The big pension liability adjustment
The Government Accounting Standards Board voted Monday to toughen pension reporting standards, a slight accounting change that has significant repercussions for muniland. Reuters’ Lisa Lambert reports how data that was formerly buried in the footnotes of financial statements will have to be made more prominent:
State and local governments will have to post their net pension liability – the difference between the projected benefit payments and the assets set aside to cover those payments – up front on financial statements, under the changes.
“The pension liability will appear on the face of the financial statements for the first time. That’s going to create the appearance of a weaker financial position,” said Robert H. Attmore, GASB chairman, who said the board intended to “peel back the veil so things are more transparent and there’s more information for policy makers.”
In addition to providing taxpayers and municipal investors with easier access to data, the GASB changes also stipulate the method by which future returns are calculated for pension funds that are underfunded. This will likely make many pension funds appear less healthy as they will have to use projected rates of return that are more sober.
For several years state and local governments have been making adjustments to retiree benefits in an effort to square up their pension plans. A consortium of government associations, led by the National Council of State Legislatures, has published a fact sheet so the public has a balanced view of the health of the pension system. It highlights how the majority of governments have already made changes to pension plans:
More state and local governments enacted significant modifications to improve the long-term sustainability of their retirement plans in 2010 than in any other year in recent history. In the past few years, nearly two-thirds of states have made changes to benefit levels, contribution rate structures, or both; many local governments have made similar fixes to their plans.
The biggest factor in determining the health of pension funds is how much return funds are earning on the $3.2 trillion in pension assets. These are the assets that have been earmarked to pay government workers in retirement. It’s vital that returns be as high as possible because pension fund returns make up 60 percent of the annual flow of resources to retirees. Employee and government contributions make up the remainder.
MuniLand Snaps: June 27
The number of millionaires ebbs and flows with the economic cycle (via the Tax Foundation).
Good Links
The Atlantic: America’s most important cities: 1978 versus 2010
Gov Tech: States seek Medicare data to keep fraudulent providers out of Medicaid
Reuters: Stockton, California to file for bankruptcy
WSJ: The Stockton bankruptcy: Should investors be worried?
MuniLand Snaps: June 26
Many local governments thrived on the increased revenues from property taxes on new homes through 2007. It’s been downhill ever since, creating a real drag on local budgets.
Good Links
Bloomberg: States lacking income tax get no boost in growth
WSJ: State and local fiscal burdens drag on economic recovery
Reuters: New rules may make public pensions appear weaker
Bloomberg: Public pensions face wider deficits under new rules
Matt Taibbi and the muniland mafia
Matt Taibbi, a contributing editor at Rolling Stone, talks to radio personality Don Imus about municipal bid-rigging.
Cheers to Matt Taibbi for “The Scam Wall Street Learned from the Mafia,” his detailed Rolling Stone article about a municipal bid-rigging scandal that has already resulted in fines totaling nearly $700 million as well as 15 convictions for antitrust violations and wire fraud. A muniland bombshell that first became public over five years ago, the scheme reached its culmination in May when three former executives at GE Capital, General Electric’s finance arm, were convicted on charges of colluding to rig the public bids on muni bonds.
Taibbi laid out the larger picture of the scandal with his characteristic flair:
By conspiring to lower the interest rates that towns earn on these investments [guaranteed investment contracts], the banks systematically stole from schools, hospitals, libraries and nursing homes – from “virtually every state, district and territory in the United States,” according to one settlement. And they did it so cleverly that the victims never even knew they were being cheated. No thumbs were broken, and nobody ended up in a landfill in New Jersey, but money disappeared, lots and lots of it, and its manner of disappearance had a familiar name: organized crime.
Taibbi’s story has gone viral and has helped broaden public understanding of this sorry scheme, which has defrauded municipal entities. But are his assertions that there is organized crime and mafia-like activities in muniland anything other than hyperbole?
Joe Mysak of Bloomberg, a top municipal bond commentator, wrote in May that the bid-rigging trial “caps the biggest scandal in the market’s history”:
The essence of the story is that the public’s trust was violated. A group of bankers took advantage of public officials, because they could, because nobody was looking. As in so much of the public finance business, officials trusted professionals to do the right thing. And they got scammed.
To date, the government has collected 15 guilty pleas or verdicts and almost $700 million in penalties from some of the biggest names in the business, including Bank of America Corp., JPMorgan Chase & Co., UBS AG and Wells Fargo & Co. and there’s no telling when it will stop.
This ought to be a moment of profound introspection for everyone. Instead, nobody wants to talk about it. Last year at the Government Finance Officers Association’s annual conference, there was a panel discussion on the new Dodd-Frank rules and their impact on public finance, and guaranteed investment contracts and swaps came up. I fired in one question from the floor, to the expert Washington lawyers collected on the stage: how bad was it? What happened to inspire all these new rules and proposed new rules? Everyone passed.
The vigilante force of the Internet
America has lined up in support of Karen Huff Klein, a 68-year-old grandmother in Greece, New York, who was tormented by four teenagers while working as a bus monitor. Her ordeal was brought to the public’s attention with three postings on YouTube by CapitalTrigga that stated:
Note: I had nothing to do with this, I saw the video on Facebook and uploaded it here to show the world how messed up these kids are.
The public response has been deafening. YouTube is filling up with responses to the original bullying videos, and these reactions are nearly universal in condemnation of the teens. Meanwhile, an independent site that was originally established to raise $5,000 for a vacation for the victim has already raised over $533,000. More than 24,000 people want to make the situation right for Klein and have donated to the fund. America is pouring out its heart to this woman. Although public employees are increasingly being vilified in this country, Americans are rallying to the support of one who has been so egregiously wronged.
But there has also been a dark, and potentially violent, response to the bullying of Klein. Postings on the Internet revealed the names, ages and addresses of the bullies, opening them to harassment. Greece Police Captain Steve Chatterton said in a press conference yesterday that the children and their families had been subjected to death threats and prank 911 calls. He said that police resources were being stretched to patrol their four residences. In the press conference, authorities from the town supervisor’s office, police department and school district implored the public to let the rule of law unfold in the case and not to take vigilante action. The Greece School District issued a statement:
We have received thousands of phone calls and emails from people across the country wanting to convey their thoughts. People are outraged by what has happened and they feel the students should be punished. While we agree that discipline is warranted, we cannot condone the kind of vigilante justice some people are calling for. This is just another form of bullying and cannot be tolerated.
According to Captain Chatterton, even though the school district is prepared to act to the full extent of the law, Klein has so far declined to press charges. The Internet has made this story international and brought massive support for the victim and condemnation for the aggressors. Karen Huff Klein may have just become the poster child for public workers and changed some attitudes toward them.
MuniLand Snaps: June 25
Federal Reserve reported public #pension assets ↑ to $3.1 trillion as of 3/31/12 — highest point since 08 market drop twitter.com/PensionDialog/…
— Pension Dialog (@PensionDialog) June 21, 2012
Good Links
Reuters: Public pensions to give “clearer picture” of finances
Reuters: Moody’s downgrades $64 billion of U.S. muni debt
Reuters: U.S. high-yield muni buyers lose safeguards
AP: Auditor: Total Illinois deficit nears $44 billion
Strategies to curb interest-rate risk in muniland
Interest-rate risk is the major challenge for fixed-income investors, especially in this period of exceptionally low interest rates. To help walk readers through the issue, I welcome this post from Douglas J. Peebles and Wayne Godlin, AllianceBernstein’s chief investment officer and head of Fixed Income and senior portfolio manager of Fixed Income, respectively.
Don’t Be Caught Long: Strategies to Curb Interest-Rate Risk in the Municipal Market
Today, a municipal portfolio full of bonds with maturities in the 20-to-30-year range is exposed to the high risk of rising interest rates. Now may be the right time to shorten your duration and lower your credit quality.
Since yields are at all-time lows, some investors have been tempted into lengthening duration to earn a little more yield. But this is potentially dangerous, because the longer the duration, the greater the loss in value if interest rates rise.
Yields and prices move in opposite directions, and how much a bond’s price moves when rates change is determined by duration. Duration measures the sensitivity of a bond’s price to changes in the level of interest rates. In general, longer-maturity bonds have longer durations, so their prices rise more if interest rates fall, but also fall more if rates rise. In other words, the longer the duration, the greater the price volatility.
We are particularly concerned about long callable bonds – and virtually every bond with a maturity greater than 10 years is callable in the municipal market. Because of callability, the upside of rising prices when rates fall isn’t equal to the downside of falling prices when rates rise. The display below shows the potential price changes for a 30-year, callable New York State general-obligation bond if rates (and yields) rise or decline by 100 and 200 basis points. The downside, when bond prices fall rapidly in response to rising rates, is much more extreme than the inverse.
MuniLand Snaps: June 22
City Controller Alan Butkovitz released an audit of Philadelphia’s Video Surveillance program that found the city spent $13.9 million for surveillance cameras but that only 102 of the 216 installed cameras were functioning properly. This has resulted in a cost to the city of $136,000 per operating camera. ”The cost is exceedingly alarming, and outright excessive – especially when $13.9 million is equivalent to the cost of putting 200 new police recruits on our streets,” said Butkovitz.
Good Links
USA Today: State, local spending remains at a restrained level
WSJ: Food-stamp fiasco
Rolling Stone: The scam Wall Street learned from the mafia
Bond Buyer: Variable and auction-rate securities dwindle
America needs a smart grid
The latest item atop Congress’s list of stuff to haggle over is the transportation bill, legislation the Washington Post calls the “best bet for passage of a major jobs bill this year.” The threat of the expiration of authority to spend money from the Highway Trust Fund at the end of the month is motivating House and Senate leaders to reach a compromise in the coming days. Although there are certainly investments to be made in our transportation infrastructure that would contribute to America’s economic competitiveness, it’s a shame that our energy infrastructure has received such scant attention from lawmakers.
The national electrical grid is as important for economic growth, if not more so, than the national highway system or the privately owned router system that supports the Internet. As part of the American Recovery and Reinvestment Act, the Department of Energy funded several demonstration programs for increasing electrical system integration and reducing peak loads on the electrical grid. These efforts are commonly known as the “smart grid,” and this is where Congress needs to turn its attention.
Fort Collins, Colorado was chosen for a public-private smart grid project supported with DOE funding. Called FortZED, the project integrates five public and private institutions into a web that shares excess electrical generation during peak load periods. Some facilities, like the University of Colorado campus, have enormous backup diesel generators that can be powered up to add electricity to the system during times of peak demand. A local brewery and city facility have large solar-cell arrays that can also feed electricity back into the system.
Electrical capacity and demand is mapped across the entire web, and smart devices collect information at nodes all along the system. The map also shows machines that can be shut down during peak demand to reduce the draw on the electrical grid. In contrast, current electrical systems use a hub-and-spoke configuration in which power is produced in a large central facility and then distributed to substations and users. A smart grid flows in all directions and utilizes excess capacity across the system, eliminating the need to build additional power plants to handle peak loads.
I’m sure that many were turned off by the DOE’s Solyndra debacle, but it’s time to invest our best thinking and resources in upgrading our nation’s energy infrastructure. Watch the 14-minute video above to see the power of collaboration and creativity that comes from designing and building smart grids. If we are to restore America’s economic vitality, we need to focus on the enormous resources that are currently underutilized.
Further:
MuniLand Snaps: June 20
WPRI reports on Providence retirees voting on pension reform. The fiscally challenged city, like many across America, is trying to reduce expenses, including pensions and retiree benefits. Providence has been making good progress.
Good Links
Public CIO: Federal crowdsourcing may solve problems fast
MSRB: Report on municipal variable-rate securities
NYT: New Jersey’s halfway-house prison complexes
Bond Buyer: Scranton’s charged atmosphere stymies attempts to stay solvent
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