The Week in Public Finance: Good and Bad News for Pensions and for Atlantic City
A roundup of money (and other) news governments can use.
For previous editions of "The Week in Public Finance," click here.
Pension Plan Peril
The stock market has been kind to pension plans in recent years. But that ended last year: Pension plan returns for fiscal 2015, which mostly closed on June 30, were meager. Many were below 5 percent, lower than their target rate of 7 or 8 percent. To make matters worse, that was before the stock market turmoil that began late last summer, which means that when most pensions close out fiscal 2016 at the end of June, their returns will again fall short.
The two-year hit will effectively wipe out the funding improvements seen in 2013 and 2014, predicts Moody’s Investors Service. In a report released Thursday, the agency analyzed 56 state and local government pension plans with total assets of more than $2 trillion. The report says that under the most optimistic scenario, where investment returns average 5 percent for the year, plans’ overall liabilities will still increase by 10 percent. This is because returns are falling short.
The most pessimistic scenario? That plans report an investment loss of 10 percent. In those cases, Moody’s says that could bump up liabilities by more than half, forcing governments to have to put in more money over the next few years than was previously forecast. With a number of governments already balking at their pension costs, that’s going to be a problem. A little over half of the plans Moody’s sampled already aren’t receiving their full payments from their contributing governments.
More pension pressure could ignite a renewed push to change state and local plans so that future payments are more predictable.
A Pension Positive
Thanks to new accounting standards, governments releasing their annual financial reports are now required to put their total pension liabilities on the statements. This places pension debt alongside more traditional debt, such as bond liabilities, and gives a more accurate picture of a government’s overall fiscal position. For many governments, it will have the effect of putting them in the red. The city of Los Angeles, for example, has to stick a $8 billion liability on its final balance sheet.
But one other California city is getting help from the new accounting change. Fresno, which has recently seen its share of financial struggles, is the only city in California reporting a pension surplus on its balance sheet.
According to Transparent California, Fresno is the only major public pension plan in the Golden State with a funded ratio of over 100 percent. “Consequently,” says the group, it “enjoys a $289 million surplus rather than contributing to the state’s approximately $300 billion in combined unfunded liabilities.”
The key, according to the group, is the city’s more reasonable pension benefits. The average pension for a full-career retiree of the Fresno Employees’ Retirement System received $39,644. By contrast, Fresno County employees’ average full-career pension is $61,513.
The Good, Bad and the Ugly for Atlantic City
As the New Jersey Legislature contemplates rescue packages for financially broke Atlantic City, it is also moving forward with a plan that could further derail the city’s main industry. On Monday, lawmakers approved a ballot measure that would expand legal gambling in the state, which is currently limited to Atlantic City.
The measure requires changing the state’s constitution and will go before voters this November. The ballot language only specifies that the new casinos be located at least 72 miles away from Atlantic City. But so far, the Meadowlands and Jersey City are considered top contenders.
If passed, the measure would divert a portion of the tax revenues collected from the new casinos to a fund dedicated to revitalizing Atlantic City, which has lost its hold as the mid-Atlantic’s gaming capital as other states on the Eastern Seaboard have legalized casinos and drawn business out of state. The loss has put a major dent in its main tax revenue source. Atlantic City faces a projected $102 million structural budget deficit -- 42 percent of the city budget -- according to a recent Moody’s analysis. New Jersey’s quest to expand gaming is also an attempt to stop revenue bleeding in a state that has its own budget troubles.
The rescue package the state legislature is considering involves two bills -- an intervention bill and a casino property tax stabilization bill. If both bills pass, the state would have the authority to restructure casino liabilities, shift casinos taxes to a less volatile structure and cut city expenses. If neither bill basses, Atlantic City could default on a debt payment as early as April or May. Local leaders have said that without state aid, the city will be forced to file for bankruptcy.