The Central Valley city of Stockton
of may become the next California municipality
to follow in the steps of Vallejo and Orange County
and file for bankruptcy.
Stockton's City Council is likely to vote next Tuesday on whether to default on
some of its bond obligations and make the first moves toward becoming the
largest city in American history to declare Chapter 9 bankruptcy.
Bloomberg reported:
City Manager Bob Deis
has told council members that he intends to put an item on their agenda for a
Feb. 28 meeting that would ask them to approve mediation with creditors as the
first step required under a new state law before the city can seek bankruptcy,
according to the person, who wasn’t authorized to speak about the matter
because it is still confidential.
Deis also will ask the council to agree to default on municipal bonds beginning
March 1, to suspend cash payments to employees who’ve accumulated unused
vacation and sick leave, and to begin an investigation into the causes of the
city’s fiscal issues, the person said.
The item isn't listed on the council's agenda for
Tuesday's meeting; however, The Stockton Record reported the impending bankruptcy decision
became an open secret this week when The Downtown Stockton
Alliance's
board of directors openly discussed the city's bankruptcy timetable in a public
meeting.
Sitting on the banks of the San Joaquin river, Stockton was among the
hardest hit cities in the country by the housing bust--only Las Vegas has a higher rate of foreclosures.
Home prices in the city tripled between 1998 and 2005, swiftly cratering back to Earth in the years since the housing
bubble popped. The result was an over 25 percent reduction in property tax
revenues flowing into city coffers.
Stockton's budgetary deficit is estimated to be somewhere in the neighborhood of
$35 million.
The city's dire economic forecast, combined with its
sky-high crime rate, earned it the top spot on Forbes's list of the Most Miserable Cities In America
two out of the past three years.
Local labor leaders have decried the move, arguing that
declaring bankruptcy will only make Stockton's
situation worse. "If any municipality declares bankruptcy, whether it's
Stockton or anyone else, what really doing is sealing their own economic death
warrant, because it makes it that much harder to dig out of an economic
hole," California Professional Firefighters Union spokesperson Carroll Wills
told Stockton's ABC-10 News.
Stockton has already made deep cuts to its budget in a
effort to shore up its finances--$18 million in cuts to fire and $13 million to
police last year alone; however, those measures appear to not have been
sufficient to balance the city's budget.
Stockton's bankruptcy would be the test case for a new union-backed California law enacted
last year making it more difficult for cities to declare bankruptcy. The law
requires municipalities within the state to declare a fiscal emergency or
participate in a 60-day mediation process with creditors before seeking
bankruptcy protection.
Stockton has already declared two fiscal emergencies in the past few years, most
recently last May. Fiscal emergencies give municipalities the ability to
largely disregard labor contracts with public employee unions and unilaterally
readjust levels of salaries and benefits—something particularly important in a
city like Stockton where police and fire costs comprise over 75 percent of the
overall general fund budget.
According to an article in the California Public Law
Journal, Stockton used its fiscal emergency powers to freeze the
automatic police and firefighters and took one fire tuck out of service.
One pitfall Stockton
is hoping to avoid is having to shell out millions of
dollars in legal fees for itself and its creditors. Vallejo
spent $11 million on legal fees during its protracted, high-profile bankruptcy;
Stockton is three-times the size of Vallejo and presumably
its bankruptcy would be significantly more complicated and costly to litigate.
Deis will be giving a media briefing regarding Stockton's finances on
Friday morning.
http://www.huffingtonpost.com/2012/02/23/stockton-bankruptcy-biggest-in-american-history_n_1298055.html
VIDEO: City of Stockton, California to Pursue Bankruptcy?
(Tim Daly / ABC News 10)
**************
Municipal Bond Holders Seek Governmental Transparency on
Pension Debt (Dave Roberts / Fox & Hounds)
By Dave Roberts Contributing editor to CalWatchDog
and long-time Bay Area newspaper reporter Thursday, February 23rd, 2012
Once upon a
time buying a municipal bond was considered a safe bet. A decent rate of return
with little risk – just the thing for junior’s college fund and grandma’s
retirement account. But that was before Standard
& Poor’s downgraded the U.S. government’s
credit-worthiness, sending shock waves through the bond markets. And before
governmental agencies increasingly defaulted on loans and threatened or
declared bankruptcy, converting safe securities into junk.
That’s
potentially a lot of junk. Investors hold nearly $3 trillion of municipal debt
in the United States.
One of those investors receiving a wake-up call is Irv
Siminoff, a World War II veteran who
served in the Pacific Theater and began investing in municipal bonds in the
early 1980s to provide a stable income for his son’s tuition at Stanford.
“I started
out investing in Wall Street right out of college, and in those days things
were pretty calm,” he told the Securities and Exchange Commission at a hearing last year in San Francisco. “One could
get 5 to 6 percent in dividends and could reasonably expect maybe a 5 to 10
percent annual return from the underlying corporation. In addition to income
from my equity portfolio and my growing business, muni
bonds seemed like an ideal, good security, a given income and investment return
at some time in the future at a scheduled date. Boy,
was I naive.”
His first
municipal bond investment was in the Washington Public Power Supply System. It was not
insured, but, he said, it “looked really safe. What could be better than
revenue from power?” He wound up losing half of hismoney
after delays, cost overruns, mismanagement and political opposition to nuclear
power resulted in WPPSS defaulting on $2.25 billion in construction bonds.
Investors and the public were largely kept in the dark about the problems. Siminoff was luckier than some investors who only received
10 cents on the dollar.
While Siminoff was naive at the outset, even sophisticated
investors can suffer from insufficient knowledge about the risks in these
supposedly safe investments. Peter Kuhn, a former accountant for Price
Waterhouse whose wife calls him a “municipal bond geek,” bought from a
professional trader a general obligation bond issued by the Hayward School District,
getting a very good yield. “However, Hayward
is having some financial challenges, and their certificates of participation
were just downgraded to nearly junk, if not junk status,” he said.
“The
municipal securities market lacks many of the basic investor protections that
exist in most other sectors of our capital markets,” said Andy Gill, senior
vice president at Charles Schwab. “It is time for this circumstance
to change, beginning with an improved disclosure regime that will boost
investor confidence and improve access to information about the municipal
securities market. Financial reporting by municipal issuers can take up to 270
days to reach an investor.”
Institutional
investors have an advantage because they are exclusively treated to investor
road shows in which bond issuers may provide financial information that never
appears in financial statements, according to Mary Colby, representing the National Federation of Municipal Analysts. But
they share the complaint about being kept in the dark.
The
situation is even worse in the secondary market in which bonds are resold; for
example, Chicago
takes 13 months to file its financial information. A lot can go wrong
financially for a government agency in the meantime.
A lack of
transparency and deceptive practices were unveiled in the Los Angeles Community
College District’s $140 million bond construction program. An audit
by State Controller John Chiang released in August 2011 concluded
that the district “could not produce complete and timely records, spent funds
outside voter-approved guidelines, ignored its own procurement rules, failed to
plan effectively, and provided poor oversight of bond funding. Shoddy fiscal
management and sub-par oversight of a project of this magnitude will undermine
the public’s trust and threaten billions of public dollars.”
But to
listen to the government representatives at the SEC hearing, you would not
think there was any problem. They argued that, as public entities, they are even
more transparent than private corporations.
The problem
actually may be much worse, given the under-reporting of unfunded pension and
retirement health care liabilities for state employees. Taxpayers may be on the
hook nationwide for more than $2.5 trillion in pensions, according to David Crane, an economic advisor to former Gov.
Arnold Schwarzenegger, with perhaps $500 billion of that in California alone.
“State and
local governments utilize a misleading method for reporting the size of public
pension obligations,” said Crane, calling it “the Alice in Wonderland world of government
pension accounting that allows governments to hide liabilities.”
“California
wasn’t alone in this regard,” Crane told the SEC. “Unrealistic reporting of
pension promises is a systemic problem. That’s why the SEC must require
realistic accounting of public pension promises. For that to happen it must
insist upon a realistic discount rate when reporting pension liabilities.”
http://www.foxandhoundsdaily.com/2012/02/chapter-4-bond-holders-seek-governmental-transparency/
**************
Bankruptcy: The Road Ahead (Chriss
Street / FlashReport)
Chriss
Street February 23, 2012
Up through September 2011, Wall Street underwriters, bond
counsels and other assorted securities industry camp followers were gloating
over the supposed failure of predictions in late 2010 by Meredith Whitney and
me that there would be a coming surge of state and local bond defaults.
These camp followers had been hitting the public airways to crow there were
only 24 municipal defaults in the first half of 2011. That was down from 60
defaults in the first half of 2010. And it was down substantially from the 144
defaults in the first half of 2009.
But all the giddy glee state and local
government were exempt from the Great Recession came crashing down on Oct. 12,
2011 when the city of Harrisburg, the state capital of Pennsylvania, filed the
second largest bankruptcy in U.S. history with more than $500 million in
liabilities. And on Nov. 8, 2011 when Jefferson
County, Ala., filed the largest
bankruptcy in U.S.
history with more than $3.1 billion in liabilities.
Most Americans cannot fathom that state and local governments in 2011 spent $2.89 trillion
and commanded 20 percent of the American economy. To fund this muscular
economic intervention, municipalities collected $2.62 trillion in revenue and
borrowed hundreds of billions of dollars by selling municipal bonds to the
public. Over the last 10 years, the outstanding amount of municipal bonds
more than doubled from $1.197 to $2.8 trillion.
Then there’s debt. According to a June 25, 2011
report by James E. Spiotto, “The debt of
state and local governments has more than doubled in the last 10 years, from
$1.197 trillion in 2000 to $2.8 trillion at the end of 2010. (Some [Citicorp] contend
that the market is actually $3.7 trillion with individual holders being $1.8
trillion [rather than $1 trillion] or 50 percent of the market but hard to
verify.)
“This does not include over $1 trillion of unfunded pension liabilities and in
addition OPEB liabilities over $200-300 or more billion plus the needed debt
financing over the next five years to bring infrastructure up to acceptable
standards of $2.5 trillion.”
Add it all up, and municipalities look like subprime
borrowers.
The municipal bond industry has always screamed that a bankruptcy filing will
deny municipalities any access to borrowing. But given that
over-barrowing by state and local governments is the primary risk for default, this is just seen to be the cost of tough love.
Historically, the results of Chapter 9 bankruptcy filings seem beneficial to
municipalities and their taxpayers. Orange
County, Calif., filed
in 1994 after losing $2 billion in speculative investing. After county
supervisors tried and failed to convince voters to raise taxes, the county
issued layoffs to 4,000 employees (20 percent of staff). And it collected $600
million in a legal settlements from Merrill Lynch,
KPMG and others. Surveys demonstrated that most residents could not identify
any lower levels of service and today the county has a stellar AA credit
rating.
The city of Vallejo
filed for bankruptcy in 2008 after being overwhelmed by municipal bond debt,
high wages and pension liabilities. After cutting police and fire by 50
percent, the city discounted $500 million in bond debt and other claims for $6
million.
The day after Harrisburg filed bankruptcy, the Jefferson County, Ala., sewer
district board met to consider filing Chapter 9. After defaulting on
$3.14 billion in municipal sewer district bonds, JP Morgan had already offered
$647 million to settle bribery charges. But even after the settlement, the
district would still need to permanently raise local sewer bills from $63 to
$395 a month to pay off their municipal bond debt.
When the county's bankruptcy lawyer, Ken Klee, was
asked by Alabama lawmakers what would be the negative if the sewer district
filed for bankruptcy, he could not see a negative for the sewer district, but
he did believe it “would be like Chernobyl” for other districts’ bond ratings
in Alabama. But since the bankruptcy filing, high credit quality issuers in Alabama have already sold billions of new municipal
bonds to investors.
State and local governments have been living in a fantasy world where borrowing
money was deemed a responsible way to operate huge organizations. Wealthy local
individuals fed that fantasy by lending irresponsible amounts of money to
bureaucrats.
The bottom line for over-indebted and over-taxed municipalities is they need to
stop borrowing money. If they are insolvent and need to consider filing for
Chapter 9 bankruptcy, the key question they ask is: “Are we better off
continuing as debt slaves?” The answer will be usually be no.
Street was treasurer of Orange
County, Calif. and blogs at Chriss Street And
Company. His recent book is, “The Third Way: Public-Sector Excellence Through
Leadership and Cooperation”
http://www.flashreport.org/featured-columns-library0b.php?faID=2012022309261371
**************
Of Public Pensions and Judges' Rulings (blog
- Eileen Norcross / Public Sector Inc)
By Eileen Norcross on February 15,
2012 11:54 AM |
publicsectorinc.com
Stateline reports that districts courts in Arizona and New
Hampshire have ruled that pension reform requiring
higher contributions from employees are unconstitutional.
Maricopa County Superior Court judge Eileen
Willet, argues, "The state has impaired its own contract...By paying a
higher proportionate share for their pension benefits than they had been
required to pay when hired, [state workers] are forced to pay additional
consideration for a benefit which has remained the same."
Other states where pension modifications are
being challenged by unions include Florida, Nebraska, and New Jersey. As the article notes this may be one
reason why states tend to pursue the path of least resistance (and least fiscal
impact): changing benefits only for new hires.
The extent to which the terms of a pension
formula are protected depends on how statutes are written. In Arizona the constitution states that upon hiring, public
employees enter into a contract with their employer and agree to split the
contributions to the pension plan 50-50. Arizona's
move to increase the employee share to 53 percent runs afoul of this provision according to Judge
Willet. New Hampshire's
constitution is not this explicit. The court bases its ruling on previous case
law that forbids the state from contract impairment.
These rulings point to the unpredictable
future of pension reform. Where states and local governments continue to be
constrained by actions that prevent pension plans from being modified for
current employees the options left are equally painful: layoff workers, raise
taxes, issue debt. There is also the "soft bailout" scenario, considered
by Michael Greve. That road, he argues, leads the U.S. to
devalued pensions and an Argentinian future.
http://www.publicsectorinc.com/forum/2012/02/of-pensions-and-judges.html
**************
Disability Pensions Allow Some St.
Louis Firefighters to Collect While Working Elsewhere
(Jeremy Kohler and David Hunn / Post-Dispatch)
**************
Illinois Has Nearly
$200 Billion in Debts and Unfunded Obligations; No State Is in More Dire Shape
(editorial - Chicago
Tribune)
**************
Corporate Pension Plans Ready to Seek More Relief From Congress (Hazel Bradford / Pensions & Investments)
By Hazel Bradford Published: February 22, 2012
Executives of
corporate defined benefit plans who've gone to Congress before to seek funding
relief are preparing to make another request.
Related Content stories
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their hands
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January
Sponsored
Links
The latest bid is
spurred by the effects of the Federal Reserve's low interest-rate policy, which
has led to soaring pension liabilities.
On Jan. 25,
Federal Reserve officials announced their decision to keep the federal funds
rate at what they acknowledged are “exceptionally low levels” of zero to 0.25%
at least through late 2014. The prospect of three more years of flat federal
fund rates has pension plan sponsors gearing up to ask Congress for relief from
soaring corporate pension liability calculations driven by those rates.
Employer groups
are working on proposed legislation with two main elements — to allow segment
discount rates to be based on average interest rates of the preceding two
years, as long as the segment rate is within 10% of a preceding 25-year
average; and to lengthen amortization periods for unfunded shortfalls of plans
between 80% and 100% funded to 15 years from the current seven-year time frame.
According to an
analysis by the American Benefits Council, Washington, the seven-year
amortization periods dictated by the Pension Protection Act of 2006 were
appropriate when it passed in 2006, “but the last few years have opened everyone's
eyes to the dramatic volatility that is possible with respect to funding
obligations and the markets. Seven-year amortization created unmanageable
obligations following the 2008 downturn and is threatening to create even more
unmanageable obligations for 2012 and subsequent years. If the PPA's amortization period has created multiple severe
problems in just a few years, we need to learn from that.”
Pension executives
are worried enough now to at least plant the idea of funding relief before a
Congress distracted by federal budget deficits and upcoming elections. They've
been there before: Past efforts were caused by funding constraints and interest
rates dictated by the PPA that were exacerbated by the financial crisis,
forcing companies to make tough choices with their limited cash.
While a few
legislators are sympathetic, legislative aides say it will take awhile to build
the pension funds' case.
An opening bid for
attention came at a Feb. 2 hearing of the House Subcommittee on Health,
Employment, Labor and Pensions. “The actions by the Fed to control interest
rates potentially put a significant near-term burden on sponsors of defined
benefit plans, something that the Fed has acknowledged,” testified Gretchen
Haggerty, executive vice president and CFO for United States Steel Corp.,
Pittsburgh. Ms. Haggerty also chairs the U.S. Steel and Carnegie Pension Fund,
Pittsburgh, which had an estimated $6.475 billion in assets as of Sept. 30,
according to Pensions & Investments data.
Pension plan
executives calculate their liabilities by discounting projected future payments
to a present value based on corporate bond rates tied to the Fed rate. That
bond rate is dictated by the PPA, which requires plans to use an interest-rate
yield curve to get the rate for calculating pension liabilities and minimum
funding requirements. The liability rate is inversely proportionate to the
interest rate — the lower the rate, the higher the liability and funding
demands.
“Plan sponsors
need more predictable funding requirements for budgeting purposes and for
managing cash flow,” Deborah K. Forbes, executive director of the Committee on
Investment of Employee Benefit Assets, Bethesda, Md., wrote in an e-mail.
Members of CIEBA, which represents more than 100 of the largest U.S. corporate
pension plans with a combined $1.5 trillion in defined benefit and defined
contribution plan assets, “want to fund their plans responsibly but, with
interest rates being kept at artificially low rates, plan funding obligations
are overstated.”
The low rates “are
creating an artificial funding crisis,” agreed Ken Porter, a former chief
actuary of the E.I. DuPont de Nemours
& Co., Wilmington, Del., and former director of the American
Benefits Institute, Washington. Mr. Porter told the House subcommittee members
that, contrary to the Federal Reserve's objectives for stimulating the economy,
the increased funding demands from lower interest rates threaten to divert
money from job creation and tax revenue into pension funds that “will be vastly
overfunded in a few years when interest rates return
to normal.”
For a typical
pension plan, Mr. Porter said, the effective interest rate required by law has
dropped roughly 70 basis points since 2011, pushing liabilities up 10%. For a
plan with $7 billion in liabilities, that creates a $700 million shortfall that
forces the company to put an additional $119 million into the plan for each of
seven years, even while benefit payments have not changed.
Proponents stress
that it is not funding relief that they seek, but rather “funding
stabilization.” Their strongest argument is jobs. U.S. Steel's Ms. Haggerty said her
company's capital investment program calls for spending $1 billion annually in
2011 and 2012 on new facilities that would create thousands of jobs and boost
the local economy, but those investments “could take a back seat to our pension
funding demands in this current low interest rate environment.”
Speaking for her
company and as a member of the ERISA Industry Committee, Washington, Ms.
Haggerty warned that without congressional action, “the
economy will continue to disappoint and underperform.”
Ms. Haggerty noted
that in 2009, while the company lost $1.4 billion, cut costs and idled five steel plants, “we still made a $140 million
voluntary pension contribution.” That made the plan 101% funded, but “if we had
used today's exceptionally and artificially low interest rates resulting from
Federal Reserve policy,” it would have been only 85% funded.
The key argument
for funding relief they have is that fewer tax-deferred dollars going into
pension fund coffers means more tax revenue for the U.S. Treasury, with some estimates
as high as $10 billion.
Between asset
losses and higher unfunded liabilities, pension plans are getting hit from both
sides, Jon Waite, director of investment management for the institutional group
at SEI Investments Co. in
Oaks, Pa.,
said in an interview. “The (Fed) put the pension sponsors in a very difficult
position. To hedge out the interest rate has become extremely difficult.”
That reality is
starting to get sympathy on Capitol Hill, where a Senate proposal to stabilize
pension funding rules was recently added to a fast-moving highway funding bill.
Sen. Tom Harkin, D-Iowa, who chairs the Senate Committee on Health, Education,
Labor and Pensions “is committed to making sure pension funding rules are
working well,” said an aide who did not want to be identified.
http://www.pionline.com/article/20120222/REG/120229979/corporate-pension-plans-ready-to-seek-more-relief
**************
OPEB Made
Easier
A new set of
best practices for 'other post-employment benefits'
BY: Girard Miller | February 23, 2012
It has now been seven years since the Governmental
Accounting Standards Board began to put "other post-employment
benefits" (OPEB), such as retiree medical benefits plans, into the
footnotes of state and municipal financial reports. Since that time, only a
handful of governmental employers have taken the next logical step and begun to
fund these liabilities like a pension plan. Most still
"pay as they go" by budgeting only enough money each year to pay the
immediate bill for the retirees. They fail to sock away money for the
benefits earned this year by the current employees.
There are many reasons for this procrastination. The best
excuse of course was the Great Recession of 2008 — which wiped out any revenue
surpluses that might have been devoted to funding OPEB properly for the first
time. Before that, budget money was actually available from the bubble-year economies
in 2006 and 2007, but nobody took OPEB seriously and politicians preferred to
start new programs, raise salaries and hire new employees, instead of making a
down payment on past-due retirement medical benefits.
Labor statistics show that state and local payrolls actually
expanded into mid 2008, even when the recession had already begun to shrink
revenues. Obviously nobody was ever elected on a campaign to fund OPEB
properly. Then there was the "national health care" smokescreen, as
if anybody actually believed that the federal government would ever have enough
money to pay for state and local government retirees' medical benefits. And
now, after the Great Recession ended technically in the spring of 2009, the
recovery has been so anemic that there haven't been surging revenues and
surprise budget surpluses like we used to experience in the
"V-bottoms" of prior business cycles. Many states and localities are
still cutting their employment levels with job freezes and attrition, even
though the U.S.
is approaching the third anniversary of the end of the recession. There are
many competing claims and priorities for any new money that might be used to
fund OPEB plans properly. Will those be just more excuses?
It's time to face the music. As the U.S. economy slowly gets
back on its feet, responsible leaders must look forward in time to the next
recession, and realize that if OPEB funding is not initiated sometime soon —
before the advocates of discretionary spending regain their moxey
— the hole we're digging will only be deeper at this stage in the next cycle.
Since 2007 when national analysts at Credit Suisse first estimated the total unfunded
OPEB liabilities of state and local governments at $1.5 trillion, those
liabilities have grown by an estimated 7 or 8 percent annually. That growth is
in line with medical cost inflation plus the aging of the workforce, so the
total liabilities today probably exceed $2 trillion. Unless the employer has
taken steps to mitigate benefits costs, the typical OPEB plan's liabilities
have grown by 40 to 50 percent in the past 5 years. The hole is getting deeper
every year and relatively few employers have stopped digging it deeper.
Some politicians have wishfully claimed that they could walk
away from their promises, and simply renege on the OPEB obligations in one way
or another. But as the California
Supreme Court has now held, there is frequently an implied contract binding on
employers who adopted these benefits by official actions such as ordinances and
resolutions. That doesn't mean that the benefits can't be abridged in federal
court upon showing of necessity under financial distress with a reasonable plan
to share the burdens and provide a reasonable replacement benefit. But, it's
highly unlikely that very many public employers will be able to walk away from
their OPEB obligations once their budgets have stabilized.
The reality is that these liabilities are not going away.
That leaves the last line of defense to the procrastinators: "It's too
complicated and you have to set up a trust which could make the liabilities
even harder to change." Again, it's another smokescreen to avoid biting
the bullet.
Fortunately, the Government Finance Officers Association
(GFOA) has stepped up to the plate with a new guidance document providing best practices to
public employers seeking to establish an OPEB trust. This primer covers the
basic questions that most public officials and managers will face, outlines the
basic legal options and pitfalls, explains in simple terms the paths available
and the pros and cons of each, and directs readers to literature in the field
to help support sound decisionmaking. Any finance
officer can start with this roadmap and easily chart a course to implement a
trust within six months.
GFOA is unequivocal that once a clear and substantial
liability is determined to exist, the wiser course of action is to establish an
OPEB trust and begin pre-funding, just like a pension plan. Their guidance
helps beginners understand the proper roles of custodians, investment advisors,
administrators and other parties to an OPEB trust, and very importantly, why
and how these differ from the traditional governance structure of a pension
plan. For example, there may be no rationale for employee membership in an
oversight body — especially when the employer makes all contributions. In fact,
some OPEB trusts provide extensive outsourcing of most governance and
investment functions, although GFOA takes note that employers should always
establish an oversight capacity and accountability to monitor the results and
operations.
You may use or reference this story with attribution and a
link to
http://www.governing.com/columns/public-money/col-OPEB-other-post-employment-benefits-Made-Easier.html
http://www.governing.com/columns/public-money/col-OPEB-other-post-employment-benefits-Made-Easier.html
