Retirement Benefits

Dane County Judge Juan Colas overturned portions of the new Wisconsin law, Act 10, affecting local governments as part of a lawsuit filed by unions in Milwaukee and Madison. The judge determined they violated free-speech rights and the equal protection clause of the state constitution, because safety personnel unions were excluded. Now, Moody’s has opined that the state court ruling overturning portions of Wisconsin’s controversial law curtailing collective bargaining rights could negatively impact local governments if it stands, Moody’s Investors Service warned. As enacted, the new law sharply limited collective bargaining rights at the state and local government level. Concurrently, the Badger State increased pension and health care premium payments for employees and cut local aid to governments to help eliminate the $3.6 billion deficit in its two-year $66 billion budget, relying on the collective bargaining changes at the local level to offset the cuts in aid. The changes were projected to save around $1 billion annually in spending by municipalities. The law stripped non-public safety unions of their right to bargain over salary and benefit issues with the exception of base wages that were capped at growth in the consumer price index. Before passage of the law last year, those issues were subject to negotiation. In its report, Moody’s noted: “Ultimate repeal of these provisions of Act 10 would be a credit negative for Wisconsin local governments, because it would slow the process of reducing public employee benefit costs by requiring negotiations with public sector unions to achieve cost savings.” While many local governments are still obligated to pay such benefits at levels set in existing contracts, Moody’s noted that many local governments have already realized significant savings during the past year. Wisconsin Attorney General J.B. Hollen appealed the Dane County decision and is asking the court to stay the lower court ruling during the appeals process. Moody’s warns that if the ruling is upheld on appeal, “Wisconsin cities, counties, villages, and school districts will have to return to traditional bargaining in order to manage personnel expenditures, a category which represents the majority of local government spending,” Madison Teachers et al v. Scott Walker, #11CV3774, Wisconsin Circuit Court, September 14, 2012.

Chocolateville

The Bill & Melinda Gates Foundation has its eye on the Central Falls public schools and area charter schools once again, touring the school district and meeting with the leaders of the charter schools. Central Falls was one of three districts to receive support from the Gates Foundation last fall to collaborate with area charters to improve student achievement. The public schools are partnering with the Learning Community, Blackstone Valley Prep, the Segue Institute for Learning and the International Charter School. Gates is exploring whether to provide grants to this partnership for, in this case, capital improvements.

Jefferson County

After approving a fiscal 2013 budget this week, Jefferson County, Ala., advised holders of its general obligation warrants they would not be paid. The county, still in bankruptcy, reported in a in a disclosure that it plans to default on the GO warrants until they are restructured under a plan of adjustment in its Chapter 9 case. Jefferson County has about $95.5 million of outstanding fixed-rate GOs insured by National Public Finance Guarantee Corp.; another $105 million of GOs are in variable-rate mode. The $15 million that would have been paid on the GO warrants in the coming year is expected to help the county pay its bankruptcy attorneys, according to published reports. Jefferson County also disclosed to investors it did not make the required payment to the Jefferson Public Building Authority for the 2006 lease revenue warrants that were sold to build a county courthouse, jail, and a 911 emergency call system; the reserves will be used to make the interest payment, the county said. It is not clear if any principal payment is due. The lease warrants are insured by Ambac Assurance Corp. The county had planned to reject the lease through the bankruptcy process. In recent weeks, attorneys said in court filings that the county was negotiating with Ambac. County Commissioners this week passed a resolution agreeing to a term sheet that would reduce annual lease payments and extend maturities.

Comin’ to you from LA, Baby

The Los Angeles City Council unanimously adopted a new retirement plan under which spouses of retired workers will no longer be eligible for city-funded healthcare. City employees will see their take-home pay reduced in years when their retirement fund takes a hit in the stock market, and employees who retire at the age of 55 after 30 years of city employment will receive pensions that are roughly one-third the amount provided to existing employees. The changes will only apply to newly hired civilian workers and will not affect the retirement benefits of police officers, firefighters, and employees at the Department of Water and Power. It will need a second vote within 30 days to go into effect. In the nonce, the council instructed city negotiators to meet with union leaders to try to find common ground and to avert a lawsuit.

Municipal Blues

U.S. District Judge Marvin J. Garbis has struck down a key provision of Baltimore Mayor Stephanie Rawlings-Blake’s overhaul of the fire and police pension system. The decision could force the city to pay tens of millions of dollars more to retirees each year. Judge Garbis held that the city’s decision to change the method for determining annual increases for retirees — resulting in less money for many — was “unconstitutional” and not "”reasonable and necessary to serve an important public purpose.” The provision was one part of a 2010 ordinance that also delayed retirement for many police and fire employees and increased their contributions to the pension system. If the ruling stands, the total cost to the city is unclear. When Mayor Rawlings-Blake introduced the pension overhaul in 2010, she said it would head off imminent fiscal crisis, saving the city at least $64 million a year. Under the adopted—but now struck-down—plan, firefighters and police officers would have been required to increase their contributions to the pension fund. Those who had worked for the city for fewer than 15 years were told they would no longer be able to retire after 20 years, but would have to work for five additional years. Retired workers also would have lost what was called the “variable benefit,” an annual increase tied to the stock market. Instead, the youngest retirees received no annual increase, and older retirees received a 1-2% annual increase. In his decision, Judge Garbis said that the law’s cost-of-living adjustments were unconstitutional in that they harmed younger retirees too severely: [The plan “had the pernicious effect of eliminating and/or reducing annual increases from retirees under 65 at the time of enactment and, consequently, significantly reducing their pensions when they became 65…it was not reasonable…There was an important public purpose to be served by the restructuring of the Plan so as to restore it to actuarial soundness and sustainability….; [H]owever, the City did not have total freedom to disregard its contractual obligations altogether.”

Pensionary Tales

The investment holdings of the 100 largest state and local public pension systems fell 1.5% from $2.76 trillion to $2.72 trillion in the second quarter of 2012, according to a U.S. Census Bureau survey released yesterday. The total cash and security holdings of these pensions, which comprise more than 89% of activity amongst public employee pension systems, fell 2.2% from the $2.78 trillion of pension fund holdings in the second quarter of 2011. Prior to the second quarter of this year, pension holdings had risen for three consecutive quarters. Total contributions to these pension systems also fell following three consecutive quarterly increases, dipping from $33.4 billion to $31.6 billion, a 5.4% decline. Total payments dropped slightly, from $54.9 billion in the first quarter to $53.4 in the second quarter, a 2.7% decline.

Bumps in the Road?

Fiscal year (FY) 2013 marks the third consecutive year that state officials are forecasting state tax growth compared with the previous fiscal year; nevertheless, it is unclear whether such growth is sustainable. According to the Nelson A. Rockefeller Institute of Government, following five quarters of declines brought on by the Great Recession, total state tax collections have risen for 10  consecutive quarters (since the first quarter of 2010); growth, however, has slowed in the last four. Overall, the state revenue situation continues to improve, but at a more tempered—and uncertain pace. Projections for FY 2013 reflect this slow growth trend as officials in nearly three-fourths of the states and the District of Columbia anticipate total tax growth between 1 and 4.9%--only two states—Georgia and Oklahoma—have forecast tax growth of more than 5% for all of the three major categories—personal income, general sales and use, and corporate income—this fiscal year. The Institute notes that there have been few notable state tax changes, which largely affect collections in FY 2013. So far, 2012 features the smallest aggregate tax cut (0.2 percent) in NCSL’s 32-year history of collecting this data.