The Week in Public Finance: Ballmer's Data Trove, Grading Pension Health and a New Muni Bond Threat
This Goes Way Beyond Open Data
You might not peg former Microsoft CEO and current owner of the NBA’s Los Angeles Clippers as a government data geek. But Steven Ballmer stepped into that role in a grand scale this week when he unveiled his privately funded, years-long project to help citizens easily track how government spends their money.
Called USAFacts, the website contains federal, state and local aggregated data on revenue and spending, as well as on debt, population, employment and pensions. Want to know about pension debt? Two quick searches reveal that unfunded liabilities in state and local retirement systems have more than quadrupled since 2000. At the same time, the median age in the country has increased by 2.5 years.
As a businessman used to the corporate world, Ballmer wants to make government financial reports more readable. To that end, the site has introduced the first government "10-K report" -- the private sector's version of an annual financial report. It aggregates data from all U.S. governments and gives progress reports on government programs, provides financial balance sheets and gives data on key economic indicators.
The Takeaway: Ballmer says USAFacts is not meant to insinuate that governments should be more like businesses. But the creation of this data trove does speak to a growing desire among the business community and citizens for better access to uniform financial data. No two governments are alike in how they present and deliver their financial data, to say nothing of the amount of time in which it takes them to do so. That makes any data compilation incredibly burdensome. Now, at least on a national basis, that headache has been eliminated.
What's more, shining a light on the real numbers behind government has the potential to change peoples’ assumptions about it. By way of explanation, Ballmer looked up how many people work for government in the U.S. The answer: nearly 24 million. When people hear that, they tend to say, "‘Those damn bureaucrats!’” he told The New York Times. But a look at the data may elicit a different response. Almost half are educators. Active-duty military and health workers represent huge blocks as well. Now, "your tax dollars are helping somehow to pay 24 million people -- and most of these people you like,” Ballmer said.
Diverging Pension Paths
A new report this week from the Pew Charitable Trusts shows that while a number of public pension plans took positive steps toward solvency, their total unfunded liabilities still increased in each of the last two years. It also found that in 2015, more than half of states achieved what’s called positive “net amortization.”
The metric, introduced by Pew last year, essentially measures whether a state is on a path to eventually eliminate its unfunded pension liabilities. The measurement does this by looking at whether a pension plan’s accounting assumptions -- notably its assumed investment earnings -- and payment schedule will hold up over time. In 2014, just 15 states achieved positive amortization. The following year, 32 did.
Despite this improvement, unfunded liabilities increased to $1.1 trillion in 2015 and are expected to total $1.3 trillion when data from 2016 is complete. The more than $350 billion increase over two years is largely due to lower-than-expected investment earnings. However, the report notes that roughly $8 billion of the shortfall is due to plans not paying their full pension bill.
The Takeaway: While it’s good that more plans shifted into the positive, there are still things to be wary about. Namely that the shift could be short-lived: There are still legitimate concerns that pension plans won’t meet their assumed rates of investment return. “Obviously you don’t know what the future will hold,” David Draine, a senior researcher, told reporters, “so the question is, are policies in place sufficient to address the uncertainty?”
For 18 states, Pew’s report says the answer to that question is a resounding no. These states have negative net amortization, meaning their liabilities will continue to increase unless they change their funding habits and/or assumptions. These states include Colorado, Illinois, Kentucky, New Jersey and Pennsylvania, which fared worst on this benchmark in 2015.
Muni Tax Exemption Threat Not Over Yet
The tax-exempt status of muni bonds might not be as safe under the current administration as some have thought. Several municipal analysts have been warning that the exemption, which allows muni bond investors to earn tax-free interest on their bonds, could be threatened by tax cuts that disproportionately benefit the wealthy.
In particular, President Trump has proposed major cuts in taxes on investment earnings. Compared to corporate bonds, municipal bonds earn slightly lower interest rates for investors because of their tax-free perk. But Court Street Group analyst George Friedlander has said a significantly lower tax rate capital gains might negate that perk -- and see investors turn more towards taxable debt for the higher investment earnings.
That lower demand for munis would drive up their interest rates and make it more expensive for governments to issue bonds. That introduces the possibility that reformers would argue the exemption therefore doesn't make much of a difference in goverments' borrowing costs. This could be the ammo some need to nix the perk entirely. That, noted Municipal Market Analytics’ Tom Doe this week, could be a boon for public-private-partnerships (P3s), “under the guise of efficiency, savings and jobs for the middle class.”
The Takeaway: Businesses have advocated that P3s offer better procurement, less risk for governments and are an ultimately cheaper way to deliver new infrastructure. But they haven’t taken off in the U.S. primarily because the municipal market offers such relatively inexpensive financing for governments. By comparison, Europe has no municipal market equivalent and P3s are the primary financing mechanism for major projects.
A key player in all this might be the role of Gary Cohn, director of the National Economic Council and a former Goldman Sachs president. As President Trump reshuffles key staff, Doe notes that Cohn, a Democrat, may soon ascend to Trump’s chief of staff. Democrats have supported limiting the tax exemption because it is largely seen as a perk for the wealthy, who are the primary investors in muni bonds. In addition, a Democrat could be more effective in whipping up bipartisan support to push through tax reform. “Trump wants wins now,” Doe wrote, “and Cohn may simply be the guy to deliver.”