• GASB Publishes Post-Implementation Review Report on Pension Standards.
• Why GFOA is Rethinking Financial Reporting.
• Conning Releases 2024 State of the States Municipal Credit Report, Outlook Shifts to “Stable” in Anticipation of Return to Pre-Pandemic Fiscal Conditions
• Bond Dealers of America National Fixed Income Conference.
• The Escalating Cybersecurity Crisis: Countering Threats to U.S. Healthcare – Orrick / Bond Buyer Webinar
• Louisiana Gun Bill Risks Roiling Wall Street’s Muni Business.
• And Finally, Profoundly, Flammably Unclear On The Concept  is brought to us this week by Yazoo City v. Hampton, in which the Supreme Court of Mississippi began its opinion as follows:  “On November 18, 2020, a fire broke out at Young’s property in Yazoo City. The Yazoo City Fire Department responded, but extinguishing the fire proved difficult for two reasons: (1) a lack of tank water in the fire department’s truck and (2) an inability to connect to a nearby fire hydrant.”  As reasons go, those are two.  We do think that the court missed an opportunity to expand the scope of the “Coming to the Nuisance” defense by adding a “Coming to the Yazoo” corollary.   How could you not know that the Yazoo City Fire Department will be staffed by clowns/ buckets of confetti?

Avocado farm brought action, by filing a short-form complaint that adopted and incorporated a master complaint that other plaintiffs had previously filed in related, consolidated proceedings, against privately owned public utility and its parent company, alleging claim for inverse condemnation and seeking damages arising from a major fire allegedly caused by utility’s unsafe electrical infrastructure.

Avocado farm and defendants settled, and a stipulated final judgment was entered by the Superior Court, under which farm was awarded $1.75 million in damages on its inverse-condemnation claim, but which stated that the judgment was without prejudice to utility’s right to appeal both the judgment and a prior order, entered before farm filed its complaint, of the Superior Court denying utility’s demurrer to the master complaint. Utility appealed.

The Court of Appeal held that:

• Appeal was not rendered moot by fact that judgment’s award of $1.75 million was contingent on appeal’s outcome;
• Stipulated judgment was appealable, despite appellate court’s serious reservations about whether it should be;
• Farm’s complaint sufficiently alleged that utility was a public entity, as required to state an inverse-condemnation claim;
• Farm’s complaint sufficiently alleged that its damages were substantially caused by utility, as required to state an inverse-condemnation claim;
• Farm’s complaint sufficiently alleged that its damages resulted from an inherent risk associated with utility’s infrastructure, as required to state an inverse-condemnation claim; and
• Farm’s complaint sufficiently alleged that utility’s infrastructure was for the public use, as required to state an inverse-condemnation claim.

Appeal by privately owned public utility of stipulated judgment against it awarding, contingent on appeal’s outcome, $1.75 million in damages to avocado farm on farm’s inverse-condemnation claim against utility for damages from fire allegedly caused by utility’s unsafe electrical infrastructure was not rendered moot by the potential that, if utility did not prevail on appeal, utility would have to pay the stipulated damages to farm, but appellate court discouraged what amounted to a side bet on the outcome of an appeal.

Stipulated judgment against privately owned public utility awarding, contingent on appeal’s outcome, $1.75 million in damages to avocado farm on farm’s inverse-condemnation claim against utility for damages from fire allegedly caused by utility’s unsafe electrical infrastructure was appealable, despite general rule that a stipulated judgment is not appealable and despite appellate court’s serious reservations about applying the exception to that rule for a stipulated judgment agreed on merely to facilitate an appeal following an adverse determination of a critical issue, where the trial court had previously denied public utility’s demurrer to similar claims in related consolidated cases, and the parties clearly intended to seek appellate review.

Allegations in avocado farm’s complaint against privately owned public utility for inverse condemnation arising from damages to farm from fire allegedly caused by utility’s unsafe electrical infrastructure were sufficient to allege that utility was a public entity, as required for farm to state an inverse-condemnation claim against it, where farm alleged that the utility enjoyed a state-protected monopoly or quasi-monopoly derived from its exclusive franchise provided by California, that its monopoly was guaranteed by the California Public Utilities Commission (CPUC), and that amounts the utility might have to pay in inverse condemnation could, under CPUC regulations, be included in rates and spread among ratepayers.

Allegations in avocado farm’s complaint against privately owned public utility for inverse condemnation arising from damages to farm from fire allegedly caused by utility’s unsafe electrical infrastructure were sufficient to allege that farm’s damages were substantially caused by utility, as required for farm to state an inverse-condemnation claim against utility, where farm alleged that utility knew that its infrastructure was old and was improperly maintained for safety, but it failed to properly assess and remediate known risks of fire, including by failing to power down its infrastructure, despite warnings of high winds and hazardous conditions, before a major fire allegedly caused by electrical arcs in utility’s distribution system.

Allegations in avocado farm’s complaint against privately owned public utility for inverse condemnation arising from damages to farm from fire allegedly caused by utility’s unsafe electrical infrastructure were sufficient to allege that farm’s damages resulted from an inherent risk associated with the infrastructure, as required for farm to state an inverse-condemnation claim against utility, where farm alleged that utility deliberately chose to forgo regular monitoring and repair of its aging infrastructure, it did not meet its own target metrics for inspecting, assessing, and remediating electrical poles that did not meet modern safety standards, and it instead modified its monitoring software to recalculate safety factors and reduce the number of poles requiring remediation.

Allegations in avocado farm’s complaint against privately owned public utility for inverse condemnation arising from damages to farm from fire allegedly caused by utility’s unsafe electrical infrastructure were sufficient to allege that utility’s infrastructure was for the public use, as required for farm to state an inverse-condemnation claim against utility, where farm alleged that the power lines that ignited the fire were part of an electrical distribution system that served thousands of acres in Central, Coastal, and Southern California.

Construction company brought action against city and city engineer, alleging breach of construction contract, negligence, and negligent misrepresentation in connection with construction project to reroof city’s police station and courthouse building.

City filed cross-complaint alleging company did not perform the job in a workmanlike manner, failed to adequately cover roof with protective sheeting, failed to ensure roof drains were not clogged, and failed to procure proper insurance coverage.

Engineer also filed a cross-complaint against company, alleging breach of contract and indemnity.

The Superior Court granted engineer’s motion for summary judgment on claims against engineer, granted city’s motion to enforce parties’ oral settlement agreement, and filed a judgment dismissing complaint and cross-complaint with prejudice. Company appealed, engineer voluntarily dismissed his cross-complaint against company without prejudice, and city moved to dismiss appeal as frivolous.

The Court of Appeal held that:

• Trial court had authority to enter judgment, and was therefore not required to expressly retain jurisdiction to enforce agreement;
• Company’s appearance as a cross-defendant gave the court personal jurisdiction over company to enforce settlement agreement which was made while court maintained jurisdiction over the matter and the parties;
• Trial court had subject matter jurisdiction to enter judgment enforcing terms of settlement agreement;
• Personal jurisdiction over city engineer was not necessary for trial court to have authority to enforce company’s covenant in settlement agreement with city to dismiss its appeal against engineer;
• Company was estopped from arguing that reporter’s transcript of settlement proceedings omitted things said at pre-trial hearing;
• Statements made by city’s lawyer on the record constituted substantial evidence supporting trial court’s implied finding of materiality with respect to broad settlement term that agreement barred all claims that arose out of incident that formed the basis of complaint and cross-complaint; and
• Substantial evidence supported reasonable inference that trial judge resolved ambiguity, if any, in reporter’s transcript of cross-talk.

Landowners adjacent to and underlying railroad easement brought separate inverse condemnation actions against the United States after Surface Transportation Board (STB) issued notice of interim trail use or abandonment (NITU) that resulted in railbanking and an easement for interim trail use, and the cases were consolidated.

After the government conceded liability, landowners sought damages for the diminished value of their land attributable to the new recreational trail use easement which trumped their prospective fee simple ownership upon the extinguishment of the historical railway easement. The United States thereafter filed a motion for reconsideration with respect to the nature and extent of the alleged Fifth Amendment taking, the parties filed cross-motions for partial summary judgment related to the size of one parcel of land vis-à-vis the railway easement, and a trial was held on damages.

The Court of Federal Claims held that:

• Execution of trail use agreement and transfer of ownership of railway easement through a duly-recorded quitclaim deed during the pendency of NITU constituted a taking, even if STB years later decided to reopen the matter years afterward and rescind its authorization post hoc;
• Court would discount first property owner’s appraisal of parcel in the “before” condition by 15%, while accepting proffered property valuation in the “after” condition;
• Court would discount second property owner’s appraisal of restaurant parcel in the “before” condition by 10%, while accepting proffered property valuation in the “after” condition;
• Court would adopt second landowner’s appraiser’s opinion as to parking lot property’s “before” and “after” value and award $1.361 million;
• Third landowners failed to establish ownership of easement area;
• Highest and best use of third landowners’ property was consistent with permissible “grandfathered” uses at sites zoned industrial traditional; and
• Court would value third landowners’ property by taking the Government’s appraisal, multiplying it by 300% to arrive at the “before” figure, and then using the Government’s concession as to the value of the remainder property.

City brought action against electric utility, seeking declaratory and injunctive relief to enforce its ordinance requiring a demolition permit and either an improvement-location or building permit associated with utility’s plan to build facility in city.

The Superior Court found for city, ordered utility to comply with ordinances and obtain permits, fined utility $150,000 for starting demolition without permits, and awarded city $115.679.10 in attorney fees, expert fees, and costs.

Utility appealed. The Court of Appeals affirmed and remanded for determination of whether to award appellate attorney fees. Transfer was granted.

The Supreme Court held that:

• Trial court had discretion to give Utility Regulatory Commission primary jurisdiction over city’s claim against electric utility;
• Commission had primary jurisdiction to decide utility’s counterclaim; and
• Trial court could not rule on city’s claim on remand.

Trial court had discretion to give Utility Regulatory Commission primary jurisdiction over city’s claim against electric utility, which sought declaratory and injunctive relief to enforce its ordinance requiring demolition and building permits for utility to build facility in city, or to retain jurisdiction over city’s action, as either the trial court or the Commission could decide a claim seeking to enforce an ordinance against a public utility.

Resolution of electric utility’s counterclaim against city, challenging city’s authority to enforce ordinance requiring demolition and building permits before utility could build facility in city, required a determination that was placed within the special competence of the Utility Regulatory Commission by the utility code, which gave Commission expansive authority to decide whether a local ordinance improperly impeded a public utility’s service, and thus Commission had primary jurisdiction to decide counterclaim; utility’s garage and office projects were necessary to maintaining its transmission lines, which in turn were critical to providing reliable utility service to customers, and demolition of existing structure was an essential precursor to construction of new substation.

Trial court could not rule on city’s request to enforce its ordinance requiring demolition and building permits before electric utility could proceed with building facility in city, on remand of city’s action against utility seeking declaratory and injunctive relief to enforce its ordinance, as Utility Regulatory Commission had primary jurisdiction over utility’s counterclaim challenging city’s authority to enforce its ordinance against utility, which would dictate whether to grant city’s request to enforce its ordinance.

Following destruction of two properties by fire, the properties’ respective owners brought action against city, alleging that fire department negligently failed to provide the knowledge and equipment to fight fires, to properly train and supervise firefighters, and to adequately maintain its fire hydrant system, and asserting claims for property damage, with one owner also asserting a personal injury claim seeking to recover for cardiac event and stroke allegedly caused by stress from the property damage.

Raising the Mississippi Tort Claims Act (MTCA) as a defense, city filed motion for summary judgment. The Circuit Court denied city’s motion. City appealed.

The Supreme Court held that:

• City was immune under the MTCA from liability for property damage, and
• City was immune under the MTCA from liability on personal injury claim.

Absent any allegation that city fire department’s actions were in reckless disregard of the safety and wellbeing of any person, city was immune under the Mississippi Tort Claims Act (MTCA) from liability for property damage allegedly caused by fire department’s failure to effectively fight fire, in negligence action brought by property owners, based on lack of tank water in firetruck and delay in connecting to a fire hydrant; although property owners alleged that city showed reckless disregard by failing to provide the requisite knowledge and equipment to fight fires, property damage claims focused solely on criticizing how fire was fought, and thus claims arose directly from acts or omissions of municipal employees engaged in the performance of their duties relating to fire protection.

City fire department’s ineffective fighting of fire, resulting in destruction of property, did not come within the exception to immunity under the Mississippi Tort Claims Act (MTCA) for actions in disregard of the safety and wellbeing of a person, and thus city was immune under the MTCA from liability on property owner’s personal injury claim, seeking to recover for cardiac event and stroke allegedly resulting from the stress caused by destruction of his property in fire, notwithstanding that property owner argued that the fire department acted in reckless disregard of his property, and linked such disregard to his injury.

Disappointed bidder on University Hospital’s request for proposals (RFP) regarding contract to design, construct, and operate pharmacy filed notices of appeal with the Superior Court, Appellate Division, after Hospital’s hearing officer denied disappointed bidder’s post-award bid protest and its protest of Hospital’s post-award change in location of proposed pharmacy.

Successful bidder’s motion to intervene was granted.

The Superior Court, Appellate Division, dismissed appeals, holding that University Hospital was not “state administrative agency” within meaning of court rule allowing appeals to be taken as of right to Appellate Division to review decisions or actions of such agencies. Disappointed bidder’s petitions for certification and motion to consolidate appeals were granted.

The Supreme Court held that University Hospital was not “state administrative agency.”

University Hospital was not “state administrative agency” within meaning of court rule governing appeals from final decisions of such agencies, and thus, disappointed bidder was not entitled to file appeals from University Hospital’s denial of post-award bid protests in Appellate Division, even though legislature designated Hospital “body corporate and politic” and “instrumentality of the State”; legislature did not place Hospital in an executive department or declare it to be “in but not of” such a department, as constitutionally necessary for Hospital to constitute “state administrative agency,” legislature gave Hospital operational independence and unique power to offer itself for sale, and legislature did not charge Hospital with implementing or administrating healthcare policies.

Relators, who were signatories of petition to have local board of an emergency services district place on the ballot a proposition to alter sales tax rates within the district, sought in district court a writ of mandamus compelling the board to determine whether the petition contained the statutorily required number of signatures or, alternatively, ordering the board to call an election on the petition.

During discovery, relators filed a petition for writ of mandamus in the Austin Court of Appeals, which denied relief without substantive opinion. Thereafter, relators filed their mandamus petition in the Supreme Court and then nonsuited their claims in the district court.

The Supreme Court held that:

• The Court had jurisdiction to grant mandamus relief against board;
• As long as the petition had the statutorily required number of signatures, the board had a ministerial, nondiscretionary duty to call an election; and
• Mandamus relief was an appropriate remedy.

The Supreme Court had jurisdiction to grant mandamus relief against the local board of an emergency services district in dispute in which relators, who were signatories of petition to have the board place on the ballot a proposition to alter sales tax rates within the district, were seeking a writ of mandamus compelling the board to determine whether the petition contained the statutorily required number of signatures or, alternatively, ordering the board to call an election on the petition; the Election Code waived any claim to immunity from mandamus relief by authorizing the Supreme Court, or a court of appeals, to compel the performance of a duty in connection with an election, and relators sought to compel performance of such a duty that the Health and Safety Code expressly assigned to the board of an emergency services district.

As a political subdivision of the State, an emergency services district is entitled to governmental immunity, which operates like sovereign immunity, and the district’s board, as the governing entity, also retains immunity.

As long as petition had the statutorily required number of signatures, local board of an emergency services district had a ministerial, nondiscretionary duty to call an election on petition’s proposition to alter sales tax rates within the district, despite argument that petition was legally defective as to the amount of the proposed change in the tax rate and as to the petition’s alleged failure to match the mandatory ballot language to be used in an election to abolish the tax, which the proposition would arguably do in part; there was a strong preference in favor of holding elections on qualified ballot measures even where there was some question about whether the measure, if passed, would be subject to valid legal challenge, and board lacked discretion to conduct its own unauthorized legal analysis to keep an otherwise qualified petition off the ballot entirely.

Mandamus relief was an appropriate remedy for refusal of local board of an emergency services district to perform its ministerial, nondiscretionary duty to call an election on petition’s proposition to alter sales tax rates within the district; the only factual question that could possibly be in dispute was the validity of the signatures, but the board had never challenged the qualifications or validity of any of the signatures, and the Election Code authorized appellate courts to grant mandamus relief to compel the performance of an election-related duty.

SIFMA Research tracks issuance, trading, and outstanding data for the U.S. municipal bond market. Issuance data is broken out by bond type, bid type, capital type, tax type, coupon type and callable status and includes average maturity. Trading volume data shows total and average daily volume and has customer bought/customer sold/dealer trade breakouts. Outstanding data includes holders’ statistics. Data is downloadable by monthly, quarterly and annual statistics including trend analysis.

YTD statistics include:

• Issuance (as of May) $193.7 billion, +35.1% Y/Y
• Trading (as of May) $12.8 billion ADV, +19.7% Y/Y
• Outstanding (as of 4Q23) $4.1 trillion, +0.5% Y/Y

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June 3, 2024

As Costs Rise, States Should Prioritize Essential Spending in Coming Budget Cycle

Interactive Exhibits Enable Deeper Understanding of Metrics

• Outlook for state credit quality upgraded to “Stable” versus 2023 outlook of “Declining.”
• State rainy-day funds remain at near-record levels but rising costs are pressuring state budgets.
• Northeast, Great Plains and Great Lakes regions benefited from a slowing of pandemic migration patterns to the west and south.
• Interactive graphics enable a closer look at the report’s 13 economic, socioeconomic and financial metrics by state and region.

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Tue, Jun 4, 2024

Fitch Ratings-New York-06 June 2024: The period of sizeable state tax cuts that began in early 2021 and peaked in 2022 is drawing to a close, with revenue implications for states becoming clearer, Fitch Ratings says. In some cases, actual revenue losses exceed state estimates, although credit quality remains stable as states have ample reserves and broad budgetary flexibility.

State legislatures have proposed or enacted an estimated $6.3 billion of new tax reductions in their 2024 legislative sessions, meaningfully less than the $26.1 billion and $40.2 billion of tax cuts, rebates and credits adopted in 2023 and 2022, respectively.

Ohio and Arizona are among the states with the largest shortfalls between forecasted and actual revenues so far in fiscal 2024. Ohio’s fiscal 2024 tax collections were tracking $445 million (1.9%) below forecast through April 30, which the governor ascribes to the cumulative effects of personal income tax (PIT) rate cuts and bracket compressions in the last two biennial budgets. In Arizona, the state’s Joint Legislative Budget Committee primarily attributed a $900 million downward revision in its fiscal 2024 revenue forecast in January to previously enacted income tax cuts.

Tax reductions over the past few years included a broad mix of both one-time and recurring tax policy actions. California enacted $10 billion of tax rebates in 2022 paid largely from surplus revenues, while Nebraska enacted nearly $1.4 billion of permanent PIT rate cuts and property tax credits. This will equal roughly 15% of fiscal 2021-2022 biennial revenues once the cuts are fully phased in by 2027.

Like Nebraska, other states including Georgia, Kentucky, Pennsylvania and West Virginia are phasing in previously enacted tax changes over multiple years. In some cases the associated revenue losses will not be fully realized, or even clear, until the early 2030s. The revenue effects of prior cuts through fiscal 2024 have so far been within these states’ expectations.

Modest revenue underperformance compared to forecasts is unlikely to have a negative credit effect given that state rainy day funds and other counter-cyclical fiscal cushions have been greatly augmented since the pandemic. State rainy day funds averaged 13.8% of prior year revenues in fiscal 2023 compared with 7.9% in fiscal 2019 and only 5% prior to the 2008 Global Financial Crisis. However, the effects of recent years’ tax cuts on revenues have not been tested by a cyclical downturn, which could have a more pronounced effect on collections.

Policymakers are reticent to enact further large, permanent tax cuts. In Oklahoma, the state senate recently resisted a gubernatorial proposal for an income tax rate cut even as the state eliminated its sales tax on groceries. In Virginia, the legislature rejected the governor’s proposal for a broad tax restructuring that also included a sizeable PIT rate cut.

States are likely to forego substantial new tax reductions in the near term, and instead focus on making more marginal changes. These include expanding or revising existing tax credit programs such as the state earned income tax credit (EITC) and childcare tax credit. Additionally, we anticipate efforts to expand tax bases will include more services and digital goods, as well as broaden transportation fees and levies to compensate for declining fuel taxes.

Contacts:

Michael D’Arcy
Director, US Public Finance
+1 212 908 0662
michael.darcy@fitchratings.com
Fitch Ratings, Inc.
Hearst Tower
300 W. 57th Street
New York, NY 10019

Sarah Repucci
Senior Director, Fitch Wire
Credit Policy – Research
+1 212 908 0726
sarah.repucci@fitchratings.com

Overview

Over the course of the coming months, 33 states, the territories, and the District of Columbia will enact a budget for fiscal 2025 (Kentucky, Virginia, and Wyoming will enact a biennial budget for both fiscal 2025 and fiscal 2026). Last year, 17 states enacted biennial budgets covering both fiscal 2024 and fiscal 2025; in seven of those states, the governor released a supplemental or revised budget recommendation for fiscal 2025. Forty-six states begin their fiscal year on July 1 (New York begins its fiscal year on April 1, Texas on September 1, and Alabama and Michigan on October 1). Puerto Rico begins its fiscal year on July 1, while the District of Columbia, Guam, and the U.S. Virgin Islands begin their fiscal year on October 1.

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American voters can be forgiven for thinking that their local governments are in a constant state of fiscal crisis. New York City continues to struggle with an influx of migrants that has jeopardized its ability to maintain services and led the mayor to appeal for greater state and federal support. Chicago grapples with a massive pension shortfall and debt burden amidst persistent difficulty in finding common ground, as illustrated by the recent failure of a mayor-led initiative to reform the real estate transfer tax. Los Angeles faces a growing budget shortfall that imperils its efforts to confront a homelessness crisis. American cities are struggling to adjust to a post-pandemic world of empty office towers and shifting commuting patterns.

Yet, many of the fiscal problems that governments face predate the pandemic. In fact, one can’t help but wonder whether there has ever been a time that local governments have managed their finances prudently, when cities did not face impending budget cuts and threats of drastic service reductions. The answer is: they haven’t. And the reason why is the same reason why so many governance challenges persist: the institutional structure and the incentives that it gives rise to. Too often, municipal leaders simply are not incentivized to engage in prudent fiscal management.

To explain why, it helps to start with one of the most basic features of local government budgets: the balanced budget requirement. Unlike the federal government, city and state governments in the United States cannot engage in deficit spending. And while the details of these requirements vary from place to place, the overarching picture is the same: governments must balance their operating budgets on a cash (or near-cash) basis.

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PROMARKET.ORG

BY TRAVIS ST. CLAIR

June 3, 2024

COMMENTARY | Today’s auditors don’t just account for finances, they also account for outcomes. Local government leaders should look to them as key allies.

Having dedicated most of my public service career to elevating the profession of performance auditing, I was gratified to see recently that it had progressed from a nice idea to a top priority for the current generation of local government auditors.

This focus on “auditing for impact” is a healthy progression toward a more inclusive and results-oriented approach, promoted by an activist brand of practitioners who, in the words of one scholar of the field, “regard the public as their ‘ultimate client.’”

It’s a positive change that has been cultivated, in part, by the Association of Local Government Auditors, or ALGA. And I saw it on display in Seattle last month at the group’s annual conference, especially on the all-female panel I moderated featuring leading auditors from diverse backgrounds, a metamorphosis that is clearly invigorating the profession.

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Route Fifty

By Mark Funkhouser

JUNE 6, 2024

Local government finance officers can employ revenue, procurement and other tactics that disrupt the status quo to finance important initiatives.

I recently watched Rustin, the biopic about nearly forgotten civil rights leader Bayard Rustin, who was the chief organizer of the 1963 March on Washington for Jobs and Freedom. In 1948, the year of Mahatma Gandhi’s assassination, Rustin traveled to India to learn the techniques of nonviolent civil resistance, which he later taught to Dr. Martin Luther King Jr.

Not long after his India trip, Rustin wrote, “We need, in every community, a group of angelic troublemakers.” These words were echoed by another civil rights icon, John Lewis, who famously said, “When you see something that is not right, not fair, not just, say something. Do something. Get in trouble. Good trouble.”

Local government finance officers might be the last people you would think of as troublemakers of any kind. Their job, after all, is to keep cities and counties out of trouble by ensuring that tax dollars are managed responsibly. The truth is that finance officers are people too, not human calculators. Many of them care deeply about making their communities better — in a fiscally prudent way, of course.

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governing.com

OPINION | June 6, 2024 • Andrew Kleine

The current high-interest rate environment presents a unique opportunity to correct accounting practices and to set public-sector pensions on a more sustainable path

NEW YORK, NY — Public-sector pensions are facing a significant underfunding crisis that has only worsened over the past 25 years despite periods of high-asset returns. This growing burden threatens the financial stability of municipal and state finances, potentially leading to higher taxes or severe cuts to retirees’ benefits and essential services if not addressed promptly. In a new Manhattan Institute issue brief, senior fellow Allison Schrager argues the current high-interest rate environment presents a unique opportunity to set public-sector pensions on a more sustainable path.

Improper pension accounting standards set by the Governmental Accounting Standards Board (GASB) are at fault for masking the true extent of underfunding. The GASB allows states and municipalities to underprice risk and the cost of their obligations—a practice that is at odds with basic finance and different from how pension liabilities are measured in the private sector. Current accounting effectively incentivizes riskier investments and overly optimistic return assumptions.

State and local pension plans use accounting standards suggested by GASB to measure their funding status in their Annual Comprehensive Financial Report (ACFR). While the ACFR does not necessarily have any direct impact on the contributions that states and cities pay to fund their pensions, it enables further underfunding because it suggests that risk is costless and that providing pension benefits is cheaper than it is.

The gap between expected returns and interest rates is narrower in the current high-rate environment, making it politically and economically feasible to adopt more defensible standards. States and municipalities should use the opportunity to adopt better and more uniform standards for how liabilities are measured and for how contributions are calculated and paid. By requiring sponsors to account for risk and the cost of guarantees, the focus would shift from returns to risk management, promoting long-term fiscal sustainability. Such accounting would ensure that regardless of rising or falling rates in the future, pensions would be properly funded.

Contact:
Leah Thomas
Senior Press Officer
(419) 266-5959
lthomas@manhattan.institute

Introduction

Public-sector pensions are underfunded, and the problem is getting only worse. Despite many years of high asset returns, municipal and state finances face a slow-moving crisis as the bill comes due on their pension obligations. The burden will either fall on taxpayers or lead to cuts in benefits on retirees and essential services on the entire tax base. The time to fix an underfunded pension plan is always yesterday, but the current high-interest-rate environment offers an opportunity to put public-sector pensions on a more sustainable path. This will require changes at the state, local, and federal levels.

The core of the problem is pension accounting. The extent of underfunding is obfuscated by the current accounting standards that enable states and municipalities to underprice risk and the cost of their obligations. State and local pension plans use accounting standards suggested by the Governmental Accounting Standards Board (GASB), a nonprofit body, in order to measure their funding status in their Annual Comprehensive Financial Report (ACFR). These guidelines often influence the contributions that fund the plans.

GASB’s accounting standards are at odds with basic finance and are different from how pension liabilities are measured in the private sector. The current standards not only obscure the extent of underfunding; they create an incentive to invest in riskier assets and provide overly optimistic return assumptions. Research shows that overly optimistic return assumptions are a big driver of the increase in underfunded liabilities.[1]

For decades, critics have called for public pensions to adopt more defendable and commonly used accounting standards.[2] This would involve using market-based discount rates (the rate of return used to calculate future cash flow), particularly low-risk government interest rates. Lower and more defendable rates would reveal the extent of the underfunding based on current market rates, which is correct. But if states and cities realize the truth, it could result in dire financial consequences for some municipalities because it could mean higher contributions or higher municipal interest rates.

True, the underfunding reported in an ACFR does not necessarily have any direct impact on the contributions that states and cities pay to fund their pensions. But it enables further underfunding because it suggests that risk is costless and that providing pension benefits is cheaper than it is. The underfunding is also important because the funding level is observed by municipal bond buyers, highly motivated voters, and anyone with an interest in the health of the pension, such as unions. There is evidence that pensions do respond to what is in ACFRs. For instance, states and cities raised contributions when discount rates were lowered after the guidance was changed in 2012 because the local governments feared pressure from their stakeholders.[3]

While informing these stakeholders on the true extent of pension funding is desirable from an economical and long-term fiscal sustainability perspective, a drastic change could be self-defeating. States and municipalities are required to use GASB accounting in their ACFRs, but they are not required to make the necessary contributions estimated by GASB to cover the underfunding or even to use the same method to estimate their contributions. If the standards are seen as completely unreasonable or unrealistic, they will have less influence, which could worsen transparency and lead to more irresponsible investing.

Although the 2012 move faced resistance, it was, at best, a half-measure that sent mixed messages. Thus, even a few years ago, when rates were near-zero, moving to a more defendable standard would have been politically untenable. Our higher-interest environment changes this situation because the difference in expected return and interest rates is no longer so large. (In fact, in the last higher-rate environment, the 1990s, many pensions were overfunded.)

The current high-rate environment is an opportunity for states and municipalities to get on the right track by adopting better and more uniform standards for how liabilities are measured and for how contributions are calculated and paid. Ideally, this reform would encourage states and municipalities to start managing interest-rate risk, so that if rates fall or rise in the future, pensions would still be properly funded.

It is expensive to guarantee funding for pensions, but it can be managed using simple interest-rate hedging strategies. When the expected return is the discount rate, there is no incentive to use these strategies because the plan sponsor is fixated on returns rather than risk management. Requiring the sponsor to account for risk and the cost of a guarantee, which this issue brief explores, changes the focus for states and cities and makes the benefits of risk management more apparent.

Continue reading.

June 6th, 2024

Issue Brief by Allison Schrager

• Proposal would limit work with banks with gun restrictions
• Bill sent to state’s Republican governor for signature

Louisiana could soon bar banks that “discriminate” against firearm entities from working on government contracts, after lawmakers advanced legislation that’s similar to a Texas statute that has whipsawed Wall Street firms’ public-finance work.

State lawmakers passed Senate Bill 234 last week and sent the legislation to Republican Governor Jeff Landry’s office for signature. Under the legislation, any company into entering a public contract of $100,000 or more must provide a written verification that they do not have a “practice, policy, guidance, or directive” that would “discriminate” against firearm entities or trade groups.

If passed, it would add to the pressure campaign from GOP states against Wall Street. Texas enacted a similar law in 2021 targeting Corporate America’s firearm policies, and it has hurt some large banks’ public-finance business in the state.

Continue reading.

Bloomberg Markets

By Amanda Albright

June 4, 2024

• Projects from terminal expansion to upgrades are on tap
• Issuance in 2024 may reach $21 billion, near pre-pandemic peak

US airports are set to storm the municipal-bond market in the weeks and months ahead to raise billions of dollars for upgrades and fixes they can no longer put off as travel surges to new highs.

At the urging of airlines, facilities across the US are increasing not only runway capacity but also amenities at new or renovated terminals, with plans for shopping areas and lounges as traffic reaches records. That’s on top of basic infrastructure maintenance.

Already this year, operators of airports in cities from San Francisco to St. Louis have come to market with $3.5 billion of debt, according to a June 3 report by Ramirez & Co. Heavy volume through September and another wave in December will push the total for the year to $21 billion, close to the pre-pandemic peak, the municipal underwriter forecast in a report released this week.

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Bloomberg Markets

By Skylar Woodhouse and Shruti Singh

June 5, 2024 at 8:43 AM PDT

University of the Arts in Philadelphia just shut down as institutions take on debt to lure new students

Debt-or-Die

Smaller US colleges facing rising costs are opting to merge or shut down entirely while university debt sales are rising as schools vie for an increasingly tinier pool of students.

Last week, University of the Arts in Philadelphia abruptly announced that it would close on June 7. The school has around $50 million of outstanding municipal bond debt, whose rating was slashed four notches to C by Fitch this week.

That’s the latest in a string of college casualties, a consequence of universities across the country contending with shrinking demand partly due to demographics — birth rates began falling in the aftermath of the financial crisis, and students born then are now approaching their college years.

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Bloomberg Newsletter

By Aashna Shah

June 8, 2024

Key Takeaways

• S&P Global Ratings views the U.S. federal-grant-secured transportation sector as stable given expected reliable funding and continued strong support for transportation infrastructure investment across all levels of government, and thus most grant anticipation revenue vehicles (GARVEEs) are rated in the ‘AA’ category.
• Funding from the Infrastructure Investment and Jobs Act (IIJA; also known as the Bipartisan Infrastructure Law, or BIL) in federal fiscal 2023 totaled $59.5 billion for the Federal-Aid Highway Program and $13.6 billion for transit formula grant programs sourced from the Highway Trust Fund. Based on estimates of outlays, the fund is projected to be exhausted in 2026.
• Inflated construction project costs, labor shortages, and other hurdles continue to erode the anticipated benefits of BIL/IIJA funding.
• Our AA+/Stable/A-1+ U.S. sovereign credit rating is linked to both stand-alone GARVEE ratings and backstopped GARVEE ratings that benefit from an additional pledged security such as state gas taxes.
• Our analysis of key financial metrics for fiscal 2023 shows that GARVEE programs continue to demonstrate very strong maximum annual debt service coverage that we do not expect will materially erode as states and regional transportation agencies potentially issue more debt to maintain and expand investment in roads and transit.

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6 Jun, 2024

• Spartanburg, South Bend borrows to build, refurbish stadiums
• Spartanburg sees Fifth Third Park opening for 2025 season

The new look of US minor-league baseball took a curtain-call last week as Spartanburg, South Carolina, sold bonds to build a stadium for the Hub City Spartanburgers, a Low-A level affiliate of the Texas Rangers.

Spartanburg, a city of 38,732 in the upstate region of South Carolina, sold $63.8 million in revenue bonds to build the 5,000-seat Fifth Third Park stadium, which is slated to cost $100 million and open in time for the 2025 season. The bonds are backed by a mix of rent, fees and taxes. The city and county are contributing another $59.4 million to the project.

Minor league baseball is still recovering from the lost year of 2020, when the pandemic shut down the season and Major League Baseball cut the size of the minor leagues by more than 40 teams to 120, and then told the rest to replace or upgrade their stadiums. In 2023, sales of municipal bonds for sports facilities tripled, to $1.8 billion, according to data compiled by Bloomberg.

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Bloomberg Industries

By Joseph Mysak Jr

June 4, 2024

Amid a rapid increase in ransomware attacks on k-12 schools, the commission is allocating $200 million over three years to strengthen cyber protections.

Parents of students in Center Line, Michigan, an inner ring suburb of Detroit, got a text late Monday night last week canceling school the next day. School officials had been forced to shut down the district’s entire computer system to stop a ransomware attack. Since schools run through technology, whether it’s food service, cameras, phones or educational software, there were few other options.

The closure ultimately lasted only one day. But parents and students have been asked to be patient as the district works “through other tech challenges” likely to surface as the breach is investigated.

Ransomware attacks like the one on Center Line Public Schools are becoming all too familiar. School districts depend more than ever on technology, and as a result, their systems and the personal data they store are increasingly targets of hackers. In 2022, according to an analysis by the cybersecurity firm Emsisoft, 45 districts reported breaches. In 2023, that number more than doubled, to 108.

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Route Fifty

By Elizabeth Daigneau,
Executive Editor, Route Fifty

JUNE 6, 2024

Norwalk, CT, June 3, 2024 — The Governmental Accounting Standards Board (GASB) today published a Post-Implementation Review (PIR) report on the Board’s pension standards.

The report focuses on GASB Statement No. 67, Financial Reporting for Pension Plans, and GASB Statement No. 68, Accounting and Financial Reporting for Pensions.

The report, issued by GASB staff, concludes that Statements 67 and 68 met the three PIR objectives:

• The standards accomplish their stated purpose,
• Costs and benefits are in line with expectations, and
• The Board followed its standard-setting process.

Furthermore, the report concludes that GASB Statements 67 and 68 significantly enhanced the accounting and financial reporting for pensions by pension plans and governmental employers with key provisions including the recognition of the net pension liability on the face of the government-wide statement of net position and the measurement of the liability using a blended discount rate.

After the issuance of each GASB standard, the GASB provides educational support, responds to technical inquiries, and often issues questions and answers about the standard through implementation guidance. More complex standards—like Statements 67 and 68—are eligible to undergo more extensive PIR procedures culminating in a final report.

More information about the PIR process, including other projects for which the GASB is currently conducting PIR activities, is available by visiting the GASB PIR web portal.

Webinar | June.13.2024 | 11am – 12pm (Pacific Standard Time)

The medical industry is currently grappling with a surge of cyber threats and security incidents that are putting sensitive patient information and essential services at risk. In the United States, the healthcare field has been particularly shaken by a series of recent ransomware attacks targeting prominent healthcare providers. These represent a troubling trend of “havoc-based attacks” with the potential to undermine key components of the nation’s infrastructure.

Join our upcoming webinar where Thora Johnson, Jenna Magan and Devon Ackerman, Global Head of Incident Response at Kroll will examine the challenges posed by these high-profile cyber incidents, the legal landscape, the role of cyber insurance, and other practical strategies to defend your institution against future attacks.

Register

Hosted by The Bond Buyer and Orrick

In a time of decreasing trust in government, we should ask if lengthy, technical financial reports published many months in arrears are the most effective way to build trust with government’s most important constituency: citizens. In a time of declining resources, we should ask if the finance officer’s time is well spent producing these reports.

This report presents GFOA’s vision for updating financial reporting. It critiques the current approach for not meeting the needs of its audiences, highlighting issues such as complexity and the time required to prepare the reports. The report also discusses the opportunity costs of financial reporting and outlines strategies to make financial reports more user-friendly, streamlined, and better aligned with users’ needs.

Read New Research.

Read the MSRB Request for Comment.

December 5-6, 2024 | Nashville, Tennessee

Registration Coming Soon

• Proceeds of new debt sale will be used for working capital
• Tower Health expects to reach profitability this year

Struggling Pennsylvania hospital chain Tower Health plans to exchange current debt and raise additional funds as it pursues a turnaround.

The system, trustee and bondholders of about $992 million in debt are supporting an exchange of “substantially all” existing bonds, according to a May 31 agreement that Tower Health disclosed in a filing Monday. The system also plans on selling $142.5 million of new municipal bonds for working capital. The finalized agreement will close in August, according to a spokesperson for Tower Health.

“This agreement secures substantial liquidity support and provides a longer-term window to advance our continued financial turnaround efforts,” Tower Health said in an emailed statement.

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Bloomberg Markets

By Lauren Coleman-Lochner

June 3, 2024

Listen to the podcast.

by Liz Ann Sonders & Kathy Jones

June 7, 2024

Charles Schwab