and with equally resounding decisiveness, the top three credit rating agencies all weighed in this week, saying the decision would hurt the state’s credit future. No, wait, it has no impact. No, correction again – it might be bad but it could be worse. OK, so it actually depends on who you’re talking to.
Moody’s came down with the harshest judgment. It issued an analysis on Nov. 24 that said the “state’s negative outlook indicates the possibility that factors such as further growth in the state's pension liabilities will drive the rating lower still.” The state is appealing the decision to the Illinois Supreme Court but Moody’s was wary of its chances and pointed out that the top court this summer indicated in a separate case on retiree health benefits that would adhere strictly to the pension protection clause. Fitch Ratings and Standard & Poor’s were far more forgiving. Both said they had already factored in the likelihood of court challenge into their current ratings for Illinois. “More importantly, from a credit perspective,” S&P added, savings from the pension reform are not included in the fiscal 2015 budget.”
Fitch did note another trouble spot for Illinois’ credit lurking just ahead: the scheduled expiration of temporary tax increases in 2015. “The state passed a placeholder budget for the current fiscal year with a stated intent to revisit the issue after the November elections,” Fitch said. “Taking steps to address the long-standing structural mismatch between revenues and spending would put the state on more solid financial footing, while failure to take action would be a return to past practices and leave the state poorly positioned to confront future downturns.”
A lesson in proofreading
A proofreading error by Miami-Dade County’s budget office is proving to be a costly mistake. The county in the next few weeks must pass its new property tax rate and 2015 budget. Again. Even after two months of rewriting, six town-hall style meetings and two public hearings. Why? Because of a typo. (That smug snort you hear is from copy editors everywhere.) Turns out that the county’s September newspaper advertisement laying out the budget hearings and proposed taxes for the next year said Miami-Dade planned to collect a total of $1,371,585,000 in property-taxes in 2015. The correct estimate is actually 5 percent higher.
The Florida Department of Revenue, which polices local government tax notices, is kind of a stickler for accuracy. Once it found about Miami-Dade’s mistake, it said the county misled the public (even though the numbers were presented correctly in public hearings and to notices mailed to taxpayers). The county now has to retake the vote and spend another $12,000 for a new newspaper ad, according to the Miami Herald. Let’s hope it gets this one right.
New math in New Jersey
New Jersey on Tuesday released its new pension valuations based on accounting rules that went into effect this year. The rules require more conservative estimates of plans’ assets for governments that don’t make a habit of fully paying their annual contribution. New Jersey has very publicly been skipping on its pension contributions as it struggled to make up for budget deficits in recent years. The new reporting rules take a bad picture and make it look a whole lot worse: for the state’s two largest plans, covering state public employees and teachers, the new disclosure reports that assets equaled only 27.9 percent of liabilities for state public employees, and only 34.1 percent of liabilities for teachers. In contrast, as of July 1, 2012, the last valuation date, the funded ratios for the state employees and teachers plans were 49.1 percent and 59.3 percent, respectively.
S&P and Fitch both issued quick assessments on what this means for New Jersey. Both stressed that the accounting rules have changed – not the plan’s actual finances year-to-year. And we all know how New Jersey has been struggling, so it’s not a surprise that its plans look really bad now (as opposed to just plain bad). The main message from the ratings agencies so far is that the new standards represent more pension transparency. And as far as ratings go, both agencies said they have already incorporated New Jersey’s weak pension funding into their current assessments. With an A rating, New Jersey is the second-lowest rated state. Illinois has the lowest rating of A-.