Federal, State and Local Government Pension and Health Care Plans
Editor's Note- This article will be devoted to dealing with only this issue for governmental pension and health care plans. To see more on this issue as it relates to corporate America, please see our article, "Corporate Retiree's Health-Care and Pension Plans"
Because of the importance of the issue of the deficit in the Pension Benefits Guaranty Corporation and the growing numbers of companies that are walking away from their pension obligation we have started an article on "The Pension Benefits Guaranty Corporation (PBGC) and Corporate Bankruptcies".
(8/10/17)- Public pension funds had a median 56.1% of their holdings in equities as of June 30, compared with 54.9% a year earlier , according to Wilshire Trust Universe Comparison Services. The median return for public pension funds in 2016-2017 was 12.4% in the year ended June 30, 2017, according to Wilshire.
Even with the good returns earned in the market since the bull took over the stock market in March 2009, many public pension funds continue to be severely underfunded. Just as is the case with Social Security, the ratio of active workers compared to retirees continues to dwindle
The data from Wilshire shows that large public pension funds have just 70% on average of what they need to pay in future benefits. Illinois is the state in the worst predicament with only 35% funding for its public workers, judges and legislators retirement benefits.
The California Public Employees Retirement System (CALPERS), the largest public retirement system in the U.S. is only 68% funded.
(8/3/17)- Documents made public from the National Conference of State Legislatures showed that Connecticut, Rhode Island and Wisconsin are still negotiating their 2017-2018 fiscal year budgets, even though all 3 of them had July 1 deadlines.
Connecticut, which has a $5 billion deficit, saw its legislature approve a $1.5 billion concession agreement from its labor unions, and the Rhode Island House passed a $9.2 budget deal that awaits its Senate’s vote of approval.
Wisconsin is faced with a $1 billion transportation-funding shortfall. There is a gas tax included in its legislature’s budget that Republican Governor Scott Walker has pledged to veto.
(7/7/17)- Even though the Illinois legislature overrode Republican Governor Bruce Rauner veto of the state’s over two year overdue budget, its bond rating may be lowered by Moody’s Investor Services because of the pension benefit deficit it faces of about $250 billion.
The measure permanently increases the state’s personal income tax rate from 3.75% to 4.95% and the corporate income tax to7% from 5.25%
N.J. passed its budget after failing to do so until after Republican Governor Chris Christie shut down state service early in July through the July 4th holiday. Maine also passed the state’s budget after a partial shutdown of services had occurred.
(6/21/17)- A recently released survey of the National Association of State Budget Officers indicated that there would be a mere 1% increase in spending in the governors’ budget proposals for the 46 states that start their fiscal year on July 1. That is the smallest increase since 2010 when states were struggling from the effects of the 2008 economic downturn.
Revenues are continuing to lag in 33 states states, while expenditures continue to increase. Uncertainty continues in connection with the Medicaid programs, and exactly how much funding will come from the federal government.
S&P has downgraded its rating on 16 states, so far this year.
(6/18/17)-The Illinois legislature will return in a special session starting next week in an attempt to pass a budget that is two years overdue. Please see our item dated 6/4/17 below, for more info on this matter.
Republican Governor Bruce Rauner ordered the special session starting Monday for the legislature that is controlled by the Democrats, as the backlog of unpaid bills reaches $15.1 billion. July 1 will be the start of the state’s fiscal year,
State workers have continued to receive their pay because of a court order, but school districts, colleges and medical and social service providers are under increasing stress.
(6/9/17)- As we pointed out in our item dated 12/16/16 below, Hartford, CT owes $410 million in unfunded pension liabilities and $562 million in debt. Its budgetary deficit, presently about $50 million, is expected to grow to almost $70 million in 4 years. Moody’s, the investment rating service downgraded the city’s credit rating to junk in October.
The Wall Street Journal in an article dated 6/7/17 wrote about another fiscal issue faced by the city, namely the fact that about one-half of the city’s real estate is excluded from paying property taxes because they are government entities, hospitals or universities.
Aetna Inc., one of the city’s largest employers and property tax payers has announced that it will be departing Hartford in the immediate future.
The main source of funding for municipalities is property tax revenue, generating 47% of the money raised by local governments, according to the Lincoln Institute of Land Policy.
Following up on out item dated 3/6/17, the Republican led House and Senate in Kansas overrode Republican Governor Sam Brownback’s veto of a bill that would undo some of his tax cuts and raise over $1.2 billion in tax revenues over two years.
In 2014, Kansans paid $700 million less in state taxes than in the previous
tax year, a far steeper decline than was projected. The override of the veto
was a sharp blow to proponents of the economic theory that by cutting taxes
that would lead to an economic recovery Mr. Brownback was first elected in
2011, and he can’t run for re-election in 2018
(6/4/17)- Both Moody’s Corp. and S&P have lowered Illinois’ rating to one level above junk, while Fitch Ratings has the state only two-levels above junk. No state has ever been rated at the junk level.
Republican Governor Bruce Rauner and the Democratic House Speaker Michael Madigan have been deadlocked over taxes and spending, so the state has been without a budget since 2015. The regular session of the General Assembly ended on May 31st without acting on a budget. Three-fifths of both houses must pass a budget, so the impasse looks like, and so Illinois still has no budget.
New Jersey is the next lowest rated state after Illinois and it is rated four notches above junk by both Moody’s and S&P.
(4/12/17)- The New York State Assembly passed the state’s fiscal 2017-2018 budget on Saturday, April 8th, and the Senate followed through by approving the $153 billion deal on Sunday, April 9th. Democratic Governor Andrew Cuomo signed the legislation, so it is now a done deal. The budget was therefore 9 days late.
Now let’s see how the federal government does in getting its budget passed, since it is already overdue since October 1, 2016. l
(4/7/17)- The New York State Republican-led Senate has now passed 6 budget bills, and the Assembly followed up by approving these measures. All parties involved said they are getting close to resolving the remaining main issues, but the leader of the Republicans in the Senate, John Flanagan stated: “Are we close? Yes.”, but at the same time he said that the Senate would close down for the 18-day Easter vacation.
(4/6/17)- The New York State Assembly, which is controlled by the Democrats, agreed to a bill that would raise the age of criminal responsibility to 18 from its present 16-year old level, and Democratic Governor Andrew Cuomo expressed his support for the legislation. This issue had been one of the stumbling blocks in connection with the state’s fiscal 2017-2018 year budget.
The New York State Senate is expected to go along with this measure. The Senate passed four budget bills late Tuesday, but the Assembly has not agreed to these items.
New York and North Carolina are the only 2 states to view 16 and 17 year old defendants as adults.
(4/5/17)- The New York State Legislature passed a pair of emergency spending bills on Monday, since it had been unable to approve a new budget for its fiscal year which began on April 1. Governor Andrew Cuomo (Dem) signed the extender that will keep the government funded through May 31
The state’s Senate is theoretically controlled by the Democrats, who have a 31 to 30 majority, but 9 of them have broken from the party, and have sided with the Republicans to control that legislative body. The Democrats control the state’s Assembly. Legislators will not be paid while New York does not have its $160 billion spending plan in place.
(3/6/17)- The Kansas Supreme Court has once again rejected as unconstitutional the new state public education funding formula. As we noted in our item dated 7/1/16 below, that court rejected the first spending formula passed by the Kansas legislature, also calling that formula unconstitutional since it failed to address the educational needs of minorities and poorer school districts.
The justices set a June 30 deadline for the legislature to set a constitutionally legal public school funding formula.
Republican Governor Sam Brownback, who was elected in 2011 is barred from seeking reelection in 2018, initiated the largest tax reductions in the state’s history. The state is already faced with a deficit running into the hundreds of millions of dollars, and the educational funding will add to that deficit The governor’s fellow Republican legislators have questioned Mr. Brownback’s fiscal soundness and are calling for tax increases.
(2/1/17)- Illinois Attorney General Lisa Madigan, a Democrat has filed a motion in St. Clair County, Ill., Circuit Court requesting that a judge end an order that allowed employees of the state to be paid despite the fact that the state did not have a budget in place. The state has been without a budget for over a year now, which no other state has done for that long since the great depression of the 30s.
The state is currently about $11 billion behind in paying its bills, according to the state’s comptroller’s office. Republican Bruce Rauner’s office said that a budget agreement may be reached this month.
Illinois’ Senate is expected to vote on a budget measure next month. No voting date for a new budget has been set by the state’s Democratic led house. As our item dated 7/13/16 below stated, it looked like the budget impasse in Illinois had been resolved, but that did not prove to be the case.
(1/16/17)- Detroit, a city famous for being the hometown of former boxing heavyweight champion Joe Louis, as well as many other famous individuals and teams is now fully lit again.
Three years ago, nearly half the 88,000 lights in the city were dark, but now, thanks to $185 million from the city, state and federal Energy Department it has 65,000 new LED street lamps lighting the streets throughout the whole city.
(1/13/17)- As we noted in our item dated 12/16/16, the Texas legislative body meets every 2 years, and this year it is facing an increasingly difficult budget to deal with for the following 2 years. Revenue for 2018 and 2019 are projected to decline by 2.7% compared to the current two-year budget period, according to state Comptroller Glenn Hegar. Texas lawmakers convened on Tuesday in Austen.
The state’s economy is estimated to have grown by only 0.2% during the last fiscal year. Revenue from the oil and gas industry to the state dropped 52^ in 2016 to the lowest levels since 2010.
Texas does have a Rainy Day Fund that it could dip into. The state is also faced with an underfunded pension plan for its workers and retirees.
(12/19/16)- Hartford, the capital of Connecticut is another major U.S. city faced with the possibility of going bankrupt. The city’s mayor, Luke Bronin is trying to come up with a plan to avoid that possibility. Even after helping to close its $40 million deficit for the current fiscal year, its fiscal difficulties continue to grow.
Hartford owes $410 million in unfunded pension liabilities and $562 million in debt. Its budgetary deficit is expected to grow to top $70 million in 4 years. Moody’s, the investment rating service downgraded the city’s credit rating to junk in October.
(12/7/16)- The Dallas police and firemen pension fund continues to be in the media’s limelight as we wrote about in our item dated 11/23/16 below, as the city’s Mayor Mike Rawlings filed a lawsuit seeking to halt any further withdrawals from the fund. More than $500 million has been withdrawn from it since August.
Pension officials assert that the fund can become insolvent in 10 years. The pension fund had assumed a 9% annual rate of return, and the actual performance has not even come close to that figure.
(11/23/16)- Dallas, Tex. was the subject of Mary Williams Walsh’s November 21st article in the N.Y. Times, entitled “A Hive of Growth, Dallas Flirts With Bankruptcy”, even though the city has the fastest economic growth among the nation’s 13 largest cities in the nation.
The city’s pension funds for its police and firefighters are near collapse, and urgently needs to be rescued to the tune of $1.1 billion. Chicago, Illinois is the other major city in the U.S. whose pension underfunding is in worse shape than Dallas. The 10,000 current and retired municipal employees are presently voting on voluntary pension cuts.
The state’s lawmakers meet every 2 years, and Dallas will ask them for help when it next convenes in Austin in May of 2017. The pension funds had assumed a 9% yearly return, and the funds fell far short of achieving this goal.
(11/11/16)- Over the objection of the Atlantic City N.J. elected officials, the state’s Local Finance Board in Trenton moved to give the head of its board, Timothy Cunningham the power to sell municipal assets, renegotiate union contracts and fire city officials.
The city’s Republican Mayor Donald Guardian said that he and the other city officials would fight this decision in the courts. The city is about $500 million in debt.
Other New Jersey cities, including Camden had been placed under supervision in the past, but in the case of Atlantic City, the Local Finance Board has taken more authority to take direct control of the city.
(10/13/16)- A small city in California, with only about 700 residents and 4 municipal retirees who are presently receiving their retirement monthly pension plan checks came roaring into the headlines when it received letters from the California Employees’ Retirement System (Calpers) that the city had 30 days to pay $1.6 million into the system, or the 4 municipal retirees would receive a sharp decrease in their monthly payments.
California state courts have ruled that once public workers join Calpers, their employers must fund their pensions for the rest of their lives. Calpers has told its 3,007 participating governments and agencies how much they must contribute each year, even if faced with bankruptcy for retirees to be covered for their pensions. A recent audit showed that the city of Loyalton had an $80,000 deficit.
Calpers sent a “final demand” to Loyalton and two other entities, the Niland Sanitary District and the California Fairs Financing Authority in September. The Fairs Financing Authority was disbanded years ago, and the Niland Sanitary District is in dire financial shape. Both these entities stopped sending their required contributions to Calpers in 2013 but have allowed Calpers to continue to administer their pension plans.
The Loyalton City Council voted in 2012 to drop out of the plan, since the town did not have the required $30,000 payments that it had been making for many years. It does not offer pension benefits to new employees.
If a municipality or agency wants to leave its system, Calpers calculates a cost that does not rely on any new money coming in, and requires the city to pay the whole amount due, instead of spreading that amount out over many years. Loyalton’s local tax collections yielded only $30,000 in 2012, when its total expenditures were $1.2 million, and much of that came from the federal and county governments.
Calpers board is expected to make a decision in November as to how it will proceed in the matter.
(7/26/16)- The crisis faced by corporate, municipal and state underfunded pension obligations is gaining quite a bit of media attention these days. Corporate America has been attempting to remedy this situation, and has been making headway with the issue as we have written about in our article ""Corporate Retiree's Health-Care and Pension Plans"
On the other hand, state and municipal governments still have a long way to go to get the problem under control. Illinois has the lowest credit rating of any state in the union, partially due to this issue and Chicago has a $20 billion underfunded pension issue.
New Jersey has an agreement to try to make up for the underfunded pension liability and Connecticut now allocates 10% of its budget to pay down the difference.
Twenty-year annualized returns for public pensions in the U.S. are expected to decline to 7.47% once fiscal 2016 results are released in the coming weeks, according to Wilshire Trust Universe Comparison Service, which is the lowest ever annual mark recorded by Wilshire, which began tracking the statistic 16 years ago.
(7/13/16)-The Illinois legislature finally came to a “resolution” of the state’s budget crisis as we noted in our item dated 6/1/16 below. Under the new budget, essential services such as prisons and state police will be funded for the next 6 months, while the state’s public school system spending is taken care of for the next year.
The stopgap budget of about $75 billion will allow highway construction and repair work to continue, and the state’s public school system will reopen in August. The budget passed in the House by a vote of 105-4, and in the Senate by a 54-0 margin.
The measure provided $215 million for the underfunded teachers’ pension fund, and would allow Chicago to raise taxes to pay for the pensions. It also provides about $1 billion for higher education
(7/1/16)- The Kansas Supreme Court rejected the new education funding law that increased state aid to poorer school districts, that was recently passed by the legislature and signed by Republican Governor Sam Brownback.. We last referred to this matter in our item dated 6/20/16 below.
It is now back in the hand of the Kansas legislature to pass a school funding bill..
(6/15/16)- The U.S. Supreme Court declared Puerto Rico’s law that restructured its public utility debts illegal, thus putting further pressure on the U.S. Congress to pass legislation to help the territory to restructure its present debt obligations. A substantial interest payment on that debt falls due on July 1.
The court’s 5-2 decision said that Congress, in prior legislation on municipal bankruptcies, did not give Puerto Rico the ability to enact its own bankruptcy process..
(6/11/16)- The New Jersey Supreme Court, by a 6-1 vote, affirmed the state’s authority to suspend the cost-of-living increases in public-worker pensions. The case stemmed from Republican Governor Chris Christie’s 2011 pension overhaul that was approved by the state’s Democratic legislature.
That bi-partisan agreement increased public-workers’ benefit contributions, froze cost of-living increases and upped the retirement age from 62 to 65.
The state in return agreed to increase payments to the retirement system over the next 7 years, reaching about $4 billion in 2018
Plaintiffs brought a suit against the agreement, claiming it was a violation of a 1997 state law that guaranteed cost-of-living increases as a non-forfeitable right
(6/10/16)- Republican Governor Sam Brownback of Kansas said he would call for a special session of the Republican led legislature to deal with the school funding issue that we discussed in our item dated 6/8/16 below .He did not set a date for the special session to convene, but the state’s Supreme Court has set a deadline of June 30 to have a new funding plan in place.
The state’s public schools are now out of session, but they provide services-year round to special education students and serve meals to poor children.
(6/8/16)-The Kansas legislative session ended without coming up with a school funding finance bill to meet the deadline set by the state’s Supreme Court. The court had ruled that the state’s school finance system was unfair to poor school districts, and warned the legislature that the schools would be unable to open after June 30.
Republican Governor Sam Brownback did not say if he would call a special session of the legislature to deal with the issue.
(6/1/16)- We last wrote about the lack of a budget in Illinois on 4/26/16 below. But there still has not been a resolution in that continuing battle between Republican Governor Bruse Rauner and the Democratic controlled House in that state
Mr. Rauner has threatened to veto a budget passed in the House, with the state’s legislative session scheduled to end on May 31. Illinois’ fiscal year began last July 1. The Governor has said he would consider higher taxes only if structural changes are part of the package.
Illinois has the lowest credit rating of any state in the union and is presently faced with $7 billion in unpaid bills.. The state has paid its employees under a court-ordered plan, which also allows some of its social services to continue to operate.
(5/5/16) The Detroit Federation of Teachers urged its members to return to their jobs after a 2-day “sick-out “that we wrote about yesterday. The union assured the teachers that they would be paid their
Salaries, if they were due to receive same in July and August.
That assurance was the result of the state’s House of Representatives Appropriations Committee approving a measure that included about $500 million to restructure the school district’s debt, and about $33 million to fund a newly created district.
Labor agreements would not carry over to the new district that was being created, and collective bargaining would be restricted. The measure would retire the old school district’s debt by 2023, and start the new district in July. The Republican led House could vote on the plan later this week.
(5/4/16)- We have written many items about the legal journey that the city of Detroit went through in its course through its bankruptcy proceeding. The last of those items is dated 12/11/14 below.
The Detroit Public School District was not involved in those bankruptcy proceedings, but it is financially on the ropes right now. Detroit Public Schools have been under the financial control of a series of emergency managers appointed by Republican Governor Rick Snyder since 2009. Mr. Snyder was the official who appointed Kevin Orr as the emergency financial manager for the city of Detroit.
The District has resorted to short term borrowing for the last several years to meet its operating expenses, with little ability to repay that debt. The District merely rolled its debt over to the following year’s budget.
That deficit has grown to $320 million this year from $94 million in 2013. The District’s long-term obligations have grown to $3.5 billion. It will not be able to maintain operations past June 30, as its financial crisis comes to a head.
Teachers conducted a one-day sick-out to highlight the plight and attempt to get the state to deal with this crisis
The School District has seen its enrollment drop to 46,000 students from more than over 200,000 in the early 1980s.. The city’s tax base has dropped precipitiosly as people fled the city.The state pays the District on a per-student basis, so that even though its debt continues to grow, it has less income to meet those obligations.
(4/26/16)- With no end in sight to the budget impasse in
Illinois, which is now 10 months past due, the legislature did pass $600
million in emergency funding to help colleges in the state get through the
The legislation, which Republican Governor Bruce Rauner is expected to sign, provides $169 million to a
state grant program for disadvantaged students that had run out of funding. It
provides $20 million to Chicago State University.
Republican State Comptroller Lisa Geissler Munger said Illinois had a backlog of $7.2 billion of debt as of April 21 that needs to be paid before any member of the legislature would receive her/his salary.
(3/26/16)- The Illinois Supreme Court denied the appeal by the city of Chicago of the ruling of Judge Rita Novack of Cook County that declared the state’s 2014 law requiring city employees to pay 2.5% more into their retirement fund was unconstitutional..
Mayor Rahm Emanuel, Chicago’s Democratic mayor had negotiated with unions for city employees and laborers to shore up two of the city’s pension funds that required the employees to pay the 2.5% increase in return for which the city would increase its annual contributions to the funds.
The court said the plan was a violation of the rights of employees, who are protected by the Illinois Constitution under a clause that states pension benefits “shall not be diminished or impaired”. The pension funds in question are deeply underfunded and are under increasing pressure as more workers retire.
(2/14/16)- Former Democratic Governor Steven L. Beshar of Kentucky announced the creation of a nonprofit group, Save Kentucky Healthcare, which will oppose Republican Governor Matt Bevin’s attempted changes in the states participation in the Affordable Care Act. Mr. Bevin took over the Kentucky governorship in December 2015.
Mr. Beshar’s effort will begin with online advertising and organizing.
The Act allowed states to make Medicaid available to more people, but the law left it up to each state whether or not to participate, and 20 have declined. Kentucky, under Governor Beshar joined the expanded Medicaid program and established its own online health-insurance marketplace called Kynect.
Kynect tied its state run marketplace with its expanded Medicaid program, so it simplified matters for potential enrollees. Kentucky has had the steepest decline of any state in the number of uninsured individuals, and Medicaid enrollment nearly doubled.
Since taking office Mr. Bevin has taken steps to dismantle Kynect, saying it will be cheaper to let the federal government run the exchange. The federal exchange does not have the one step process of enrolling in the health insurance marketplace, while enrolling in expanded Medicaid in one easy step.
About 7% of Kentuckians younger than 65 were uninsured last year, which is below the national average of 11%.
(2/4/16)- Now its North Dakota making the media headlines because of the state’s budget shortfall. Republican Governor Jack Dalyrymple issued an order requiring cuts of just over 4% to all of the state’s agencies, and raiding North Dakota’s rainy day fund to help make up the more than $1 billion budget shortfall caused in large part because of the slumping oil industry in that state.
The $14.4 billion 2-year budget that began on July 1 was built on oil prices and economic assumptions back then that have proven to be faulty.
The governor will draw down $497 million from the state’s Budget Stabilization Fund, leaving it with a balance of about $330 million. Funding for the state’s pension liability shortfall still remains unresolved.
(2/1/16)- Connecticut has funded only 39% of its obligations for its 96,000 state employees and retirees, according to its comptroller’s office. To fully fund the system by 2032, as required under an agreement with state-employee’s union, the state would need to more than double its $1.5 billion annual contribution in the intervening years.
New Jersey’s employee’s pension funds are more than $37 billion underfunded. The underfunded pension obligations of state and municipal plans will probably be the most important issue, and how to deal with it, at the upcoming election in November.
(1/11/16)- Democratic Governor Jerry Brown of California has proposed a $122.6 budget that includes billions more for education, health-care and infrastructure rebuilding. It also includes an additional $8 billion payment into the state’s rainy day fund, and includes steps to pay down California’s debt load.
State Republicans cautioned against expanding any of the state’s social welfare programs that would require long term funding.
(1/1/16)- A top-aide of Louisiana’s Democratic Governor-elect John Bel Edwards said the state is now facing a $750 million greater deficit than previously estimated that must be closed by June 30. Louisiana’s current fiscal year calls for a current fiscal year budget of $25 billion.
The latest revenue estimates are being negatively affected by the drop in the price of oil and a slump in collections from corporate income taxes and sales taxes. Present estimates for the state show a $1.9 billion shortfall for the next fiscal year which starts in July
(12/10/15)- States collectively saw tax revenue climb 5.6% in the fiscal year that ended June 30. Over 40 states reported revenue collections at or above projected levels, according to the National Association of State Budget Officers.
Minnesota has a political fight over what to do with its $1.9 billion surplus. The recently passed Highway Transportation Act took $10 billion from the Federal Reserve’s rainy day fund in order to get enough votes in Congress for passage. It was easier for the legislators to do it that way rather than raise the 18.5 cents federal tax when you buy gas for your car.
(11/17/15)- The Illinois budget impasse that we wrote about in our item dated 10/16/15 below, continues as the saga now enters its fifth month
The Democratic controlled legislature and the Republican Governor Bruce Rauner have not met since late May. A meeting between the two sides had been scheduled for Wed., November 19, but House Speaker Michael Madigan requested a postponement of the meeting because of a death in the family.
That meeting has now been rescheduled for December 1.
(10/16/15)- Illinois Comptroller Leslie Munger said, that because of the state’s budget impasse, as we discussed in this article in item dated 9/3/15 below, she would have to delay payment of $560 million in November to its various pension funds. This would be true for the December payment also.
At the same time, she did say, Illinois pension obligation would be paid in full by the end of fiscal 2016 next June. The state’s budget is still not in place even though its fiscal year began July 1.
(10/6/15)- Congratulations to the state of South Dakota for having a 100% funded state pension obligation, according to Fitch Ratings analysis of Bureau of Economic Analysis data, and the National Association of State Retirement Administrators of most recent state data from 2013 or 2014 (funded pension obligations). Wisconsin came in a close to South Dakota at 99.9% and the state of Washington third at 98.7%
On the wrong side of the data is Illinois with 47.1 % of its pension liabilities funded and Kentucky with 48.9% funded.
New York came in in 9th place with its funding level for state employees and retirees at 88.3%
(9/26/15)- In order to meet the pension payments that are due into the city of Chicago’s police and firemen’s pension plans, Democratic Mayor Rahm Emanuel has proposed the largest property tax increase in the city’s history, as the third largest city in the U.S. faces a huge budget deficit crisis. Moody’s recently downgraded the city’s credit rating to a “junk” category and its 2016 operating budget ,faces a $232.6 shortfall;
His plan calls for raising $544 million from the property tax increase that would be phased in over 4 years. It also calls for a tax on e-cigarettes, a $9.50 monthly garbage pickup fee, and moving about 300 police officers out of administrative posts onto the streets as the city attempts to combat the alarming rise of crimes being committed within its boundaries. ’
(9/7/15)- The state court system in Kansas now faces a shut-down since Shawnee County District Judge Hendricks declared the state’s law passed in 2014 which provided for the selection of Kansas’ chief judges illegal. That law also contained a provision that declared the funding for the state’s court system “null and void” if the selection provision was declared unconstitutional.
Kansas Attorney General Derek Schmidt has requested Judge Hendricks to put his decision on hold while he appeals the ruling.
(9/3/15)- The budget battle between Republican Governor Bruce Rauner of Illinois and the Democratic controlled legislature has now entered its third month, with no end in sight. Please see our item dated 7/9/15 below for additional details on this matter.
The state’s Democratic controlled House is attempting to override a veto of a bill that would force arbitration in contract negotiations going on now, between the American Federation of State, County and Municipal Employees Council 31, which represents a large majority of the state’s employees and the Rauner administration officials.
Mr. Rauner’s administration is trying to increase state employees’ contributions for their health benefits and no longer allow union dues to be deducted directly from a worker’s pay.
(8/25/15)- Detroit sold $245 million of municipal bonds last week, making it the first sale that the city has conducted since it emerged from bankruptcy earlier this year.
The bonds were sold through the Michigan Finance Agency and yielded 4.5% , which was a full percentage point higher than other single-A rated debt, according to Thomson Reuters Municipal Market-Data They will mature in 2029, and are backed by a first claim on the city’s income taxes.
Standard & Poor’s Rating Service gave the issue a single A credit rating, even though the city’s credit rating is in the junk category.
(8/14/15)- Republican Governor Chris Christie of N.J. vetoed a measure that would have added $300 million to the state’s underfunded pension system for public workers. Mr. Christie vetoed 12 other measures that the legislature had passed, while signing 27 measures that had gotten approval from that branch of the government
The Democrats had argued that the increased revenues taken in by the state warranted allocating these funds to the underfunded pension system, while Mr. Christie argued that the state’s pension funds system had to be changed with workers and retirees paying more, and retiring at later ages.
(8/9/15)- As we noted in our item dated 7/2/15 below, Maine’s legislature had overridden the veto of the budget by Republican Governor Paul R. LePage. The Maine Supreme Judicial Court recently ruled that dozens of bills that had been opposed by the governor have become law because of his failure to veto the measures in time.
The court unanimously sided with the legislature in a suit brought by Mr. LePage to set aside these bills. The legislative bodies had temporarily adjourned their sessions in June. The governor has a grace period of 10 days within which time he can veto a measure. He did not veto the laws until after the legislature permanently adjourned its sessions. The ruling from the court stated he should have acted within the 10 day period after the temporary adjournment.
There were a total of 65 laws that Mr. Page had vetoed, but under the court ruling are now the laws for Maine.
(7/27/15)- Judge Rita M. Novak of the Cook County Circuit Court ruled that the agreement between the city of Chicago and its employees and retirees was unconstitutional, and that was the only course she could follow, since the Illinois Supreme Court declared any changes to pension and health-care provisions could not be negotiated away and was unconstitutional. Please see our item of 5/11/15.
City officials said they would appeal the judge’s ruling. The city’s pension system is expected to go bankrupt within 10 to 13 years.
The negotiated pension changes that were voided by the court called for reducing cost-of-living increases that retirees receive each year, increasing workers’ mandatory contributions to the funds and strengthening the city’s pledge to step up its own contributions.
28 of the city’s unions had agreed to the negotiated terms, but the 3 remaining city union’s took the matter to the court from which Judge Novak’s ruling was handed down from.
(7/16/15)- Republican Governor Scott Walker of Wisconsin signed the state’s budget bill one week after its fiscal year had begun. The budget plan calls for the spending of $72 billion over two years, and brings that state’s contentious fight to an end.
Mr. Walker used a line-by-line veto power granted to Wisconsin’s governors to make over 100 changes to the budget approved by the lawmakers. It includes a provision that repeals the state’s prevailing wage laws., which set minimum wages for public construction projects. He had previously been the force behind a state law that bars companies from requiring workers to pay an equivalent amount to union dues.
(7/9/15)- The budget impasse that we wrote about in our item dated 6/4/15 has now resulted in Judge Diane Joan Larsen, a Cook County judge’s ruling that pay will be denied to about 65,000 state workers, since Illinois has not passed and have the governor sign a budget.
The ruling came in response to a request for a legal review by Attorney General Lisa Madigan. Her ruling stated that Comptroller Leslie Munger could pay only those workers who are covered under the federal minimum of $7.25 an hour plus overtime. Ms. Munger’s office and the state’s personnel agency said that because of their antiquated computer system it would take about a year to reprogram the system to comply with the judge’s ruling.
That means no workers will get paid until Republican Governor Bruce Rauner, and Democrats who control the legislature, can agree on a budget for the state’s fiscal year that has already begun.
(7/7/15)- With the state of Washington having reached the outline of a 2-year $38 billion budget deal that included a 12% increase in spending, that still leaves Illinois, Wisconsin Pennsylvania and North Carolina without budgets, even though their fiscal years have begun.
In South Carolina, Governor Nikki R. Haley, a Republican, signed that state’s budget, but also issued line-item vetoes on dozens of items in the final pact.
Democratic Mayor Rahm Emanuel of Chicago announced the cutting of 1,400 jobs in the city’s school districts and boosting borrowing, as that city tries to avoid going into bankruptcy, as Detroit ultimately went through, before emerging with a cleaner financial picture.
(7/2/15)- Republican Governor Paul R. LePage and the Maine Legislature are at odds over the two-year state budget that was recently passed, but required the governor’s signature. He vetoed the budget that was passed, but the legislature overrode the veto by a Democratic led House vote of 109 to 37 and a Republican led Senate vote of 25 to 10
The governor has vetoed a record number of bills, while the legislature in turn has overridden his veto a record number of times. Tax policy and a charter school for at-risk youths are the latest issues dividing the governor and the legislature.
(6/25/15)- Republican Governor Scott Walker and leaders of his party, which controls the Legislature, are having a disagreement over how to close the state’s budget gap without imposing some form of tax, or by issuing bonds to pay for road and bridge repairs in their area.
The governor proposed to issue $1.3 billion in bonds to pay for the repairs, but the Republican leaders in the state are opposed to more borrowing. The state’s nonpartisan budget office estimated that Wisconsin could save $345 million over a two-year period of time by accepting Medicaid expansion under the Affordable Care Act, but the governor has refused to go along with the plan. Mr. Walker also proposed a cut of $300 million from the University of Wisconsin education system
(6/22/15)- The California legislature passed the $115.4 billion budget deal that we discussed in our item dated 6/18/15 below.
In New Jersey, the state’s highest court ruled that Governor Chris Christie could skip the pension payments that he had promised to make. In a 5-2 decision, the Supreme Court of New Jersey said that the governor and the Legislature had violated the debt limit clause in the State Constitution when they signed the law requiring the state to make large payments over a series of years.
The 2011 law and a companion signed in piece of legislation required public employees to pay more towards their benefits, and in exchange the state agreed to make the annual payments to their pension funds. The payments were made for 2 years but in 2014 a payment of $696 million was made, instead of the $1.58 billion agreed to be made; while in 2015 it was $681 million instead of the $2.25 billion owed.
In California, a state court judge in Sacramento ruled that the state is obligated to return $331 million that it took from a fund designated to help troubled homeowners, but used instead to plug holes in the state’s budget.
(6/18/15)- Democratic Governor Jerry Brown of California and legislative leaders announced that they have reached a deal on $115.4 billion in spending for the fiscal year that begins on July 1. The Democratic legislature for the state had passed a budget plan that called for $117.5 in spending, as they attempted to restore some funding for programs that had been cut during the recession.
Mr. Brown had called for spending restraints.. The deal includes spending $265 million to fund 7,000 more preschool slots, 6,500 more child care slots and extends Medi-Cal, the health-insurance program for the poor and to children who are in this country illegally.
\(6/12/15)- A judge has approved the proposed Rhode Island settlement of a landmark public pension system overhaul that we discussed in our item dated 4/7/15 below. The judge, Sarah Taft-Carter of Superior Court called it a fair but imperfect solution.
The overhaul was put into law in 2011 by the state legislature, but law-suits by public-sector unions and retirees tied up the matter in the court system for years. The original overhaul was intended to save the state $4 billion over 20-years.
The proposed settlement would preserve about 90% of the savings. The state’s legislature must still vote on the proposed settlement. It provides for cost-of-living increases and one-time stipends for retirees.
(6/9/15)- The front page article in the June 7th edition of the N.Y. Times, written by Julie Bosman, entitled: “States Confront Cavernous Holes in Their Budgets” highlights the budgetary difficulties now faced by state legislatures and their governors, even when they belong to the same political party.
\Only 25 states have passed budgets for their fiscal year, according to the National Association of State Budget Office, which follows state legislative activity. Whether due to revenue shortfalls, the need to cut back spending or pension funding requirements, the problem continues to worsen.
(6/4/15)- The special session of the Democratic Illinois legislature, which had been called by Republican Governor Bruce Ratner, adjoined with no resolution of the problem of the state’s large pension and budget deficit.
The legislature approved a spending plan for the year beginning July 1, that contains a $3 billion deficit, and called for the governor to back a tax increase to fill the void.
Mr. Ratner said that any tax increase would have to come with broad changes that would include a freeze on property taxes, less workers’ compensation insurance for businesses and term limits for politicians. The state has the lowest credit rating of any state in the union, and the largest pension fund liability to further complicate matters.
Lawmakers approved the payment of $330 million, instead of the required $550 million, for Chicago’s pension funding, but that city has the largest funding gap of any city in the nation.
(5/14/15)- Moody’s Investors Service, a credit rating agency lowered the city of Chicago’s rating by two notches, down to junk status. With the lowering of its credit, the city will have to pay a higher interest rate, if it seeks capital in the bond market.
This move comes shortly after the Illinois Supreme Court declared the revision of the state’s pension system unconstitutional, as mentioned in our item dated 5/11/15 below. The question now becomes, will Chicago follow the path taken by Detroit and opt for protection from its creditors via the bankruptcy laws, as we have written about in many of our items below?
(5/11/15)- The Illinois Supreme Court declared that the state’s 2013 pension revision violated the state’s constitution, and affirmed the November decision of the circuit court that held the action unconstitutional. The current Illinois pension shortfall is estimated to be $111 billion, one of the largest in the nation.
All 7 members of the court ruled in favor of declaring the revision unconstitutional. The changes would have curtailed future cost-of-living adjustments for employees, raised the minimum age for retirement and put a cap on pensions for the highest wage earners.
Illinois’ constitution specifically stated that the pension system for workers “shall not be diminished or impaired.”
(4/28/15)- In the latest estimate from Kansas officials, the state will collect $187 million less in taxes through June 2016 than the forecast they made in November 2014. This new forecast means that the Republican governor of the state Sam Brownback, and its Republican led legislature will have to consider larger tax increases than they had anticipated, as well as further cost reduction measures to balance the state’s fiscal year budget.
The state’s current year tax revenue estimate will be reduced by $88 million, to about $5.7 billion, and by about $100 million from Kansas’ 2016 prediction for its fiscal 2016 estimate, which begins in July by nearly $100 million.
State officials had been working on budget proposals requiring about $150 million a year in tax increases.
(4/7/15)- Six of the 9 public unions that had sued to prevent the pension changes that Rhodes Island enacted in 2011 have reached a tentative agreement that would resolve the matter, if the state’s General Assembly votes to approve it also. We discussed this matter in our item dated 4/17/14 below.
The newly elected governor of the state, Gina Raimondo had been in the forefront of making the changes when she was the state’s attorney-general. The proposed settlement would affect 59,000 current and past employees, whereas the remaining 3 unions represent only about 800 employees.
The proposed settlement would provide adjustments to the minimum retirement age, the chance for more frequent cost-of-living increases, and an increase in the defined-benefit pensions available to long-time public employees
(3/24/15)- As a follow-up to our item dated 3/7/15 below, Republican Governor Bruce Rauner of Illinois has instructed all state agencies to divert money from nonunion employer paychecks away from being used to pay union fees until a judge rules on the legality of the move. Mr. Rauner’s action could keep about $3.74 million out of union bank accounts.
(3/18/15)- Memphis, Tenn. is in the limelight these days in the battle between municipal employees and employers who are trying to cut down on their ever increasing pension liabilities. In this case the city opted to end its traditional defined-benefits pension and try to replace it with a 401(k) plan for current employees and for new hires.
More than 250 police and firefighters have quit the force, and attracting replacements for them is proving to be difficult.
U.S. public pension liabilities have increased by 32.7% in the years following fiscal 2008, while assets in these pension funds have increased by 14.4%, according to preliminary fiscal 2014 data from the National Association of State Retirement Administrators. Public retirement systems have enough assets to cover 73.5% of future obligations, according to the latest findings from the Association.
(3/14/15)- Although the federal government is benefiting from the bull market that started in March 2009, many of the states continue to suffer from the problem of the consumer not spending the money he/she is saving in the drop in the price of gas for his/her car.
There are 30 states collecting less in taxes, adjusted for inflation, than when the recession hit, according to a Pew Charitable Trust study that examined the data through September. Sales-tax revenue grew by only 1%, according to an analysis by the Nelson A. Rockefeller Institute of Government, at the State University of New York.
The drop in sales-tax revenue since the beginning of the recession has been highlighted by the drop in revenue for sales-tax items associated with the home building industry.
(3/7/15)- Our item dated 11/26/14 below, discussed the legality of the state of Illinois reducing pension benefits and requiring retirees to pay a small portion towards their health-care benefits. Twenty-seven of the state’s labor unions have filed a lawsuit seeking to invalidate Republican Governor Bruce Rauner’s executive order ending a requirement that state workers pay union dues even if they do not want to join the union.
The lawsuit asks a judge to issue an injunction preventing the order from being implemented.
On the other hand Mr. Rauner has filed a federal lawsuit against the unions, seeking to have “fair-share” dues declared unconstitutional. Fair-share dues are paid by non-union members covered by collective bargaining agreements to cover the cost of bargaining, handling grievances and other nonpolitical activities from which all workers benefit.
The unions assert that the order violates collective bargaining agreements and state labor law, since the governor did not have constitutional authority to issue the executive order
(2/28/15)-Stockton, California emerged from its Chapter 9 bankruptcy proceedings on February 24, after an earlier ruling that we discussed in our item dated 11/13/14 below from Judge Christopher M. Klein of the U.S. Bankruptcy Court for the Eastern District of California in Sacramento, who cited the California pension system (Calpers) as a bully for insisting that public employee pension plans were exempt from being cut.
Stockton did not even seek permission to freeze its pension plans, but the judge wrote the city could do so, and it was not a breach of contract or unconstitutional for the city to do so. Judge Klein rejected the argument that Calpers was a priority creditor in the Chapter 9 proceeding. Two creditors in the San Bernadino Chapter 9 bankruptcy proceeding that we discussed in our item dated 11/21/14 below have referred to Judge Klein’s decision to prevent that city from making its pension contributions to Calpers.
Although states can’t file for bankruptcy protection, the state of Illinois is appealing a ruling wherein a county judge found that the state’s attempt to restructure its pension obligations was an unconstitutional attempt to circumvent that state’s constitutional provision that specifically stated it could not be done.
(1/8/15)- Detroit’s bankruptcy proceedings cost the city nearly $178 million in fees and expenses for the lawyers and consultants involved in the case, according to its latest court filing. Jones Day, Detroit’s lead law firm in the proceeding billed the city $57.9 million.
The city paid nearly $165 million out of its general fund budget for professional fees for itself and for a court-appointed committee representing retirees, to Martha E.M. Kopacz, the special advisor to Bankruptcy Court Judge Steven W. Rhodes on the feasibility of the plan of adjustment and the special mediator in the proceedings.
The Detroit Institute of Arts announced that it had secured enough pledges from donors to meet its $100 million obligation under the terms of the “grand bargain”.
Under the terms of the agreement it and other parties to the grand bargain earn a discount for making larger payments up front over a period of 20 years. Under the terms of the agreement the Institute has an annual commitment of $5 million in the first five years.
(12/11/14)- Republican Governor Rick Snyder announced that he would end Detroit’s status as a city in financial emergency, thus ending the need to have his appointment Kevyn D. Orr’s overseeing the city finances. December 10, 2014 the date for the official ending of the Detroit bankruptcy proceeding.
Mr. Orr has had that title since March 2013. As we noted in our item dated 11/8/14 below, bankruptcy court Judge Steven W. Rhodes approved the city’s plan of adjustment, which shed about $7 billion of Detroit’s debt, and to reinvest about $1.7 billion in the city’s services to its residents.
(11/26/14)- Back on 7/8/14 below we wrote “The Illinois Supreme Court, in a 6 to 1 ruling, reversed a lower court decision that allowed the state to require retirees to pay for part of health care, and had dismissed the retirees’ case. The case was remanded back to the lower court, where the retirees can proceed with their challenge.
The case in the lower court also involves the issue of reduction in pension benefits. The Illinois Constitution specifically states that membership in the state’s pension or retirement system “shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.”
The lower court in the person of Judge John W. Belz of the Sangamon County Circuit Court in Springfield, Illinois has ruled that the pension overhaul enacted in December 2013 violated a clause in the State Constitution that makes pensions “an enforceable contractual relationship” that cannot be impaired.
The state’s attorney general, Lisa Madigan, said she would appeal the decision to the State Supreme Court.
The newly elected Republican Governor, Bruce Rauner has previously stated that he thought that the state had not gone far enough in reforming the pension and health-benefits of state employees to ensure the financial stability of Illinois, as it faced huge deficits down the road.
(11/21/14)- Back on 9/7/13, we had an item on federal Judge Meredith Jury’s ruling that the city of San Bernadino, California could file for Chapter 9 bankruptcy protection. At a hearing on November 18, Judge Jury scolded city officials for making little progress on a reorganization plan and gave the city a deadline of May 30 to file its plan of adjustment. When you compare San Bernadino’s bankruptcy timelines to Detroit’s, you can see how quickly Detroit got its matter resolved.
San Bernadino’s bankruptcy attorney Paul Glassman told the court that the most important matter was for the city to reach an agreement with the California Public Employees’ Retirement System (Calpers). The city had previously agreed to continue to make full payments to Calpers.
(11/8/14)- Delivering an oral opinion before the court, Judge Steven W. Rhodes approved the city of Detroit bankruptcy-exit plan. Calling the plan “feasible and generally fair and equitable to creditors in the same position as required by bankruptcy law”, the ruling came almost 15 months to the date that Detroit filed its petition. For more info on this matter, please see our item dated 10/2014 below.
The Detroit City Council will have to approve the plan of adjustment, and there will be a new financial-oversight board overseeing the city’s finances for the next 12 years.
(11/3/14)- Judge Christopher M. Klein of the U.S. Bankruptcy Court for the Eastern District of California in Sacramento confirmed the plan by the city of Stockton, Calif. to exit bankruptcy, rejecting a claim that it unfairly discriminated among creditors by cutting the payment to a mutual fund that held $36 million in bonds issued by the city to pennies on the dollar.
The mutual fund company, Franklin Templeton Investments, was a secured creditor on $4 million of the bonds, but the city had offered to pay only $300,000 on the balance.
The judge did not cut any of the pension obligations of the city, but the employees’ health care plan was cancelled in his ruling. Please also see out item dated 10/3/14 below to see his earlier rulings in the case.
(11/1/14)-The New York Times recently highlighted the fact that there are at least 3 lawsuits pending against Gabriel Roeder Smith & Co., a top actuarial consultant firm for public pensions. Detroit has been a client of Gabriel Roeder since 1938, when the city first started offering pensions.
Gabriel Roeder’s job was to help Detroit’s pension trustees run a sound plan. The plaintiffs in the various suits allege that the firm failed to properly advise the trustees on accounting and actuarial questions.
It is quite possible that Judge Steven W. Rhodes will rule on the Detroit bankruptcy “plan of adjustment” the week of November 3.
(10/22/14)- A judge temporarily blocked the Philadelphia School Reform Commission from cancelling the teachers’ union contract and requiring the union members to pay a share of their health insurance premiums starting in December, as we noted in our item dated 10/11/14 below. The school district said it would appeal the ruling.
The union, the Philadelphia Federation of Teachers, sought the injunction, claiming the commission lacked legal authority to impose the changes. The commission has asked a state court to rule it has the power to void the contract under the state’s takeover law.
(10/20/14)- As we noted in our item dated 9/27/14 below, Judge Steven W. Rhodes had granted a one week delay in Detroit’s bankruptcy trial. Thomas F. Cullen Jr., a lawyer for the city has informed the judge that “substantial progress” had been made in the talks with Financial Guaranty Insurance Company (FGIC) during the week break.
“We are proceeding with a firm and active faith that we will have a deal to present to the court, or announce to the court” he stated. An attorney for Financial, Alfredo R. Perez, also asked Judge Rhodes to suspend the trial for two more days “to see if we can have a consensual deal by that time.”
Under the terms of the settlement with FGIC, the city will contribute $6 million towards the demolition of the 35-year old Joe Louis Arena in which the Detroit Red Wings are currently playing through the 2017 season. Any unused money would go to the insurer. FGIC will have the rights to build a hotel, retail and condominium complex on the 5 acre site.
The company would have the rights to a parking garage on the site, and would receive two types of notes from the city with a total stated value of about $146 million. The city also agreed to provide about $20 million in “settlement credits” that FGIC can use to bid on other city properties that may come onto the market in the future.
The settlement agreement must be approved by the Detroit City Council. Judge Rhodes is expected to resume the bankruptcy trial hearing this coming week, and could come down with his decision shortly thereafter. It is quite possible that with a prompt ruling by Judge Rhodes, Detroit can emerge from bankruptcy by Thanksgiving.
(10/11/14)- The Philadelphia School Reform Commission, the agency that oversees the Philadelphia public-school system announced it was cancelling the teachers’ union contract and requiring the educators to contribute for their health-insurance coverage.
The teachers’ union filed a court action questioning the legality of the cancellation of the contract and the requirement to contribute for the health-insurance benefits, which previously had been free. The current contract had expired in August 2013, but the teachers had continued to work under its terms until a new contract had been negotiated.
Chairman Bill Green of the commission stated that in requiring the teachers to contribute a premium for their health-insurance coverage would save the school district $54 million this year. The commission was created in 2001 by the state to oversee Philadelphia school system because of the extreme financial condition that it was in, at that time.
Starting in December, individual teachers would be required to contribute between $27 and $71 a month, while those under a family plan would have to pay premiums of amounts $77 to $200 a month. There are 135,000 students in Philadelphia’s public school system
(10/3/14)- Back on 4/13/13 below, we wrote “In upholding the Chapter 9 bankruptcy petition of the city of Stockton, California, Judge Christopher M. Klein will be bringing to a head the question as to whether or not the city's bondholders and the insurers of those bonds are being treated fairly, since the city is making full payment for its commitment to the California Public Employees' Retirement System (Calpers), which is therefore detrimental to the bondholders or "capital markets" group.
The city's creditors will contest whether the "plan of adjustment" which is the equivalent to a plan of reorganization in a Chapter 11 bankruptcy matter is a fair one to all creditors of the municipality.
The city's commitment to Calpers is over $900 million, which it has continued to make, so that its pensioners receive their monthly checks. The case will take many months before the judge makes his ruling on this question, but obviously it has major implications for other cities presently in or undergoing bankruptcy proceedings.”
As a reminder, the Stockton, California Chapter 9 bankruptcy proceeding, before Christopher M. Klein of the Eastern District of California, was the largest city bankruptcy proceeding before Detroit Michigan became the largest filing by a municipality.
A ruling from Judge Klein on Stockton’s petition to exit the bankruptcy stated that he would make a final decision on October 30, but that the Calpers’ lien, which by now had grown to $1.6 billion was based on a contractual provision, and as such should be included as a non-secured creditors’ claim under the federal bankruptcy law and not entitled to any priority as guaranteed by California state law. Contractual obligations can be voided under federal bankruptcy laws.
“The bankruptcy code provides that the lien can be avoided and be treated as an unsecured claim” Judge Klein said.
Franklin Templeton Investments, a mutual fund company that owned about $36 million of the city’s debt raised the issue since all creditors of the same class must be treated equally under federal bankruptcy law. If the Calpers lien were to be given a priority, as it was under California’s pension laws, the city’s “plan of adjustment” would illegally favor one unsecured creditor over the other unsecured creditors.
(9/27/14)- Judge Steven W. Rhodes of the bankruptcy court has granted representatives of the Financial Guaranty Insurance Company a one week postponement in the trial in light of the settlement arrived at between Detroit and the Syncora Guarantee, the other major bond insurer involved in the proceedings. The city will present a new blueprint to the judge who must determine the “feasibility” of the plan.
Martha E.M. Kopacz, a senior managing director at the firm of Phoenix Management Services who was hired by Judge Rhodes to review the city’s financial plans testified at the trial that the plan was feasible.
The Detroit City Council approved the creation of a regional water authority with its surrounding counties (Oakland, Wayne and Macomb) that will allow the city to maintain control of its water system as we noted in our item dated 9/12/14 below. The authority must now be approved by at least one of the counties. The city council also voted to approve the deal with Synacore that we described in that same article.
Mayor Mike Duggan, and the Detroit City Council voted to allow Kevyn D. Orr, the city’s emergency financial manager, to continue in overseeing the bankruptcy proceeding, while the mayor would immediately retake control of police operations, and the City Council would once again become responsible for approving city contracts.
By Michigan law, the city leaders by a two-thirds majority could have voted to remove Mr. Orr as of this weekend.
Judge Steven W. Rhodes is expected to rule sometime in October as to the “fairness and feasibility” of Mr. Orr’s plan of adjustment. Once the city does clear the bankruptcy hurdle under the plan, a commission that includes representatives of the state would oversee the city’s financial decisions.
(9/17/14)- An internal report on the fees that Detroit’s bankruptcy is costing reached the $126 million mark, with more to come, which is nearly 4 times the amount, estimated what the cost would be in December 2013. For comparative purposes the GM bankruptcy cost was about $110 million, while the Lehman Brothers Holding Inc. fee was about $2.2 billion.
Robert Fishman was appointed by the bankruptcy court Judge Steven W. Rhodes to oversee the costs, which according to the latest court filings have come to $50 million through March that he has approved. The city had a cash balance of $156.8 million for the quarter ended June 30. The city has over 100,00 creditors owed money, and Emergency Financial Manager Kevyn D. Orr’s appointment is good only through the end of this month.
(9/12/14)- A tentative settlement seemingly has been reached between Detroit and Syncora Guaranty, the bond insurer that is one of the largest creditors of the city that has opposed its plan of adjustment in the bankruptcy trial now being held before Judge Steven W. Rhodes.
Representative for Syncora and the city have called for and gotten a two day adjournment of the trial in order to work out the details of the settlement. A memo signed by Kevyn D. Orr, the city’s emergency financial manager, described some of the terms of the settlement. Syncora would be given a stake in the tolls from the tunnel that now exists between Detroit and Windsor, Ontario, as well as some nearby land.
Syncora’s share of the revenue from the tunnel would run until 2040. The land in question is riverfront property that could be developed by the insurer.
Syncora would have the ability to lease a parking garage for 30 years, if it would invest $13.5 million in repairs over the first five years of the lease. The lease would allow the insurer a 40% return on its investment, and one-fourth of that would be shared with the city.
Syncora and the Financial Guaranty Insurance Company of New York had insured $1.5 billion of certificates issued by Detroit in 2005 that were underwritten by the Bank of America and UBS. The legality of the issuance of these certificates had come into question, and Detroit had been offering only about 10 cents on the dollar in the bankruptcy proceeding. It remains to be seen if the banks would release the insurers from their obligations in this matter.
The city also reached an agreement with its 3 suburban neighbors to lease its water system to a new regional authority. Under the lease agreement the city would receive $50 million a year for 40 years, which it would then spend to repair that system. The city would still hold title to the water system, but the newly created Great Lakes Water Authority would have some say in how it is run and what it charges customers.
$4.5 million a year would be used to help struggling Detroit residents to stay current on their water bills. This agreement must be confirmed by at least one of the three county boards, and either Detroit’s City Council, or by Mr. Orr.
The city would issue $800 million in bonds that would be backed by the stream of money coming from the water system’s customers.
(9/11/14)- Detroit’s passage through its bankruptcy proceeding has now reached the stage wherein Judge Stephen W. Rhodes’ hearing on its plan of adjustment is now being held, and this hearing should last for about one month. Six classes of city creditors have voted in favor of the plan, while 5 classes voted against it. There are rumors of settlement talks between the city and some of those who object to the plan of adjustment.
Under the plan before Judge Rhodes, the city’s more than 100,000 creditors could come away nearly empty handed or with as much as 74 cents on the dollar for Detroit’s general obligation bondholders. The consultant hired by Judge Rhodes to advise him on the plan, Martha E.M. Kopacz determined that the plan is feasible.
(9/5/14)- The Michigan Finance Authority sold about $1.8 billion in bonds tied to Detroit’s water-and-sewer system, to be used to buy back existing higher interest paying debt and to make improvements in the system. The system is currently operated as a city department, with investors currently holding about $1.5 billion worth of the debt.
The hearing to assess the city’s plan of debt adjustment began before bankruptcy Court Judge Stephen W. Rhodes on August 29th.
Detroit agreed with a unit of Barclays PLC to obtain $275 million in bond financing that would retire $120 million in prior debt to creditors and be used for revitalization initiatives.
(8/28/14)- The city of Detroit said it would resume the turning off of water to people who have not paid their bills, after suspending doing this for slightly over a month. The city has suspended turning off the water to the delinquent accounts as it tried to work out a fair payment program with these individuals
Nearly 45% of the city’s 173,000 residential water accounts are considered past due, with about 25,000 customers having reached payment plans with Detroit. More than 19,000 residents of the city have had their water shut off since, they were either 60 days behind in paying their bill, or owed more than $150.
(8/6/14)- The Wisconsin Supreme Court upheld the Constitutionality of the state’s recently passed Act 10 that significantly limited collective bargaining rights for most public workers. In a 5-t5o-2 decision, the justices rejected arguments that the restrictions violated freedom of association and equal protection rights, among others.
“Collective bargaining remains a creation of legislative grace and not constitutional obligations” wrote Justice Michael J. Gableman wrote in the majority opinion.
Act 10 limited bargaining rights to pay raises within the rate of inflation, and increased workers health-care and pension premiums.
(7/30/14)- Kevyn D. Orr, Detroit’s Emergency Finance manager filed his fifth version of the city’s debt-cutting plan with Judge Steven W. Rhodes and the bankruptcy court in which he called for an independent monitor to be appointed after the emergence from its bankruptcy.
That would be in addition to a financial review committee called for when the state contributed $194.8 million to aid the city.
(7/23/14)- The result of the vote of Detroit’s retirees and present workers to accept a 4.5% cut in their pensions, as well as an end to their cost-of-living increases came out favorable. Retired firefighters and police officers would not see cuts in their monthly pension checks, but will see smaller cost-of-living increases in the future. 73% of those eligible to vote favored the plan, while 82% of the retired and active firemen and policemen voted in favor of the plan.
Judge Steven W. Rhodes has scheduled a trial to begin August 14 to consider whether the plan filed by Emergency Manager Kevynn Orr is fair, equitable and in the best interest of all creditors.
Martha E.M. Kopacz, the expert selected by Judge Rhodes to examine the plan, concluded in a long report that the plan was a feasible one.
(7/13/14)- The 11th of July was the last day for those eligible to vote on Detroit’s Emergency Manager Kevyn Orr’s proposed pension cuts for municipal workers and retirees, with the results expected to be announced shortly.
Judge Steven W. Rhodes of the U. S .Bankruptcy Court for the Eastern District of Michigan has requested U.S. attorney general Eric H. Holder to submit a brief on whether Chapter 9 bankruptcy is unconstitutional if it allows municipal workers and retirees to have their pensions cut.
Corporations have been permitted to cut pensions when they have filed Chapter 11 bankruptcy petitions, but there have not been any prior decisions on this matter for public employees and retirees. Judge Rhodes had previously ruled that Detroit was eligible to proceed with a Chapter 9 petition, and the city’s unions are appealing that decision.
A federal judge ruled on Friday that Detroit was entitled to casino revenues worth about $15 million a month, and could use the money to settle its bankruptcy debts. Syncore Guarantee, the insurer of debt and reverse-repos issued in connection with a $1.5 billion debt offering back in 2005.
(7/8/14)- The Illinois Supreme Court, in a 6 to 1 ruling, reversed a lower court decision that allowed the state to require retirees to pay for part of health care, and had dismissed the retirees’ case. The case was remanded back to the lower court, where the retirees can proceed with their challenge.
The case in the lower court also involves the issue of reduction in pension benefits.
The Illinois Constitution specifically states that membership in the state’s pension or retirement system “shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.”
Republican Governor Chris Christie of New Jersey vetoed the state budget item that would have paid the pension contributions he promised in signature legislation three years ago as we noted in our item dated 6/30/14 below. He used his line-item veto to cut the pension payments, as well as the tax increases that would have paid for them.
The two agreements that he had signed three years ago required state employees to pay more towards their benefits, but in return pledged that the state would make its full annual contributions to the pension funds.
(7/4/14)- Governor Pat Quinn of Illinois largely approved the state’s 2015 budget, which he had previously criticized as incomplete since it did not extend the temporary income tax increase, which is to roll back on January 1, 2015. If the legislature does not come back into session the state is faced with a $4.4 billion budget deficit.
As noted in our item dated 4/14/14 below, the city of Chicago is facing its own budgetary and pension funding shortfalls.
(6/30/14)- The American Federation of State, County and Municipal Employees, Detroit’s largest union signed a five year agreement with the city’s emergency financial manager Kevyn D. Orr that called for the restoration of the recent wage cuts for the workers.
The agreement will give the municipal employees a 5 percent raise as of July 1.
A New Jersey Superior Court judge in Mercer4 County has ruled that it is legal for Republican Governor Chris Christie to cut pension payments due from the state for this fiscal year to $696 million from $1.6 billion. Judge Mary C. Jacobs ruled that Governor Christie acted properly when he reduced the payment because of an unexpected revenue shortfall.
Judge Mary C. Jacobsen left open the question as to whether or not he can also reduce the payments for the budget beginning in July from $2.25 billion to $681 million. New Jersey is required to have a balanced budget at the end of its fiscal year, which ends June 30.
Mr. Christie had issued an executive order under the state’s Disaster Control Act, even though the governor promised in signature legislation three years ago to make the payments
(6/21/14)- California and New York are among the states with the highest level of unfunded retiree-benefit obligations. In the case of California, as of March of this year, that level was at $64.6 billion in unfunded health benefits.
The Governmental Accounting Standards Board (GASB) has unveiled some proposals that would bring out into the daylight a more accurate picture as to exactly what level unfunded benefits owed by the states would be. These proposals are now subject to public comment, through August 29, and possible reconsideration before the board acts. These public hearings will be held in New York, California and Illinois in September.
The proposals follow similar changes that the board made in 2012 for disclosure of pension obligations. According to the Center for Retirement Research at Boston College, a group of 150 public-employee pensions that were 72% funded in 2013 would have been only 65% funded under the new proposals.
Moody’s Investor Service estimates state total unfunded retiree benefit liabilities at $530 billion.
(6/13/14)- The board of Detroit’s general retirement system voted to endorse the city’s bankruptcy plan, as part of the grand plan that includes outside funding and base pension-plan cuts of 4.5% for former municipal workers.
Detroit’s pensioners, numbering about 32,000, must vote by July 11 on the plan, and if they reject it, could be faced with even steeper cuts. A trial has been tentatively set to begin in mid-August on the city’s bankruptcy plan.
Ford Motor Company Fund and GM and its foundation both pledged $10 million, and Chrysler Group LLC pledged $6 million to help preserve the Detroit Institute of Arts from having to auction off any of its artwork. This money would be used, in addition to the private funds raised, to transfer the collection into a trust designed to keep the work on public display in the city.
The city would use the funds from the transfer to help plug a $3.5 billion shortfall in funding for Detroit’s two municipal pension funds.
(6/5/14)- The Michigan State Senate went along with the State’s House, as we discussed in our item dated 5/25/14, to contribute $194.8 million to Detroit’s retirement systems from Michigan’s rainy-day fund. These funds are part of the grand-bargain that will hopefully speed up the city’s bankruptcy plight. Republican Governor Rick Snyder will sign the measures approving the expenditures.
Still pending is the needed approval for cuts in their pensions by Detroit’s retirees vote. The series of nine bills passed the Senate by a 21 to 17 vote. Ultimately it will be up to bankruptcy Judge Steven W. Rhodes, who will hold hearings on the city’s emergency financial manager Kevyn D. Orr’s plan of adjustment in order to finalize the matter.
(5/25/14)- The Michigan State House voted to contribute nearly $200 million from the state’s rainy day fund for a deal to spare Detroit retirees from larger pension cuts and to avoid selling artwork from the Detroit Institute of Arts (DIA).
Under the deal, the state would send $194.8 million into Detroit’s retirement systems. The rainy day fund would be repaid over a 20 year period of time with revenues the state gets from the tobacco settlement. A nine-member financial review commission would be created to monitor the city’s finances over the coming years .Seven of the members of the commission would be appointed by the governor or state officials.
The commission is empowered to review all city contracts of amounts over $750,000, collective bargaining agreements and operating budgets and appointing a chief financial officer. The DIA would not have to sell any of its artwork under the agreement, but it would be barred from asking for additional tax revenues from taxpayers in three counties after current bills expire in 2022.
JPMorgan Chase, will commit about $100 million to help Detroit with housing repairs, blight removal, job training and economic development projects over the next five years. This commitment is in addition to a $250 million five-year initiative the company announced in December.
(5/20/14)- State income tax collection slipped 0.4% in the first quarter of 2014, according to the Nelson A. Rockefeller Institute of Government. Much of the drop can be attributed to the fact that fiscal experts incorrectly expected Congress to increase the tax on dividends and long term capital gains to 20% from 15% at the end of 2013. This caused many investors to take their gains at the end of 2013, and many corporations to pay special dividends at the end of that year.
State personal income tax grew by 10.3% last year, as the nation slowly evolved from the recession of 2008.
(5/18/14)- The California State Legislature overwhelmingly passed the rainy-day fund measure proposed by Governor Jerry Brown, as we discussed in our item dated 5/14/14 below. Half the money in the fund would go to pay down the state’s lo ng term debt and liabilities for the next 15 years. If approved by the voters in November, the measure would become Constitutional law in the state.
(5/14/14) Democratic Governor Jerry Brown of California has reached a deal with the state’s legislature to put a measure before the California voters in November, that would create a permanent rainy-day fund that would help pay down the state’s debt, and put aside some of its surplus for when hard times would result in going into deficit. It was just a couple of years ago that the state ran a $20 billion deficit, as noted in our item dated 1/10/14 below.
The state is expected to run about a $4.6 billion surplus for its present fiscal year. There is a cap on taxes in the state, with most of the surplus coming from increased capital gains taxes paid by Californians as a result of the stock gains of the last five years.
The deal would increase deposits to the fund when capital-gains tax income increases, and require payments to cut down on the state’s debt. It would also require that 1.5% of general fund revenue go to the fund annually.
(5/8/14)- The federal judge overseeing the Detroit bankruptcy matter signed off on the fifth and presumably final proposal by the city, thus clearing the way for the vote by retirees, employees and bondholders to begin receiving ballots on the city’s plan to rebuild and settle its debt obligations. Voting will continue for several weeks since there will be about 100,000 creditors who will be voting on the matter. Ballots must be returned by July 11.
There still has not been a settlement arrived at between the city and the Detroit Firefighters Association and Detroit’s largest union of police officers.
As we pointed out in our item dated 4/23/14 below, it will be ultimately up to Judge Steven W. Rhodes who will hold a trial that is expected to begin in July, to determine if he will accept the city’s plan of adjustment.
(4/30/14)- The city of Detroit and its municipal workers’ unions have agreed upon a five year labor agreement, the terms of which have not been made public yet. The agreement is subject to ratification by union members but does not include public-safety workers.
The city filed a final version of its “disclosure statement” with the bankruptcy court on Friday, which is a detailed explanation of Detroit’s financial past leading to the current bankruptcy, and its plans for settling claims against the municipality. If bankruptcy court Judge Steven W. Rhodes approves the city’s filing, it will then up to the more than 100,000 creditors to vote on in May and June.
(4/24/14)- As a follow-up to our item dated 4/1/14 below, bankruptcy court Judges Steven W. Rhodes has hired Martha E.M. Kopacz, a Boston based consultant, as his special advisor, to assess the feasibility of Detroit’s reorganization plan.
Ms. Kopacz is a senior managing director at Phoenix Management Services L.L.C., a national turnaround and financial consulting firm. Her firm has given advice to public agencies and local governments in New York, Delaware, New Jersey and Pennsylvania. She will charge the city $500 an hour for her work.
Judge Rhodes also appointed Richard Ravitch of New York as his special advisor. Mr. Ravitch helped New York City avoid bankruptcy back in the 1970s. Mr. Ravitch, a former chairman of the New York Metropolitan Transportation Authority, and lieutenant-governor of New York will provide his service at no cost.
(4/23/14)- Judge Steven W. Rhodes of the U. S .Bankruptcy Court for the Eastern District of Michigan dismissed objections from unions, banks and bond insurers to Detroit’s bankruptcy plan, thus in effect clearing the way for a vote by creditors on the city’s plan of adjustment. The vote is expected to take place sometime around mid-May.
That would be followed by a trial on the plan in late July, with the judge’s ruling expected in August. Please keep in mind that emergency financial manager Kevyn D. Orr’s term in office is due to expire in September.
(4/22/14)- As we noted in our item dated 4/9/14 below, Detroit’s retired firemen’s’ and policemen’s pension fund had been expected to see cuts between 6% and 14%, while other retirees were told to anticipate cuts between 26% and 34%. In a surprising development, the city and its pension funds announced a settlement under the terms of which there would no, or only a 4.60% cut in pension benefits.
Under the terms of the settlement, the retired 6,500 Detroit policemen and firemen would have no cut in current pension benefits, but would have their cost-of-living increase cut in half. The city has about 20,000 retirees and 10,000 present employees who must vote on the proposed settlement.
There is still a great deal of uncertainty concerning a $350 million contribution from the state to the city to aid it in its financial plight. The city is also hoping to use some funding from the federal government which is intended for housing purposes to be diverted to help alleviate the financial crisis
Because of the bull market that has occurred since March 2009, the city was willing to accept a higher expected rate of return for those 2 funds than the 6.25% to 6.50% rate that it previously had been assuming. The city also factored in the agreement between private donors and the Detroit Institute of Art that would bring in an additional $816 million into the pension funds.
Under the terms of the settlement, other municipal retirees would have their pension benefits cut by 4.60%, have their cost-of-living increases eliminated, and health care benefits would be diminished.
The settlement must be approved by Judge Steven W. Rhodes, who is presiding over the bankruptcy proceedings, and the financial creditors, who are being offered about 15% on the face amount of their securities, as well as the insurers of these issues, who will in all likelihood sharply oppose this settlement agreement.
A court appointed committee of retirees and union officials were surprised by the settlement and there is no assurance that they will approve it.
Under municipal bankruptcy rules, if one class of impaired creditors votes to approve the plan of adjustment, the judge overseeing the bankruptcy proceedings can force the approval of the plan on all other impaired creditors.
(4/17/14)- As we noted in our item dated 2/22/14 below, Rhode Island has a long way to go before its state pension system is able to resolve its shortfall. Complicating matters now is the fact that the police union voted against the proposed settlement of the state’s 2011 pension overhaul. The police union members were the smallest of the 6 groups that had to approve the overhaul. The overhaul was aimed at saving the state $4 billion over the next 20 years.
The 9 different unions brought suit challenging the legality of the new law. The parties were ordered back into mediation, and will report back to the judge within a week.
Back in Illinois, the House and Senate passed legislation raising the amount municipal employees must contribute to the retirement system and reducing cost-of-living increases, as proposed by Democratic Mayor Rahm Emanuel of Chicago, as we noted in our item dated 4/5/14 below.
The measure had been paired with a $250 million property-tax increase for the city of Chicago, for which the City Council must now vote to approve. The current measure would put the city on the path to being 90% funded on its pension obligations within 40 years. Governor Pat Quinn, a Democrat has not stated if he would sign the measure
(4/13/14)- U. S .Bankruptcy Court for the Eastern District of Michigan Judge Steven W. Rhodes, who is overseeing the Chapter 9 Detroit bankruptcy proceeding, ruled that Detroit could proceed with the plan to pay $85 million to UBS and Bank of America over several months to terminate the financial contracts known as interest-rate swaps that we discussed more fully in our item dated 3/12/14 below.
Under the terms of the agreement the two banks will back Detroit’s “plan of adjustment” that is critical for the city’s early resolution of its bankruptcy proceeding. Municipal bankruptcy law allows the judge to impose the same type settlement on all others in the class of creditors known as impaired creditors.
The Michigan state law that created the city’s emergency financial management, under which Kevyn D. Orr was appointed, will expire in September of this year.
Judge Rhodes, in his ruling, stated that even if the unsecured creditors would prevail in their case claiming that the credit-default swaps were illegal, the U.S. Bankruptcy Code contains “safe harbor” for financial derivatives that says, in effect, that swaps and other such financial contracts remain fully enforceable, even in bankruptcy.
(4/9/14)- The bankrupt city of Detroit filed a revised payment schedule with the court, wherein it proposed to pay even less than its prior filing to bondholders and city pensioners. City firemen and policemen and retirees from these departments are currently voting on a 6% reduction in pension benefits and the elimination of cost-of-living increases. If they voted against the plan they would see a 14% reduction. Other employees and retirees would see a similar reduction in their benefits.
Unsecured bondholders would, under this revised plan receive, 15% on the dollar value of their bonds, as opposed to 20% under the terms of the older plan. It is estimated that the city has over 100,000 creditors to deal with in the bankruptcy proceeding. The next scheduled hearing before the bankruptcy court is set for April 14.
(4/5/14)- Democratic Mayor Rahm Emanuel of Chicago joined the growing chorus of city mayors calling for municipal workers to pay more for their retirement and medical benefits, while raising taxes on property owners in an attempt to bring the city’s pension funds back from insolvency.
The state of Illinois is faced with the largest deficit of any state in the U.S., and it has passed legislation overhauling its state pension system. The way things stand now the city will be required to contribute almost $600 million for city workers’ pension funds next year.
Mr. Emmanuel’s proposal would require employees to contribute about 11 percent of their salaries to their pension funds by 2019, up from the 8.5% that they now contribute. Cost-of-living raises which now are increased at a 3 percent rate, compounded each year would rise more slowly, and would even be skipped in certain years.
Property taxes would be increases about $50 for a home worth $250,000, and similar increases would occur each year for the next 5 years. Increasing the retirement age minimum is another possibility that is being discussed.
U.S. bankruptcy Judge Steven W. Rhodes approved a loan agreement enabling the bankrupt city of Detroit and Barclays Capital, a subsidiary of Barclays PLC to borrow $120 million, to be used among other things to buy new police and firefighting vehicles, because of the urgent need to improve city services.
The city is backing up the borrowing through income-tax revenue and the future sale of assets. Emergency Financial Manager Kevin D. Orr is proposing a 6% reduction in pension benefits for current and future police and firemen, and the elimination of cost-of-living increases. That proposal is now being voted on by the police and firemen, and if rejected, the reduction would be increased to 14%.
(4/1/14)- Judge Steven W. Rhodes of the U. S .Bankruptcy Court overseeing the Chapter 9 Detroit bankruptcy proceedings is proving to be quite an activist in the case. That is being shown when he indicated his desire to appoint his own independent expert witness to help him evaluate the city’s proposed “plan of adjustment”. Of course there is the matter as to who pays for this independent expert, on top of the expert witnesses already testifying in this matter.
Kevin D. Orr, the city’s Emergency Finance Manager has stated that he had no objection to Judge Rhodes’ proposal. It is unclear as to who would pay any fees due to the judge’s expert witness.
Judge Rhodes, in a recent court filing, asked the city and its creditors if they had any objection to his hiring his own expert who could provide a report and “give testimony regarding the feasibility of the city’s plan of adjustment and the reasonableness of the City’s assumptions regarding its revenues, expenses and plan payments.”
(3/20/14)- The Financial Guaranty Insurance Company, the insurer for investors who bought $1.4 billion of “certificates of participation” in 2005, has filed a countersuit in the U.S. Bankruptcy Court for the Eastern District of Michigan in response to the suit that Detroit filed in January seeking to void those certificates, claiming that the transaction was a sham. Detroit brought the suit claiming the certificates were null and void.
The city claimed that it had maxed out on the amount of debt it was legally allowed to issue in 2005, and that the certificates were issued under a complicated structure just to avoid that ceiling. Bank of America and UBS were the underwriters for the issue, as we noted in our item dated 3/12/14 below. Three prior settlements had been set up but never finalized as we noted in that item.
Financial Guaranty said in its filing that when it was first approached to insure the certificates, it sought legal opinion from the city’s financial advisors and even the state government. All of them told the insurer that the transaction was legal, binding and enforceable, and would not put Detroit in violation of its legal debt limit.
(3/12/14)- Kevyn D. Orr, Detroit’s Emergency Manager announced that he had reached another new tentative agreement to settle the claims of Bank of America’s and UBS’s against Detroit, and will file the $85 million plan in a few days with the federal bankruptcy court. The debt was incurred in 2009 for some collateralized debt obligations under which the city pledged casino taxes in case of default.
The prior tentative settlements were for $230 million and then for $165 million, while this latest settlement called for a total of $85 million to be paid to the banks over time. Please see our item dated 2/27/14 where Bankruptcy Court Judge Steven W. Rhodes rejected the prior settlement that was arrived at between mediator Judge Gerald Rosen and the other parties.
(3/7/14)- Even though over 40 states have taken steps to rein in their pension costs, the gap between the projected cost of the benefits and the money set aside to pay for them continues to grow. That gap is now estimated at $4 trillion this year from $3.1 trillion in 2009, according to Joshua D. Rauh, a finance professor at Stanford University.
On the one hand, we have had a bull market for 5-years now, with workers contributing more towards their pension costs, while on the other hand, retirees are living longer lives.
(2/27/14)- U. S .Bankruptcy Court Judge Steven W. Rhodes, who is overseeing the Chapter 9 Detroit bankruptcy proceeding, rejected a deal that had been arrived at by the mediator he appointed, U.S. District Judge Gerald Rosen, between Bank of America and UBS AG, and the city as to the amount due to be paid to the banks for some collateralized debt obligations that were backed by revenues from the city’s gambling casinos.
(2/22/14)- Rhode Island and its pension system are back in the news again when the state and the representatives of its public employees union announced that they had accepted pension modifications which were mediated by federal officials. For additional background on this matter, please go back to our item dated 11/23/11 below.
The agreement still has a long way to go before it can become effective since the union membership will have 2 months to vote their approval of the agreement; then it must be approved by Judge Sarah-Taft Carter of the State Superior Court, who is hearing the case; then by the system’s retirees, and finally by the state legislature
Under the Rhode Island Retirement Security Act of 2011, annual cost-of-living increases for retirees were suspended until the state’s pension system became at least 80% funded, except for a single increase every five years. The agreement that is now pending approval reduced this to one increase every four years
Employees with more than 20 years on the job will be able to stay in their defined-benefits plan, rather than moving into a new hybrid type of plan, as long as they agree to make higher contributions, which could be as much as 11%. The state will increase the amount it contributes to the pension system from $486 million a year to $510 million a year.
The law raised the retirement age for most of Rhode Island’s 66,000 state employees. It also shifted the employees out of defined-benefit pension plans into a hybrid system that mixed elements of a traditional pension with an individual 401(k).
(2/14/14)- Kevyn D.Orr, Detroit’s Emergency Manager said that he expected to delay the filing of the city’s “plan of adjustment” as we discussed in our item dated 2/7/14 below past February 17th, but would be filed before March 1.
He attributed the delay to the ongoing negotiations and mediation meetings. As we noted below, U. S .Bankruptcy Court Judge Steven W. Rhodes, who is overseeing the Chapter 9 proceeding, had previously ruled that the city’s pensioners aren’t entitled to special protection from potential cuts, even though the state of Michigan has a constitutional protections for pensioners.
(2/7/14)- The terms of Detroit’s “plan of adjustment” for its estimated $18 billion in debt, which must be filed with the bankruptcy court by February 17, are coming into the light of day. Under the terms of the plan, retirees would get cash worth about 50% of their claims over time, while the holders of the city’s debt securities issued in 2005 would get about 10% of their claims.
If the city is able to lease the city’s water and sewer system, the unsecured creditors would get an additional 3% for their claims. The proposal included $3.1 billion in cash contributions that Detroit would make to its two municipal pension system over the next 40 years, and $500 million to support the city’s retirees’ health plan.
The city would issue notes to its creditors at a 20% recovery rate, while others would only get about 10% for their claims.
The Detroit Institute of Arts (DIA) announced that it would raise $100 million, which would be added to the $370 million that has been pledged by 10 national and local private foundations.
(1/27/14)- Republican Governor Rick Snyder of Michigan has proposed a plan to request 50,000 special federal immigration visas over the next 5 years to attract foreign professionals, who are willing to work and reside in the city. The number of such requests would be staggered over the 5-year time frame, with about 15,000 such requests coming for the 5th year.
The visas, known as EB-2s, are available to professionals with advanced degrees and people with special ability in the sciences, arts and business. Those who obtain it become eligible for a green card, or permanent residency. The federal government can award up to 140,000 such visas each year, but that cap has not been reached over the last few years.
As noted in our item dated 1/2014, the governor did announce his proposal to provide some “conditional funding” for Detroit.
(1/20/14)- MIRS, an online newsletter that covers Michigan political issues, reported that Governor Rick Snyder told state legislators that the state could speed up Detroit’s emergence from bankruptcy “by sinking $300 million to $400 million over 20 years into the ”grand bargain” fund that we discussed in our item dated 1/17/14 below.
In another breaking development in Detroit’s bankruptcy proceeding, U. S .Bankruptcy Court Judge Steven W. Rhodes rejected a proposed settlement of a so-called interest-rate swap agreement settlement between the city and Bank of America Corp. and UBS AG, calling the pact financially imprudent.
The city had pledged its casino-tax revenue to secure the swap agreements, which was used to fund the city employee funds Bank of America and UBS had agreed to restructure $293 million in secured debt that was part of the swap agreement, in exchange for $220 million. The city then arranged financing to pay off the reduced debt with a loan backed in part by casino-tax revenue.
Swap agreements, under federal legislation, are outside the jurisdiction of the bankruptcy code.
Judge Rhodes questioned the city’s emergency financial manager Kevyn Orr for not challenging the originality of the original debt deal to fund the city pensions as well as the swap agreement that followed. Judge Rhodes urged the parties to continue to negotiate on the deal.
(1/17/14)- In a so called “grand bargain plan” originated by Chief U.S. District Court Judge Gerald Rosen, who was the mediator appointed in Detroit’s Chapter 9 bankruptcy matter, 7 charitable foundations pledged a total of $330 million, so that the Detroit Institute of Arts (DIA) would not have to sell any of its paintings.
The holdings of the museum will be placed in the hands of a non-profit public trust. The city will then be able to use the funds to help it make up for the shortfall in its municipal pension system. The Ford Foundation pledged $125 million; the Kresge Foundation of Troy, N.Y. pledged $100 million; $30 million will come from the Miami-based John S. and James L .Knight Foundation and $25 million will come from the Michigan based William Davidson Foundation.
Mariann C. Noland, president of the Community Foundation for Southeast Michigan was said to have been one of the community leaders to have helped get the ball rolling.
Creditors of the city say that there are actually over 66,000 works-of-art in the museum’s collection, not the 2,700 as was used by the auction house Christie’s when that firm put a value of $454 million to $867 million on the collection. The creditors claim that the true estimate of the value should be over $1 billion, and therefore filed an objection to the “grand bargain” agreement..
U. S .Bankruptcy Court Judge Steven W. Rhodes, who is overseeing the Chapter 9 proceeding
(1/10/14)- In our item dated 12/8/13 below we wrote: “The state’s (California) independent legislative analyst’s office reported last month that at the end of its current fiscal year in June, the state will have a $2.4 billion reserve, more than double the $1.1 billion previously estimated. At one point the state was about $20 billion in the red.”
Here it is roughly one month later and the state’s Legislative Analyst’s Office is now predicting roughly a $4.7 billion surplus. With the stock market continuing to climb to new highs, and with many mutual funds have made many substantial capital gains distributions at the end of 2013, it is quite likely that both the federal and state governments will enjoy a bountiful tax season on the revenue side.
(1/8/14)- Kevyn D. Orr, Detroit’s emergency manager said he would delay implementation of his executive order of December 30 that would have frozen the pension benefits for thousands of the city’s workers to allow a possible compromise in federally mediated talks.
The order froze benefits for 5,600 active workers and 12,000 retirees, eliminated cost-of-living increases, and created a 401 (k) style retirement plan for all new city workers. Mr. Orr said that he reserved the right to reinstate the freeze retroactively to January 1 if mediated talks could not produce a compromise on the city’s pension obligations.
The executive order affected non-uniformed employees and retirees, but did not affect the police and fire retirement system, which is considered to be better funded than the general retirement fund. Current retirees would continue to receive their pension checks, but active workers would not accrue additional benefits based on time worked.
Santa Clara California County Superior Court Judge Patricia Lucas ruled that key portions of a measure voted on by its citizens and enacted in San Jose, California that would have required city workers to contribute to keep their promised pension benefits, as well as a provision to temporarily suspend cost-of-living raises for retired workers was illegal.
The judge ruled that the provisions in the contract were a “vested right” and could not be altered. At the same time the judge declared that the city could however impose pay cuts on its present work force and alter the terms of the municipal workers health plan.
A California state law, as in Michigan prohibits reductions in the pensions of state workers. San Jose, unlike Detroit, is not in bankruptcy court proceedings.
(12/16/13)- A report from the National Association of State Budget Officers indicates that the rate of growth in state revenues in 2014 is expected to be significantly slower than in 2013. Growth is expected to be 0.8% in the fiscal year that started October 2013, compared with an estimated 5.7% increase a year before.
There are several reasons for the drop in revenue, one of which is the fact that several states enacted tax cuts, because of the improving economy. Another reason is because there was a disproportionate increase in revenues for the fourth quarter of 2012, because of the mistaken belief that the federal government was going to increase the tax rate on capital gains and dividend income.
On the other hand there may be a silver lining, in that because of the strength in the stock market this year, several mutual fund portfolio managers have elected to nail down some of the funds profits, thus resulting in bigger capital gains distributions than usual.
Spending in state budgets grew 3.6%, or $26.3 billion, for the fiscal 2014 year, which actually is below the 5.6% historical average growth rate.
(12/10/13)- Governor Scott Parnell of Alaska said he would urge in his fiscal 2015 budget plan that the state tap $3 billion in one of its savings accounts to pay down $11.9 billion unfunded liability in the state’s two largest pension funds. The proposal would also allow Alaska to reduce its annual contribution to its Public Employees Retirement System to $500 million a year from this year’s $600 million and raise the funded status of the two pension funds by 10% almost immediately.
The Public Employees Retirement System is 63% funded, and the Teachers’ Retirement System is 53% funded.
Meanwhile, back in Illinois, Governor Pat Quinn signed into law the plan that the legislature adopted to overhaul that state’s public pension system as was discussed in our item dated 12/5/13 below.
(12/8/13)- The financial health of the states continues on a slow but steady course as is reflected in the latest statistics out of California. The state’s independent legislative analyst’s office reported last month that at the end of its current fiscal year in June, the state will have a $2.4 billion reserve, more than double the $1.1 billion previously estimated. At one point the state was about $20 billion in the red.
California’s legislature felt that it was therefore justified in increasing the salary of its members by voting a 5.3% salary increase bringing the members base pay to $95,291 from $90,526. In addition to the base pay the increase applied to their per diem lodging and expense handout of $163. Some of the legislators have refused to accept the increase.
Democratic Governor Jerry Brown’s pay will go up to$173,987 from $165,528.
(12/5/13)- Both houses of the Illinois legislature passed the compromise budget plan that we discussed in our item dated 12/2/13 below. The plan hopes to generate between $90 billion to $100 billion in savings by curtailing cost-of-living increases for retirees, offering an optional 401(k) plan for those willing to leave the pension system, capping the salary level used to calculate pension benefits and raising the retirement age for younger workers, in some cases by five years.
In exchange, some workers would see their pension contributions drop by 1%. The state would increase its payments into the system by $60 billion to $70 billion
The measure passed the Senate by 30 to 24, with 3 members voting “present”.The House approved the measure 62 to 53, with one member voting “present”. Both bodies of the legislature are controlled by the Democrats, and Governor Pat Quinn is also a Democrat.
(12/4/13)- As noted in out item dated 11/27/13 below, U. S .Bankruptcy Court Judge Steven Rhodes ruled yesterday that the city of Detroit had bargained with its creditors “in good faith”, and had met the criteria needed for a city to file for bankruptcy. Judge Rhodes also ruled that the city’s public-sector pensions could be reduced as part of its restructuring plan.
In a summary of his rulings the judge also stated: “that the Michigan state constitutional provision that protected municipal workers from having their pensions cut “do not apply to the federal bankruptcy court”.
The city’s public-employees’ unions announced that they would appeal Judge Rhodes’ rulings. There is no doubt that other cities in this country that are in extreme financial crisis will be looking at this case to see if they too should follow in Detroit’s footstep.
(12/2/13)- Illinois legislators will vote tomorrow on a proposed deal aimed at saving about $160 billion over 30- years, as the state seeks to remedy the $100 billion budget deficit that it now faces. A bi-partisan committee was appointed by Democratic Governor Pat Quinn with the avowed purpose of finding ways to alleviate the deficit. For more info on this matter please see our item dated 7/15/13 below.
The details aimed at fixing the problem included cuts in cost-of-living increases for retirees, raising the age for retirement for some state workers, and setting a cap on pensions for those with the highest salaries. State workers unions have come out strongly in opposition to the plan, saying that it violated the state constitution which forbids cuts in state employees’ pensions.
(11/27/13)- U. S .Bankruptcy Court Judge Steven Rhodes announced that he would rule on Tuesday, December 3 as to whether or not it was legal for Detroit Michigan to file for Chapter 9 bankruptcy court protection. Of the five questions involved in determining the legality of the city’s action ,the main issue is whether or not it bargained “in good faith” with its creditors.
(11/9/13)- Stockton, California, the largest U.S. city to declare bankruptcy until Detroit’s recent filing, got some breathing room when its residents passed a sales-tax increase that would generate about $28 million a year in revenue. For more information on the Stockton bankruptcy, please see our item dated 8/12/12 below. The city’s voters approved a ¾ of a cent sales increase at the election Tuesday.
In San Bernadino, California the electorate ousted several of the officials that they thought were responsible for the financial mess that the city fell into, which led to its bankruptcy filing. For more information on this matter please see our item dated 10/30/12 and 8/6/12.
(10/31/13)- According to data provided to the Wall Street Journal by Merritt Research Services LLC, the median spending on pensions among this country’s 250 largest cities rose to 10% of general budgets in 201`2, up from 7.75% in 2007.
With all eyes of the municipal pension world now focused on the Detroit pending Chapter 9 Bankruptcy case, and the ruling of U. S .Bankruptcy Judge Steven Rhodes on the legitimacy of the city to file for bankruptcy, we will see if other cities with pension difficulties opt to go this route also.
(10/28/13)- Republican Governor Rick Snyder of Michigan will testify at a hearing before U. S .Bankruptcy Judge Steven Rhodes on the matter of the legality of the Chapter 9 bankruptcy filing by the city of Detroit. The city will have to demonstrate that it met the 5 requirements needed to file such a petition. One of those requirements is to prove that it negotiated “in good faith” with its creditors, including municipal employees’ unions.
Judge Rhodes is expected to rule on the matter before the end of the year. His ruling will determine if the city’s bankruptcy plan can proceed to reorganize the municipalities finances.
(10/24/13)- The Detroit bankruptcy case is serving to bring into view the practice of skimming off “the excess” when the expected rate of return of a pension fund was exceeded in any given year, with the excess being spent by making extra payments to the municipality’s pensioners.
An example of this occurs when the expected rate of return for the pension fund is 8%, and the fund earned 10% in a given year. New York City; Phoenix; San Jose, CA; and Tampa, FL, in addition to Detroit were localities where the pension trustees allowed this to happen.
This practice exposes these pension funds to two negative results when the pension fund falls short of its targeted investment return. The first negative occurs because no extra payments come in to the fund to make up for the shortfall.
The second negative results from the fact that these “extra payments” decrease the assets remaining in the fund and the plan is weakened by this action. This practice has now been eliminated but the damage has been done.
(10/15/13)- The fiscal condition of the cities in the U.S. continues to gradually improve as shown in the figures from the recently released study from the National League of Cities. The latest City Condition Survey, which has taken place yearly since 1986, shows that city sales tax revenues increased by 6.2% in 2012 over 2011.
For cities that have income taxes, revenue rose 4.4% from 2011 to last year. Property tax revenues fell 0.4% last year from the prior year, but with the recovery now taking place in the real estate market, that figure will change for the better in 2013.
(9/13/13)- Republican Governor Rick Snyder of Michigan has agreed to be questioned by union lawyers about his decision to let Detroit to file for Chapter 9 bankruptcy. Attorneys for the governor and other state officials had been resisting a deposition based on executive privilege, but they informed Bankruptcy Court Judge Steven Rhodes that they would allow the questioning of the governor about his decision to allow the city to file for bankruptcy protection.
The judge had criticized the attorney general’s office for shifting the reasons to avoid a deposition last week.
(9/7/13)- It took about a year, but federal judge Meredith Jury ruled that the city of San Bernadino, CA could file for Chapter 9 bankruptcy. For additional details on this matter please see our item dated 10/3012 below.
The city, with 213,000 residents declared a state of emergency and filed the papers for Chapter 9 bankruptcy protection, which made it the 3rd California city to do so at that time.
The city ceased making payments to the California Public Employees Retirement System (Calpers). Calpers was the sole party objecting to the city’s bankruptcy petition. This case may in turn have a bearing in the Detroit filing for Chapter 9 bankruptcy protection as we discussed below.
(8/31/13)- William B .Lynch, the state appointed financial overseer for the city of Harrisburg, Pa. announced his plan to rid the city of $360 million of debt through the sale of an incinerator and the lease of parking facilities for 40 years. He filed his proposal with the Commonwealth Court in Harrisburg for approval.
The city’s creditors have agreed to take about $100 million less than they are owed, though they could recoup more money after 25 years from parking revenues.
The sale and lease of the parking facilities require that the city council approve the deal, which they are expected to do. Under the plan, Harrisburg would sell the incinerator for between $126 million and $132 million to Lancaster County Solid Waste Management Authority.
The plan also calls for a state agency to issue bonds for between $258 million and $262 million and for the parking facilities to be run be a public-private partnership.
(8/25/13)- The deadline to file objections to Detroit's filing of its Chapter 9 bankruptcy petition was Monday, August 19, and Bankruptcy Court Judge Steven Rhodes has set October 23 as the date for the trial to begin as to the city's eligibility to file for bankruptcy. About 100 objections to Detroit's eligibility for bankruptcy were filed by the deadline
The state's attorney general Bill Schuette, who will defend pensioners in the bankruptcy proceedings did not file a protest to the city's eligibility to file for bankruptcy
Detroit has an estimated $3.5 billion in unfunded pension liabilities, and since the state has a constitutional provision against cutting municipal pension, that will be one of the major issues to be determined in this matter. The two pension funds that represent Detroit's city workers and retirees are challenging the way the city's emergency manager has calculated their unfunded liability. According to their calculation, the city's pension funds are only $500 million underfunded.
(8/15/13)- Judge Steven Rhodes, who is handling the Detroit Chapter 9 bankruptcy proceedings, has appointed Chief Judge Gerald Rosen of the Federal District Court as a mediator in the case. Judge Rosen said he would work with a small team of other mediators, in confidential sessions as stated in the order appointing him to the position.
Judge Rosen said that his aim is to bring those involved in the case together "in a neutral forum, away from the glare of the spotlight", and resolves as many of the disputes as possible.
(8/8/13)- In a front page article in the August 6 edition of the New York Times, Monica Davey and Mary Williams Walsh, entitled "Chicago Sees Pension Crisis Drawing Near", the authors highlighted a problem now coming to the forefront in many of the cities in the nation.
"The pension fund for retired Chicago teachers stands at risk of collapse. The city's four funds for other retired workers are short by $19.5 billion. At least one of the funds is in peril of running out of money in less than a decade. And starting in 2015, the city will be required by the state to make far larger contributions to the funds, which could leave it hundreds of millions of dollars in the red".
Going back to our item dated 7/15/13 below, the state has failed to come up with a budget. Democratic Mayor Rahm Emmual has spoken openly about increasing retirement ages, raising workers contributions to their retirement funds and temporarily freezing inflation adjustments now paid to retirees.
(7/25/13)- The Michigan State Court of Appeals ordered a temporary halt to 3 lawsuits seeking removal of the city of Detroit's attempt to file for bankruptcy under Chapter 9 of the Bankruptcy Code. A lower court had ruled that the filing of the bankruptcy petition was illegal, since a state law forbids the lowering of pensions for municipal employees.
A three judge panel of the appeals court stayed the lower court order and any other proceedings in the lawsuits challenging the bankruptcy until the appeal by Attorney General Bill Schuette is resolved or the appeals court issues a further ruling. Judge Rosemarie Aquilina of Ingham County Circuit Court had ruled that state officials could not proceed with the bankruptcy proceeding.
(7/23/13)- It came as no great surprise, but the city of Detroit filed under Chapter 9 of the Bankruptcy Code last Thursday. For our most recent item in this matter, please see our item dated 6/26/13 below.
Owners of the city's bond are expected to battle with city workers, retirees and pensioners in the coming months, and even more likely over the coming years, as to which creditor takes priority over each other.
The letter of the law seems to state that bondholders get paid before municipal workers, but that is not the way it is liable to work out.
When New York City was faced with bankruptcy in the early 1970s, the Municipal Assistance Corp, (MAC) was set up, so that bondholders got delayed payment of their principal, with lowered interest rates negotiated to ease the burden, and workers and pensioners were paid in full.
(7/15/13)- Illinois Democratic Governor Pat Quinn, suspended the pay of its legislator until they resolve the almost $100 billion pension shortfall faced by the state. The governor and the Democratic controlled House and Senate each have different viewpoints as to how the shortfall should be addressed.
Illinois legislators make $67,836 annually, with leadership positions collecting additional stipends.
The state House and Senate have been deadlocked over their respective plans to go about dealing with the shortfall. As we noted in our item dated 6/20/13 below, the bipartisan committee that was set up to try and reach a compromise on the different plans, failed to reach a compromise by the deadline set by Governor Quinn.
The governor said he would not accept any part of his $177,412 a year salary, until the pension shortfall issued was resolved.
(7/9/13)-State income tax collections increased by 17% this year over last year, through April according to the Nelson A. Rockefeller Institute of Government, at the State University of New York, Albany.
On the other hand we now find many states increasing their spending in response to the increase in revenue that they are receiving. In California, Democratic Governor Jerry Brown just signed a $96.3 billion budget up from $87 billion two years ago.
In North Dakota the budget that was approved in the spring increase spending by 50% for the next two years. The state is fortunate enough to have had some major oil and natural gas discoveries that have helped to swell its revenues.
Texas approved a biennial budget that increases outlays to $106 billion form $84 billion. In Florida the increase in spending was 6% to $74.5 billion over the previous fiscal year.
The latest job creation number for June was an increase of 195,000, so as long as the economy continues its slow tortuous improvement, the spending increases can be handled.
(7/2/13)- Moody's Investor Service released a report recently in which the data indicated that the 50 states have, in aggregate, just 48 cents for every dollar in pensions that they have promised.
On the other hand, the states estimate that they have a total of 74 cents on the dollar, leaving then about $980 billion short of their pension liabilities.
(6/26/13)- Under the proposals announced by Kevyn Orr, the emergency financial manager of Detroit, Michigan bondholders could receive as little as 10% of their principal back on their bonds. Several of these creditors feel that they could do better if the city went into bankruptcy. The city's debt total around $17 billion. City employees and retirees feel that they have "given back" more than there share of benefits, and that they should not be forced to concede any more of their health or pension benefits.
(6/20/13)- And still no budget compromise from the Illinois legislature, even though both legislative bodies are controlled by the Democrats and the governor is a Democrat. The $96.8 billion state pension deficit still continues to be a problem two years after the legislature first attempted to deal with it.
The House and the Senate agreed to form a bipartisan committee to come up with a compromise plan. If the committee can come up with a compromise plan Governor Quinn stated he would then reconvene a legislative session.
(6/16/13)- Governor Pat Quinn, the Democratic Governor of Illinois proposed a compromise in his attempt to resolve the state's budget battle between the different budgets passed by the House and the Senate.
The House plan would impose pension changes on state employees and raise the retirement age. The Senate plan would give employees the option on what benefits to receive in retirement. Even though both branches of the legislature are controlled by the Democratic Party, they could not reach a compromise before adjourning on May 30.
In California, Democratic Governor Jerry Brown and legislative leaders have announced that they reached a compromise on their different budget plans, with the general-fund spending set at $95.7 billion set for this fiscal year, starting July 1. That amount is just about what the governor proposed in May, while being about $2 billion less than what the legislators were calling for late last month. Democrats hold the majority required to pass a budget in both houses.
(6/10/13)- After having two of the investment rating services downgrad the credit rating of the state of Illinois, Democratic Governor Pat Quinn called the legislature back into a special session starting June 19, to try and arrive at a compromise budget package, as we detailed in our item dated 6/7/13 below.
Because of the state's failure to deal with its $96.8 billion pension shortfall, both Fitch Rating and Moody's Investors Service cut Illinois' credit rating, thus reinforcing its dubious distinction of having the lowest rating of any state in the Union.
(6/7/13)- The Illinois legislature has ended its current regular session without coming up with a solution to its employee pension shortfall that has now reached the $96.8 billion level. Each chamber passed separate overhaul packages in May, but has failed to reach agreement on a final plan before adjourning last week
Governor Pat Quinn, a Democrat, said he will bring together legislative leaders to try and arrive at a compromise between the differing plans. Now that the regular session has ended, any legislation to take effect this year would require a three-fiths majority.
The Democrats control both the Senate and the House in the state, so it is an intraparty dispute that is preventing a resolution of this crisis. Illinois has the lowest credit rating of any state in the Union. For additional information on this matter, please see our item dated 8/21/12 below.
(5/31/13)- The improving economic numbers continue to be reflected in the increased revenues shown from some of the data from the Census Bureau. State revenue collections for all states combined showed an increase on average of 4.5% last year.
Forty-seven of the 50 states saw their tax revenues increase in 2012. On the expenditure side of the ledger, state governments are loosening their belts as shown by the increase in funding for their colleges and universities.
Lawmakers in Indiana recently approved a $500 million funding increase over two years for state colleges and universities, following 4 years of cutting allocations to education.
In New Hampshire, the governor has proposed increasing the university budget for the coming academic year by $20 million, or 37%. Florida has recently approved a budget that included higher education funding by $314 million, or 8.3%, following 7 years of cuts.
(5/23/13)- Governor Jerry Brown, Democrat from California projected a surplus of $1.1 billion for the state's budget that ends June 30, 2014. California last had a budget surplus in the early 2000's. The state's deficit had grown to over $17 billion in 2009
Mr. Brown has put $1.1 billion into a reserve "rainy day" fund, and his budget plan envisions both paying down some of the state's debt as well as boosting education spending, the latter required by state law.
He anticipates that revenue will be at $98.2 billion in the current fiscal year ending June 30, up 13% from $872 billion in 2012. The state benefited from an unexpected $4.5 billion windfall in personal income tax receipts this year.
The revised budget of $96.4 billion for the next fiscal year includes a $1.3 billion reduction in spending compared with the $97.7 billion plan announced in January.
(5/15/13)- As we noted in our item dated 3/19/13, Kevyn Orr, the emergency financial manager of Detroit, Michigan, who was appointed by Republican Governor Rick Snyder issued his initial report on the financial condition of the city, as required by Michigan law within 45 days of his appointment.
That initial report indicated that the city was in dire financial condition. He indicated he would have to make cuts to employees' health care and pension plans, as well as sell municipal assets in a move to stave off going into Chapter 9 Bankruptcy proceedings.
Mr. Orr's full restructuring plan for the city is expected to be finished in the next 90 days, according to his spokesman.
(4/13/13)- In upholding the Chapter 9 bankruptcy petition of the city of Stockton, California, Judge Christopher M. Klein will be bringing to a head the question as to whether or not the city's bondholders and the insurers of those bonds are being treated fairly, since the city is making full payment for its commitment to the California Public Employees' Retirement System (Calpers), which is therefore detrimental to the bondholders or "capital markets" group.
The city's creditors will contest whether the "plan of adjustment" which is the equivalent to a plan of reorganization in a Chapter 11 bankruptcy matter is a fair one to all creditors of the municipality.
The city's commitment to Calpers is over $900 million, which it has continued to make, so that its pensioners receive their monthly checks. The case will take many months before the judge makes his ruling on this question, but obviously it has major implications for other cities presently in or undergoing bankruptcy proceedings.
(3/19/13)- Republican Governor Rick Snyder of Michigan named Kevyn Orr, a bankruptcy attorney and partner in the law firm Jones Day in Washington, D.C. as Detroit's emergency financial manager.
Mr. Snyder said that he had selected Mr. Orr based on his 30 years experience with legal and financial matters, including the 2009 bankruptcy proceedings for Chrysler Group LLC.
The 54-year old Mr. Orr will be paid a salary of $275,000 a year. He holds two degrees from the University of Michigan, and he will have the ability to sell city assets, break municipal labor contracts and renegotiate terms with Detroit's creditors.
Mayor Dave Bing said that he would not opposed the appointment and the City Council has also agreed to go along with the appointment.
(3/10/13)- Detroit's Democratic City Council voted to challenged Republican Governor Rick Snyder's plan to appoint an emergency financial manager, as we noted in our item dated 3/3/13 below.
Detroit's Mayor Dave Bing announced that he would not take part in the challenge. "We need to end the drama and infighting and understand that whether we like it or not, an emergency financial manager is coming to Detroit."
As we noted in the item dated 3/3/13, the governor now has 10 days to reconsider his decision.
(3/3/13)- Declaring that "There is probably no city that is more financially challenged in the entire United States", Republican Governor Rick Snyder said he would proceed with the appointment process of an emergency financial manager to oversee the operations of the city of Detroit. Please see our item dated 2/24/13 below for more information on this matter.
City officials will now have 10 days to seek reconsideration from the governor before a state board formally would appoint the manager.
Under a controversal state law, the manager would ultimately hold power to cut city spending, change contracts with its labor unions, merge or eliminate city departments, oversee sale of city assets, and if all else failed, recommend the filing of bankruptcy proceedings
(2/24/13)- As a follow-up to our item dated 12/10/12 below, the review team appointed by the state of Michigan concluded that Detroit is mired in a serious financial problem. If Republican Governor Rick Snyder concurs with this finding, state officials will appoint an emergency financial manager to oversee the cities financial operations.
If the emergency financial manager fails to resolve the situation, the next step would be for the city to file for bankruptcy protection. Mayor Dave Bing, and the city of Detroit whose population is about 83% black, is governed by mostly Democrats, while the state of Michigan is nearly 80% white and Republican.
Mr.Snyder has 30 days to reject the conclusion arrived at by the panel. If he agrees with their conclusion, Detroit officials could still appeal the decision. City officials could also enter into a legal agreement that would require them to share the operations of the city with the emergency financial manager.
(1/29/13)- Standard & Poor's (S&P) Credit Rating Service cut the state of Illinois' credit rating, putting the state on track to have the lowest credit rating of any of the states. Louisiana had held that dubious honor for many years.
The decision followed the failure of the state's legislature to deal with the largest public pension shortfall in the U.S. The shortfall is estimated to be $95 billion.
The downgrade brought Illinois' rating to A- from A, and puts it at the same level as California's rating. S&P has a negative outlook for Illinois while that of California is positive.
(1/26/13)- The latest data available shows that there is a widening of the gap in pension shortfalls for most municipalities but this situation is likely to change as the effects of the bull market in equities over the last 4 years will work towards lessening of the gap.
Recently released figures from the Pew Center on States cover the period of the height of the recession, namely from 2007 through 2009. The gap grew from 74% in 2007 to 79% in 2009.
The study showed a $217 billion shortfall for 61 cities covered by the study. Pension systems are considered healthy if they are 80% funded.
More than half of the shortfall, or $118 billion is from underfunded health-care costs for municipal workers and retirees.
(1/25/13)- The Florida Supreme Court upheld the constitutionality of the state law passed in 2011 that overhauled the state pension system requiring a 3% payroll contribution by state workers. In doing so, in a 4-to-3 vote, it reversed a lower court ruling that the law was unconstitutional.
At the time the law was passed Florida was faced with a $3.6 billion budget shortfall.
This decision eliminates the possibility of a refund of an estimated $900 million in employee contributions and fees collected since 2011. The overhaul covers about 623,000 state workers and teachers and included curbs on inflation increases in retiree benefits.
(1/20/13)- As bad as the deficits are for the federal and local governments, there is beginning to be some sunshine down the road. This is best exemplified by the state of California, which had a $26 billion deficit in its fiscal 2010 budget.
Taking into account some fiscal trickery, Governor Jerry Brown stated that he expected that California would have a $21.5 million surplus by 2014.The governor also stated that he was thinking of putting aside a $1 billion reserve fund to guard against future downturns.
His latest budget showed increased spending for areas that had recently hit by the budget axe. Okay, we realize that the governor is doing a lot of pulling our legs with his budget, but still the direction is clear. Things are improving!!!!.
The state achieved this position with a temporary tax measure that expires in 7 years, an improving real estate market, budgetary statewide cutbacks and an improving stock market, but still the situation is getting better, not worse.
(12/24/12)- A fiscal survey of states released by the National Governors Association and the National Association of State Budget Officers found that states expect to collect $692.8 billion in general fund revenues this fiscal year, which is more than they collected in 2008, the last fiscal year before the recent recession.
21 states are still not collecting as much revenue as they did before the recession, and almost half are spending less than they did before the economic downturn.
Because of expected changes in the tax law, it will not come in as a surprise to us if the revenue figures turn out to be greater than expected as more of corporate America is declaring special dividends for their shareholders so that they would only have to pay 15% for this income versus the increased figures that the fiscal "cliff" negotiators may agree upon.
The same would be true for the increase that results from the taking of capital gains this year at the lower tax rate than what the negotiators may arrive at for capital gains taken in 2013.
(12/10/12)- As a follow-up to our item dated 4/22/12 below, the City of Detroit's finances continue to deteriorate so that a state-appointed emergency financial manager may be called into action.
The city and its mayor, Dave Bing agreed to a consent deal that allowed the city to operate with help from an oversight board that included officials chosen by the state. Michigan residents voted to overturn the state's emergency manager law in November, thus complicating the situation even further.
Moody's Investor Services downgraded Detroit's bond rating, and kept the city on negative outlook credit rating. Under a prior state law, an emergency manager can be appointed to oversee the city's finances, but the manager would not have a broad powers as he would have had under the defeated new law.
Appointment of an emergency manager would be a step meant to avoid bankruptcy or even default by the city.
(10/30/12)- San Benadino, California, which filed for Chapter 9 bankruptcy protection in August, has stopped making its regular payments to the California Public Employees' Retirement System, and now owes it $5.3 million. For additional details on the bankruptcy matter, please see our items dated 8/6/12 and 7/12/12 below.
"I don't look at Calpers as being any different than any other creditor," said Jim Morris, chief of staff to San Benadino Mayor Patrick Morris, a city with about 213,000 residents..
There are about 1,600 retired city workers, and about 1,700 active workers covered under the localities pension plan.
The 4 California cities presently seeking bankruptcy protection are: San Bernadino, Mammouth Lakes, Stockton and Vallejo.
(10/2/12)- The U.S. Postal Service announced that it would default on a $5.6 billion debt, making it the second time it failed to fund future retirees health-care costs in two months.
Postal delivery services will not be affected by the default. The previous failure to fund a retiree health-care payment was for $5.5 billion. The default means the Postal Service is in violation of a law that requires a prefunding of future retiree obligations.
Congress had previously made allowances for the first default, but has failed to do anything in connection with this second default. The Postal Service had reported a $5.2 billion loss for the quarter ended June 30.
The city of Camden, N.J. said it would disband its police force because of the dire financial condition that the city found itself in. The city had previously cut back on its police force, but this takes it a step further. It will then hire new policemen at lower salaries and with lower benefits.
(9/29/12)- 45 states have rolled back pension benefits for their workers since 2009. Newly hired employees will be receiving lowered pension benefits. On the health-benefit side of the equation, both newly hired and older employees will be paying higher premiums, higher deductibles and formulary restrictions will be tightened.
In several states, retirees will be given lump sum payments, so that they will no longer be covered under the state's health plan, but must go out and buy their own coverage.
The new laws have cut only $100 billion from the $900 billion pension shortfall in retirement benefits, according to a study that was done by researchers at Boston College for the Wall St. Journal. Most states have laws that specifically restrict the cutting of pension benefits for state workers and retirees.
Courts in Minnesota and Colorado have ruled that cost-of-living increases can be reduced. Please see our item dated 7/36/11 below.
As of 2010, state workers are paying 10% more towards their retirement plans, according to a study done at Boston College.
(9/25/12)- There may be some light at the end of the tunnel, and it may not be the headlights of an oncoming train. For a pleasant change, the S&P rating services announced that it has placed the state of California on its list for a possible rating increase. As we pointed out in our item dated 9/3/12 below the state is taking steps to alleviate its budget deficit problem.
California residents will vote at the upcoming election on a sales tax rate increase, and that measure is too close to call as of this date.
The state's fiscal problem continues to be huge as shown by a recent announcement from the directors of the State Budget Crisis Task Force, that a lot of the state's other debts do not appear in the official budget. These obligations could add anywhere between $167 billion to $335 billion to the state's budgetary problem.
Much of the additional debt involves irrevocable promises to provide pensions to public workers, health care for state retirees and their families, the delayed cost of highway maintenance, and an estimated $40 billion bill to bring drinking water up to federal standards.
Former Federal Reserve Board Chairman Paul A. Volker, and Richard Ravitch, a former New York lieutenant governor, founded the task force last year. It is also conducting a detailed analyses of a the budgets for Illinois, New York, Texas, Virginia and New Jersey.
(9/22/12)- Cities expect revenue to decline 3.9%, on average in fiscal 2012, according to the survey results released by the National League of Cities. This will represent the 6th straight year of decline.
The study found that while sales-tax revenues increased 2.4% so far in 2i012, that wasn't enough to offset the drop of 2.1% in property taxes and a 0.8% fall in income taxes.
Among the 324 cities in the survey, 66% said pension costs increased in 2012 from the prior year, and 81% said that health-care costs also increased.
(9/14/12)- As a follow-up to our item dated 9/3/12 below, starting in January current employees of the state of California will contribute more towards their pension, and future employees will see cuts in their benefits.
New employees will have higher retirement ages and smaller pensions. Starting in July 2013 all employees will also pay a greater portion of their pension costs, unless they already split the costs in half with their employer.
Eventually all state employees will pay 50% of their pension costs, with about two-thirds of state workers already paying that much now.
(9/8/12)-Judge Frank J. Bailey, of the U.S. Bankruptcy Court in Providence signed of on a debt-adjustment plan that will allow Central Falls RI to emerge from bankruptcy a little more than a year after the city entered court protection under Chapter 9 of the Bankruptcy Code. Please see our item dated 12/26/11 below for more information on the Central Falls bankruptcy case.
The plan is expected to become effective in mid-October.
Under the terms of the plan, pensions of municipal workers will be cut by up to 55%, although a state fund will bolster their benefits for the next five years. Pensions at or below $10,000 a year will not be affected. A 4% property tax increase in each of the next five years will be assessed, while the number of city workers will be cut from 174 in May, 2010 to 118 as of the end of June.
The city went into receivership in 2010, declared bankruptcy in August 2011, with the receivership scheduled to end on December 31, 2012. The Rhode Island State General Assembly enacted a law giving bondholders the right to place liens on tax revenue, and the constitutionality of that law has yet to be tested in the courts.
(9/3/12)- The Pew Center on the States, a nonpartisan organization, estimated in a June report that California's main pension plans were 78% funded in the fiscal year ended June 2010, and faced a $112 billion funding gap.
California's Democratic Governor Jerry Brown and the state's Democratic leaders announced that they had agreed to overhaul state workers' pensions, partly by boosting the retirement age and capping benefits.
The plan caps the salary on which pensions can be based at $110,000, and raises the retirement age for future employees by at least two years. It also requires new and current state workers to contribute half of their pension costs and sets similar targets for current local employees, subject to collective bargaining.
As more and more states face up to their underfunded pension obligations, you will see more and more of these type agreements being announced in the media.
(8/21/12)- The special Illinois legislative session that Democratic Governor Pat Quinn called to deal with the state's employee pension shortfall failed to agree on a remedial package to the problem, so it has been postponed until the next regular session of the state legislators.
Pension costs in the state now account for 15% of its $33.7 billion budget, whereas it was only 6% of the budget only a few short years ago.
Between 2009 and 2011, 43 states enacted some form of major changes to the retirement plans of the state employees and teachers, according to the National Conference of State Legislatures.
The plan that almost came to a vote in the Illinois General Assembly sought to eliminate the state's unfunded pension liabilities over the next 30 years, so it certainly did not have a short term solution to this problem that is also faced by many other states.
(8/18/12)- The Nelson A. Rockefeller Institute of Government estimated that local governments made about $50 billion in pension contributions in 2010, but that their unfunded pension liabilities totaled $3 trillion and unfunded health benefit liabilities are more than $1 trillion.
The U.S. Commerce Department estimates that local government spending and investment dropped at a rate of 2.1% in the second quarter, which was the 11th consecutive quarterly drop.
Local governments have cut an estimated 66,000 jobs in the past year. In the long run this has positive implications, but in the short run "it hurts." It seems as if the housing market has bottomed out and this will mean increased property tax revenues down the road, which is so critically important for most local governments.
Local governments are also reining in pension and health care costs for their employees, retirees and their families. Once again, this will have long run benefits to the financial health of the municipalities and states.
(8/12/12)- National Public Finance Guarantee Corp., a unit of MBIA Inc. filed a petition in U.S. Bankruptcy Court in the Eastern District of California objecting to the city of Stockton's decision not to seek concession from the California Public Employees' Retirement System (Calpers) before filing for bankruptcy protection in June.
The bond insurance firm of Assured Guaranty Corp. also filed a petition challenging the city's bankruptcy filing without seeking concessions from Calpers. All other creditors had to make concessions before the filing of the bankruptcy petition by the city, and yet the retirees were not asked to give back any of their pension benefits.
The two challenges deal squarely with the issue of retiree pension benefits.
Stockton contributes about $10 million annually to an investment fund operated by Calpers, but these payments do not cover what Calpers pays out to Stockton retirees. As a result, Stockton's debt to Calpers totals $147 million.
Stockton owes $90 million to bondholders insured by National Public Finance and about $160 million to bondholders insured by Assured Guaranty.
(8/6/12)- San Bernadino, California, a city with a population of about 210,000 residents filed for Chapter IX bankruptcy protection in the United States Bankruptcy Court, Central California District on August 1. City expenditures for its fiscal year that began July 1 exceed its revenues by about $45 million.
For additional information please see our item dated 7/12/12.
(7/27/12)- In the past month, officials in four California cities (Stockton, Compton, Mammouth Lakes and San Bernadino) have either filed or indicated that they may file for bankruptcy protection.
Cities such as Detroit, have a financial advisory panel overseeing the fiscal plan of the municipality.
Municipal workers continue to be laid off or have salary cuts imposed on them. Not only must they contribute more towards their health care costs, they are faced with higher premiums for their coverage and paying higher deductible costs.
If this sounds familiar, this is what corporate employers have been faced with also. The effects of the economic recession of 2007 through 2009 continue to resonate throughout the country.
On the positive side it does look like the housing industry has bottomed out. Property values have stopped dropping, and this in turn will mean increased revenues for local communities that depend on real estate taxes to fill their coffers.
(7/22/12)- As a follow-up to our item dated 4/11/12 below, Mayor Dave Bing of Detroit announced that he will be cutting the pay and benefits of municipal workers. As cities and states struggle with their deficits and even bankruptcies, the trimming of expenses continues to go on.
Even though the moves were opposed by a majority of the members of the Detroit city council, Mayor Bing went through with the cuts as per the agreement that had be reached with state officials and the governor.
The consent agreement called for the creation of a nine-member financial advisory board, and the naming of two new city executives who will help to develop and carry out a financial recovery plan for the city. The mayor and the City Council members will keep their respective jobs, but with greater oversight.
The wage cut of 10% will affect nearly all of the members of the nearly 50 unions that the city has to deal with. Even though the City Council voted 5 to 4 against the cuts, the rejection was overridden by the approval of the advisory panel.
In addition to the pay cuts that were announced, there will also be a shift from rules of seniority for transfers and promotions, a reduction in additional pay for afternoon and nighttime shifts, an end to supplemental unemployment benefits beyond the legal requirements and more.
About 11,000 people work for the city, but that number is expected to be cut by about 1,000 workers before the end of the year.
(7/18/12)- A report from the State Budget Crisis Task Force, an independent body led by former Federal Reserve Chairman Paul Volcker and former N.Y. Lt. Governor Richard Ravitch, determined that because of rising Medicaid costs, expected federal budget cuts, underfunded pensions liabilities and lowered property tax revenues, the states budget crisis is going to continue for several more years.
For whatever reason, the report did not mention increased tax revenues from the rising stock market from its lows in March 2009, and increased sales tax revenues may mean that this "doom and gloom" scenario may not be an accurate bit of "crystal ball" gazing.
The report found that Medicaid spending is the single largest spending category in most state budgets, and grows at an average rate of 7.2%, while state revenue grow at a rate of 3.9%. An improving economy may throw this past revenue growth rate out the window.
Over 650,000 state employees have been laid off since 2008, and in all likelihood this trend will continue for a while yet.
Underfunded pension plans will have to be dealt with, and rising health care costs for workers is another continuing issue that has to be dealt with also.
On the plus side of the equation is the low interest rates that exist today, so that state's can borrow at much lower interest rates than many of the state obligations that are now maturing.
Yes, the "doom and gloom" is out there, but not as bad as they
would have us believe.
(7/12/12)- San Bernadino, California's City Council authorized the city of about 210,000 residents to file for Chapter 9 Bankruptcy protection. The city expects its deficit to rise to $45 million this fiscal year. Andrea Travis-Miller, the interim city manager, said it would take about 30 days before the city staff would be prepared to file the paperwork.
Jim Morris, the son of the mayor Patrick Morris, stated that labor costs represent about 80% of the city's budget.
The city's portion of its employee pension costs has risen to $2.2 million in the current fiscal year from $1 million in fiscal 2006-2007, according to a report on the locality's website.
The city's policemen and firemen's salaries are based on salaries of policemen and firemen in cities of similar size in the area, but those communities are wealthy than San Bernadino.
In declaring a fiscal emergency, the city will try and bypass a new state mediation process under which a distressed city negotiates with creditors for up to 90 days before filing for bankruptcy.
If it does file for bankruptcy it will become the third California to do so in the last year.
(7/6/12)- As per our item dated 6/12/12 below, the Stockton, California City Council voted on June 25 to file for Chapter 9 Bankruptcy for the city of over 300,000 residents on July 1. This is the biggest city to file for bankruptcy, although more cities will follow Stockton down this path.
The city faced a $26 million deficit that could not be closed after a 90-day mediation period of time with its creditors. It is located in the San Francisco Bay area, and was one of the hardest hit communities that suffered from being one of the highest foreclosure areas in the country.
Stockton cut about $90 million from its budget since 2009, including deep cuts in its municipal staff, police and fire departments.
(6/25/12)- Democratic Governor Jerry Brown and the Democratic-controlled Legislature in California have reached a budget deal aimed at closing the state's $16 billion budget deficit. The governor had originally projected that the deficit would only be $9 billion. Under a change in the law in the state, a simple majority of the legislature is needed to approve the budget, as opposed to the two-thirds needed before this change.
If passed by the end of this month it would only be the third time in the last two decades that the budget was passed on time.
If the voters fail to approve a proposed sales tax increase to 7.75% from 7.50% that will appear on the ballot in November, an array of immediate cuts totaling $6 billion will come into play. Those cuts would affect the state's education system as well as its social service system the most.
A surcharge would also be assessed against those earning more than $250,000 a year, which measure would also have to be approved by the voters in November.
(6/17/12)- State tax revenues are projected to rise 4.1% in the 2013 fiscal year, according to a report from the National Association of State Budget Officers, but state spending are projected to rise only 2,2%.
Only 8 states had to make mid-year budget cuts in the current fiscal year. That compares with 19 last year and 39 the year before.the states as a whole are continuing to show a very slow, but nevertheless improving financial picture.
(6/13/12)- Residents of San Diego and San Jose voted overwhelmingly on Tues. to cut the pension benefits for current city employees as well as future hires.
In the case of San Diego, almost 2/3rds of the residents voted in favor of the cuts and in the case of San Jose the vote in favor of the cuts was almost 70%. The union representing the San Jose police officers filed a lawsuit in Superior Court on Wednesday seeking to block the cuts as being unconstitutional under California state law and that they violated the vested rights of their members under their pension plans.
The measure gives the workers two choices-either they can keep their present pensions but must contribute up to 16% of their present salary to their plans, -or they can enter a less generous pension plan with a higher retirement age, benefits that accrue more slowly and smaller cost-of-living increases,
Future hires would be put into a plan that costs even less, and would be required to contribute up to half of its cost.
(6/10/12)- In a 6-to-1 vote, the Stockton, California City Council passed a resolution authorizing City Manager Bob Deis to declare bankruptcy if the city can't reach an agreement with creditors by the time a state mediation process expires on June 25.
The city owes more than $700 million in long term debt to creditors, and is faced with a $26 million deficit in the fiscal year beginning July 1.
The city began negotiating in February with 19 parties, including retirees and city workers, under a California law that requires municipalities to try mediation before filing for Chapter 9-bankruptcy protection. The city has already laid off 25% of its police force, 30% of its fire department and 43% of the rest of its municipal workers. If no agreement is reached, the city said it would file for bankruptcy by July 1.
As this article continues to show, the public sector employees are having their benefits and pension accounts reflect the negative effects of the recession as more and more municipalities try to shrink their deficits.
(6/1/12)- As a follow-up to our item dated 5/31/12 below, a tentative deal has been struck between the city of Providence, Rhode Island, and its workers and retirees that will allow the city to avoid going into bankruptcy. Please also see our items dated 5/3/12 and 5/1/12 below for more background information on this matter.
Mayor Angel Taveras announced that retirees, current safety officials and current municipal workers had agreed to a 10-year suspension of cost-of-living increases for most pensions, and limitations thereafter, and the migration of their health care plans onto Medicare.
In the future we expect to see more agreements of this type between municipalities and its workers and retirees, but worry about the implications for the Medicare system's liquidity which is already in great trouble.
(5/31/12)- Governor Lincoln Chafee of Rhode Island, the nation's only independent governor, appointed a commission to oversee the finances of Woonsocket. City officials had requested the commission after a supplemental tax increase failed to pass in a special vote held by the municipality to help pay for a $10 million budget shortfall in the school system.
This is the third time the state has taken over the finances of one of its cities, the others being Providence and Central Falls.
(5/22/12)- One of the biggest beneficiaries of the recent initial public offering of Facebook will be the state of California. According to the latest estimate from Governor Jerry Brown the state now faces a $15.7 billion deficit. Back in January, when the governor first issued his budget plans, the deficit was estimated to be $9.2 billion. Looking back a bit, when he first came into office the state was running $26 billion in the red.
Mr. Brown attributed the rise in the deficit to the anemic economic recovery and court rulings that barred spending cuts the state had approved. The state comptroller's office estimated that personal-income tax came in $2 billion below estimates in April.
A ballot measure in the fall would temporarily increase sales taxes to 7.5% from 7.25% for four years, and it would increase income taxes by as much as 3 percentage points for seven years on individuals making more than $250,000 a year or households making more than $500,000 a year.
On the other hand, it is estimated that Facebook alone could provide $1.5 billion in additional tax revenue by June 2013, plus a substantial increase in personal income taxes from the insiders involved in the Facebook initial public offering.
(5/18/12)- As noted in our item dated 12/26/11, Jefferson County Alabama is now undergoing bankruptcy proceedings under Chapter 9 of the Bankruptcy Code. The state's House of Representatives tabled a tax bill that would have imposed a tax on out of county residents who worked within the county limits.
The county includes Birmingham, the state's largest city, found itself in financial difficulty as a result of a large sewerage bond issue, which requires large interest payments that can not be met under the current financial stress that the locality now finds itself under..
(5/3/12)- As a follow-up to our item dated 5/1/12 below, Brown University announced that it would increase voluntary payments to the City of Providence, as the municipality looks to avoid going into bankruptcy. Brown as a non-profit educational institution is exempt from paying taxes, but under an agreement between the school and the city in 2003 agreed to make voluntary payments to the city of $2.5 million a year, and also $1.6 million in taxes on certain commercial and leased property.
The new agreement calls for the school to make additional voluntary payments of $31.5 million over 11 years, on top of its prior commitment.
Brown owns about 200 buildings valued at more than $1 billion, which if taxed would bring into the city's coffers about $38 million annually.
Governor Lincoln Chaffee, the nation's only independent governor, and a Brown graduate helped to negotiate the settlement between Providence and the university.
The state's smallest city, Central Falls, sought bankruptcy protection last summer. For more information on this matter, please see our item dated 12/26/11.
(5/1/12)- Mayor Angel Taveras of Providence, Rhode Island proposed a $638 million budget that assumes additional contributions from the city's tax-exempt institutions and pension systems changes. For more details on this matter please see our item dated 2/12/12 below.
The pension changes that the mayor is proposing would include greater pension contributions from municipal workers and longer services before a worker became eligible for a pension.
The changes would reduce the city's unpaid pension liability, currently more than $900 million, by more than $230 million, and would force retirees over 65 to switch to the federal Medicare program for their health insurance coverage.
(4/11/12)- The city of Detroit, Michigan, which could run out of cash as
soon as next month, and state officials finally came to an agreement aimed at
arriving at a solution to the financial problem facing the municipality.
Mayor Dave Bing, the former basketball star and the governor stated that they would go along with the agreement.
The consent agreement calls for the creation of a nine-member financial advisory board, and the naming of two new city executives who will help to develop and carry out a financial recovery plan for the city. The mayor and the City Council members will keep their respective jobs, but with greater oversight.
In addition to layoffs, the financial recovery plan is expected to seek changes in the pension plans for municipal workers.
(4/8/12)- Does a state law, or even a state's constitution, trump the Federal Bankruptcy Code? That interesting legal question is discussed in Mary Williams Walsh's article "Untouchable Pensions May Be Tested in California" in the March 17th edition of the New York Times.
Stockton, California is on track to become the largest municipal bankruptcy in American history. The city is contributing $70 million a year towards its pension obligation for its retirees and present workers. Its contribution represents less than 70% of its obligations to the pension beneficiaries.
The state's Constitution bars any reduction in pensions for municipal or state workers, even as to future retirees. State law also forbids reductions in pension obligation by the state or its municipalities for retirees or present workers.
The city is presently in mediation with its creditors that will determine by the end of June if it will file for Chapter 9 bankruptcy.
When a corporation goes into bankruptcy it usually stops making payments to its pension plans. Chapter 11 bankruptcy permits companies to shed their pension obligations completely if they can show the bankruptcy judge that is the only way that the company can reorganize its finances. That is when the federal Pensions Benefits Guarantee Corporation ( PBGC) takes over the plan.
There is no PBGC to step in when a municipality goes into bankruptcy. Calpers, the state's billion dollar pension system asserts that Stockton is prohibited from decreasing any pensions for retirees or present municipal workers by both the state's Constitution and a state law that also prohibits any decrease.
Stockton's city manager, Robert Deis wants to cut municipal retirees' health benefits, because the city's health plan is completely unfunded, while the pension plan was at least 70% funded. The city contributes about $9 million a year for its retiree health costs and $30 million a year as its pension obligation.
Will Stockton ultimately seek to reduce the pensions of its present and/or future retirees? If it does do either, Calpers has threatened to take the matter to the courts. This will be a very interesting matter to follow.
(2/29/12) New York State Comptroller Thomas DiNapoli said that sales tax collections grew by 5% last year, so that it now exceeds the levels reached in 2008.
The higher sales tax collections "are a good sign for the economy, but continued caution is warranted, " Mr. DiNapoli said.
(2/24/12)- Slowly, ever so slowly, more and more states are reporting improving economic conditions. Tom Haggerty, an analyst with the National Conference of State Legislatures, noted that 17 states exceeded their expected personal income tax collections in the first quarter of the current budget year, and 18 states got more in sales tax than they had expected.
Federal revenues, which rose 3% in 2i010, have risen by 6% in 2011, according to the Congressional Budget Office (CBO).
Hard hit Michigan has collected $8.8 billion in general fund revenues, up from $7.6 billion in 2010 thanks to growth in state income and sales tax revenue. Officials in the state are now projection $632 million more in revenues over the next two years than they had been expecting only months before.
(2/12/12)- The battle lines are being drawn between state and municipal officials seeking to alleviate their underfunded pension problems, and their employees and retirees. Mayor Angel Taveras, a Democratic mayor or Providence recently proposed plans to reduce pensions for retired municipal workers and try to force retirees over 65 to switch to the federal Medicare program for their health insurance coverage.
He also vowed to appeal a Superior Court ruling that prohibited moving some retirees from the police and fire department to the Medicare program.
In New York City, the battle is brewing between Mayor Michael Bloomberg and officials of the municipal workers union over a billion dollars that the mayor wants to use to reduce the deficit from the city's underfunded pension funds. The union wants to use that money for raises for municipal workers who have not had a raise in 2 years.
New York City's pension cost for fiscal year 2012 is estimated at $7.8 billion. Any changes to pension fund contributions have to be approved by the state legislature.
Mayor Bloomberg also wants to reduce the "assumed rate of return" that the pension funds will earn in the coming years from 8% to 7%, saying that even at 7% this rate is too high. The lower the "assumed rate or return" is set at, means the more money that the city will have to contribute to the funds, but the mayor says that in doing so, he is taking a more conservative realistic approach, especially in light of the stock market decline of 2008.
The unions, on the other hand, want a smaller decrease in the assumed rate, since this might leave more money available to the city so that it could afford the salary increases that the union hopes will be available for its membership. They also want to increased payments to the pension funds to be spread out over 22 years, so that smaller additional funding can be utilized to inflict less pain.
(2/5/12)- Connecticut's Democratic Governor Daniel Malloy proposed increasing the state's payments into the State Employees Retirement System, one of the nation's most under-funded public pension funds. His proposal called for the state to increase its annual contributions by about $123 million a year, to about $1.59 billion, which would fully fund its pension fund in 20 years.
The state's present $10 billion pension fund is under funded by about $5 billion. The state is currently contributing about $1 billion a year to the fund, which would mean that it would have to contribute about $4.5 billion in 2032 if it continues on this under-funding path.
Moody's Investors Services recently downgraded the state's credit rating citing its high pension and debt costs, which eat about 20% of the state's $20 billion budget.
(1/25/12)- Just as corporate America switched from defined benefits pension plans to 401(k) plans for its employees, federal, state and municipal governments are making the same changes as they attempt to lower their pension obligations.
The latest state to go down this path is New York, where Governor Mario Cuomo (Dem.) presented such a plan as part of his 2012-2013 budget. His proposed switch could save the government $79 billion over 30 years.
Rhode Island was the most recent state to move part of its work force into 401(k) plans. State employees would be given the option of contributing at least 4% of their salary, up to 7% if another 3% is matched by the state. They could cash out earlier than other employees who have to work as long as 10 years before becoming eligible for benefits.
The governor also proposed a new benefit tier that would raise the minimum retirement age to 65 from 62 and require workers with higher salaries to contribute as much as 6% into their plans. Most workers now pay a range of zero to 3%.
(12/26/11)- Jefferson County, Alabama and Central Falls, R.I. have gone down two entirely different paths in their dealings with their respective bondholders, and it has meaningful implications for their retirees. Both are now undergoing bankruptcy proceedings under Chapter 9 of the Bankruptcy Code, but other than that similarity, their methodology of dealing with its creditors is sharply different.
Jefferson County has determined that the bondholders of some of the community's debt obligations will not be paid when it is due, even though the bonds are "general obligation" bonds. General obligation bonds are deemed almost sacrosanct, so when looking back at history, there have been very few general obligation bond defaults.
In reality, the bondholders really hold "warrants" not bonds, so this presents an interesting diversion in the matter.
In the case of Central Falls, R.I., retired firefighters and police officers voted in favor of cuts to their pensions, which amounted to about 25% over the next five years. A minimum of 75 retirees had to support the proposed cuts, but at last count at least 82 of them had approved the decreases.
Rhode Island state legislators had passed a law earlier this year that put bondholders first in line among all creditors of municipalities in the state. The retirees agreed not to challenge the state law as part of the agreement.
The deal with the retirees included a proviso that called for the state to appropriate about $2.6 million to help them deal with their pension shortfalls. Without the state aid, the cuts would be as much as 55% for many of the retirees. Their pension benefits vary widely, from about $4,000 to $46,000 a year, depending on their final salary, years of service and other factors.
Central Falls' retirees do not participate in Social Security.
The new agreement also reduces the annual cost-of-living adjustments and requires retirees to start contributing towards the cost of their health-care benefits.
There are those who argue that the Central Falls cut in pension benefits is the better route to follow, because if you go the Jefferson County route, the interest rate costs for all state and local borrowing will go up as a result of the "greater risk" that bondholders are now faced with.
(11/23/11)- Both houses of the Rhode Island legislature, meeting in a special session on November 17th passed a pension overhaul bill that will rein in state workers' benefit costs, and will even effect the pensions of retired workers.
Earlier this year, the state had enacted 4 milder pension changes, leaving retirees unscathed. Public employees' unions have sued, arguing that those previous cuts were illegal, and they are likely to challenge the new cuts as well.
In Detroit, Mayor Dave Bing called for drastic changes in pension and health care benefits for municipal workers citing the dire financial straits that the city found itself in. Layoffs and give-backs will be required or else a state emergency board will take over operations of the city. Increased premiums for health care coverage will also be needed.
(11/2/11)- State tax revenue climbed 10.8% during the quarter ended in June according to a report released recently by the Nelson A. Rockefeller Institute of Government at the State University of New York at Albany. Even with the increase, tax revenues still are 5.5% less than for the same period in 2008. That is the major reason why you continue to see layoffs and cutbacks on the state governmental level.
Tax increases, such as new or higher taxes and fees have added about $8 billion, or 3.5% to the second quarters numbers.
State sales-tax collections increased 2.9% in the second quarter, compared with the same quarter last year, which is less than half the first-quarter pace, and the slowest growth rate since the first quarter of 2010.
Local property taxes fell 1% in the second quarter compared with the same quarter in 2010, the third quarterly decline in a row.
(10/12/11)- The results of a survey that was recently released by the National League of Cities shows that for the second year in a row, property tax collections are projected to fall. The estimated drop this year of 3.7% is a result of lower tax assessments catching up with the devastated real estate market.
Sales tax revenues are projected to increase this year, according to the survey, but income tax collections are also expected to drop as unemployment, lower wages and stock market weakness show up negatively for the tax system revenue side of the equation.
Nearly one third of the cities are laying off workers, and more than half have canceled or delayed infrastructure projects. This will be the 5th straight year of overall declining revenues for the cities.
One of the report's authors, Christopher W. Hoene, director of the Center for Research and Innovation at the league of cities, said that it is a question that is still up in the air as to whether or not the worst is over. "The question is, are we going into the low point or are we emerging out of it".
(9/7/11)- A lawsuit was filed in federal court on behalf of New Jersey's hundreds of thousands of teachers, firemen, police officers, state and local employees challenging the law signed by Governor John Christie in June. The new law required the workers to contribute more annually to their pension fund, eliminated for the foreseeable future automatic cost-of-living increases, and required newly hired employees to work longer before being entitled to full pension benefits.
The new law also halted temporarily the unions' ability to bargain health-care benefits for its members by creating a panel to set policies, which will likely cost the majority of workers more money. In affect, the new law abrogated the contractual rights won by the employees through collective bargaining procedures with the state over the years.
Financial experts estimate that New Jersey has under-funded its pension obligations by about 38%, which is the major reason the fund is in so much difficulty.
With both Ohio and Wisconsin passing similar legislation, this is just the first salvo in a legal battle that will resonate through the legal system in the coming years.
(8/11/11)- Detroit city officials announced that the city had reached an agreement with union officials representing it police officers that confirms an arbitrators ruling in April under which 1,500 higher ranking police and firefighters would no longer get a cost-of-living adjustment to their benefits and would see a cut in the rate at which they earn benefits.
These same city official estimate that the agreement would save the city about $100 million over the next 5 years.
Detroit spent about 25% of its $1.2 billion general fund this year on pensions for union and nonunion members. The city currently has 11,000 workers and 22,000 retirees. It reduced its work force by 10% in the last four years, while its pension and health-care costs rose by 40%.
(7/26/11)- Earlier this year, pension funds in Colorado and Minnesota curtailed annual-cost-of-living increases as called for under their pension agreements. In the case of the Colorado pension fund, the bill reduced the pension system's annual-cost-of-living increase from a fixed rate of 3.5% to a maximum of 2%. The new law also increased the amount that both the employees and employers had to contribute to the pension plan. There was no increase at all for retirees.
So far state court judges in both Colorado and Minnesota have upheld the curtailed annual-cost-of-living increases. More states have indicated that they intend to go down this path.
The average state pension system has 1.9 current workers per retiree, according to the National Association of State Retirement Administrators, a trade group for directors of statewide retirement systems.
In Rhode Island, 67 cents of every $1 contributed to the pension system by employees goes to cover the fund's $6.3 billion unfunded liability, not to their retirement according to Gina Raimondo who oversees the state's $6.4 billion pension fund.
(5/4/11)-Connecticut officials estimated last week that the state surplus for the current year was growing by $300 million and the revenue estimates for the next fiscal year are up by $282 million.
The U.S. Treasury now projects that it will only have to borrow $142 billion between the April through June quarter instead of the earlier amount it had projected which was $299 billion. The present debt ceiling, which is set at $14.29 trillion, will be reached on May 16th.
Because of this increased income, the Treasury will, through extra ordinary measures, be able to hold off through August, instead of its earlier estimate of July before breaching this level. These steps include suspending programs under which the government borrows money from pension funds for federal employees and then pays interest to these funds.
Once a new debt ceiling has been set, this money plus interest must be repaid. The increased revenues from tax receipts is further indication that the country is gradually regaining its footing from the recession of 2008.
(5/3/11)- As cash strapped state, city and local officials look for ways to effectuate savings, retirement and pension plan cutbacks are coming to the forefront. Just as corporate America has created two-tier pension plans for its workers, and has switched from defined-benefit pension plans to 401(k )plans for their employees, government officials are looking to make the same type of changes to pension plans for their employees.
An arbitrator in Detroit, Thomas W. Brookover recently ruled that the city of Detroit could legally reduce the rate at which police lieutenants and sergeants earn pension benefits from 2.5% of their salary per year to 2.1%. Please keep in mind that the average pension for retired police officers in Detroit is not especially high at $28,501 per year.
Mayor Dave Bing of Detroit said that he would seek to have new employees covered by 401(k) plans instead of defined benefit plans, which are more costly to the city.
The city of Oakland California laid off one-tenth of its police force last year after failing to win concessions on pension costs.
(4/29/11)- According to the latest data from the Pew Center on the States, on average, state pension plans had 75% of the assets needed to cover the long-term benefits owed to government workers, based on fiscal-2010 data from 16 states that had reported so far. The average state pension fund was 78% funded in fiscal 2009, based on the numbers for all 50 states, compared with 84% in fiscal 2008 according to the Pew data.
New York was 101% funded, the only state with a pension surplus in fiscal 2009, while Illinois, at 51%, was the least funded. In 2010, at least 19 states passed legislation to reduce pension benefits, and several state lawmakers have proposed additional cutbacks this year.
Asset values at state and local pension funds increased 35% from March 31, 2009, when the Dow Jones was at its low point up through the end of 2010, according to the National Association of State Retirement Administrators. The Dow is up about another 8% this year, so slowly but surely the worst of the shortfall for pension plans may be behind them.
(10/13/10)- Two recent news headlines brought to the forefront some of the difficulties faced by federal, state and local governments, and how they are dealing with the problem. The September monthly employment numbers from the Labor Department showed a decline of 159,000 government employees, and a total unemployment rate of 9.6%.
The governments are shedding their employees in order to be able to better deal with the massive deficits they face.
The second news item contained the fact that the State of California finally passed its $126 billion dollar budget after being late by 99 days in doing so. That state is faced with a $19 billion deficit. The deal to pass the budget included changes in the states pension system, which has become a major burden for California.
Under the change, employees hired after November 1 would receive pension benefits set to pre-1999 levels, the year in which the state gave huge pension benefits increase to its employees.Governor Arnold Schwarzenegger signed the budget, which was 100 days late when he signed it.
(9/17/10)- Last year, Minnesota replaced its previous pension formula, which increased retiree benefits annually based on investment gains and inflation with a flat 2.5% increase.
In May, the state lowered that increase for some retirees and eliminated it for others, until the pension plans are 90% funded (a level that could take decades to reach). A Minnesota court is considering a lawsuit brought by some of the state's current retirees who are receiving benefits under the older pension formulas, seeking class- action status. In the lawsuit, the retirees are seeking to have the revamped plan declared illegal as a violation of their rights under the old plan.
Similar cases are pending in South Dakota and Colorado.
(8/21/10)- The Securities and Exchange Commission (SEC) accused the state of New Jersey of securities fraud for falsely claiming it had been properly funding the state's two largest pension funds while selling billions of dollars of state bonds.
This was the first time an SEC action was instituted against a state, while the only other suit was against the city of San Diego over the handling of a public pension fund. The commission had announced in January that it had set up a special unit looking into public pension disclosures
In accepting a cease-and-desist order to settle the matter, the state accepted without admitting or denying the findings. No penalties were imposed, No individuals were named in the order.
The action involved 79 separate bond offerings totaling $26 billion form 2001 to 2007. The two pension funds cited in the action were the $34 billion Teachers' Pension and Annuity Fund and the $28 billion Public Employees Retirement System. There are currently about 689,000 employees and retirees covered under the New Jersey plans
There was a surplus in the plan in 2003, which has now grown to an under-funding of about $3.8 billion now.
The commission said that from 2001 to 2007, the state claimed to have money set aside in a " benefit enhancement fund' as part of a "five-year plan" to pay for new benefits for teachers and general state employees. In fact, the fund was an accounting illusion.
"Hopefully, it (this action) will send a message to other states or local governments, "Elaine C. Greenberg, chief of the SEC's municipal securities and public pensions unit, said in an interview
A New York Times article in April 2007 by Mary Williams Walsh brought the matter to the attention of the authorities.
(7/8/10)- With many state and local governments finally facing up to the fact that their pension obligations are overwhelming, many of them are taking steps to deal with the problem.
Unions and employees' associations in states such as Vermont, Iowa, Minnesota, Colorado, Wyoming and California have supported rollbacks not just for new hirees, but for current and retiree union members also, in order to try to avoid furloughs, layoffs and even insolvency for their pension plans.
In California, a recent agreement between the state and 4 of its unions curtailed benefits for about 37,000 of its workers.
The state legislatures have attempted to get higher monthly contributions from employees to their pension plans, a later retirement age and lower cost-of-living adjustments for current and retired workers.
In Mississippi, state workers will be contributing 9% of monthly-earned wages, up from 7.25% beginning July 1. Nine state legislatures have voted to reduce benefits, increase monthly contributions or both for current workers and in some cases, retirees also.
(6/28/10)- Can state and municipal pension funds legally reduce pension benefits that were promised in writing to their retirees? The answer to this question that is now pending before the court system will have far reaching implications for all state and municipal pension funds.
Pension funds are faced with the possibility of not having enough funding to pay the benefits that were promised to their retirees. One way to deal with this situation has been to reduce the benefits for newly hired workers, and also to increase the amount that all workers must contribute to their pension funds.
Earlier this year, pension funds in Colorado and Minnesota curtailed annual-cost-of-living increases as called for under their pension agreements. In the case of the Colorado pension fund, the bill reduced the pension system's annual-cost-of-living increase from a fixed rate of 3.5% to a maximum of 2%. The new law also increased the amount that both the employees and employers had to contribute to the pension plan. There was no increase at all for retirees.
On a federal level, there was no increase in social security payments to beneficiaries this year, since the formula for the increase actually showed that there should have been a decrease in payments.
The Minnesota lawsuit came after the state legislature passed a bill in May that reduced retirement benefits from a 2.5% annual increase to between 1% and 2% depending on the pension fund.
Both Colorado and Minnesota have been hit with lawsuits by retirees, so we will just have to wait and see how this matter plays out.
(4/17/10)- According to a study by the Center for State and Local Government Excellence and the Center for Retirement Research only 43% of the state and local pension plans had assets totaling at least 80% of their liabilities, compared with 54% in 2008.
Experts recommend public sector pensions maintain a funding level of at least 80%. The study found that this was the lowest level of funding in the last 15 years. Of 71 pension plans that submitted contribution figures so far, 39 reported not paying their full pension bill.
New Jersey's governor has proposed not making any of the state's $3 billion contribution because of the state's $11 billion deficit. Virginia has proposed contributing only $1.5 billion of its $2.2 billion contribution and Connecticut's Governor Jodi Rell is delaying contributing its $100 million required amount.
(3/24/08)- As of last week, at least 25 states were expecting budget shortfalls for the 2009 fiscal year, according to the Center on Budget and Policy Priorities, a liberal research group in Washington that tracks state budgets. It is the largest number since 2002, when 37 states were forced to cut their budgets.
The largest of the state budget deficits is faced by California, which is looking at an estimated $14.5 billion plus deficit. The outlook is for these deficits to increase because of the combination of weak consumer spending resulting in lower sales tax revenues; weaker real estate markets resulting in lower property tax revenues coming into state treasuries; a lower stock market in which the Dow is down about 8% as of this date which in turn means lower capital gains for most individuals and the precipitous drop in earnings from companies in the financial sector of the economy.
New Hampshire, which has never had a state income tax is considering imposing one for the first time in its history. Most states are looking at cuts in their spending, with education costs in the forefront of the cutting process. Many of the services to the residents of the community will be cut back on to a greater extent.
It does not take a wise guru to recognize the fact, that just as corporate America has cut back on the health-care benefits, and retirement plan benefits of their employees, the federal, state and local governments will also be making some severe cuts in these areas also.
(3/13/08)- Corporate America has had to face up to the under-funding of companies' pension and health care plans, and whether they like it or not, the same is now true for federal, state and municipal plans.
At the request of Senators Max Baucus, Democrat of Montana, and Charles E. Grassley, Republican of Iowa, the chairman and the ranking Republican of the Senate Finance Committee, the Government Accountability Office (GAO) looked at a sample of about 70 public retirement and health care plans.
Congress has very little authority over how state and municipal governments handle their pension accounts, but in the hope or avoiding a disaster before it occurs, this matter is being looked into.
As a practical matter the actuaries who set the "assumed rate of return" for a pension plan play a key role in determining whether or not a pension plan has a realistic chance of being properly funded. One of the problems with pension fund "assumed rate of returns" is that if a higher rate is assumed, the lower the present contribution is that has to be paid into the plan. This potential conflict of interest is true whether we are looking at a corporate pension plan or a governmental pension plan.
According to the report from the GAO less than half of the states are setting aside their required yearly contribution amounts. Some of the states that have been failing to contribute what their auditors said was required to be contributed are New Jersey, Illinois, Pennsylvania and Kentucky.
In some states, including California and New York, public employees have successfully sued to force governors and state legislators to appropriate the proper amount.
Unlike pensions, which are funded in advance, health care for retired public workers is handled on a pay-as-you go basis. This methodology will lead to disasters down the road. With health care costs rising, the GAO predicted that health costs could start to snowball causing "daunting fiscal challenges."
FOR AN INFORMATIVE AND PERSONAL ARTICLE ON PRACTICAL SUGGESTIONS WHEN
SELECTING A NURSING HOME SEE OUR ARTICLE "How
to Select a Nursing Home"
by Allan Rubin
updated August 10, 2017