Retiree health-care obligations, which usually are not budgeted in advance, paint a bleaker picture. States should have set aside nearly $51 billion to pay for these expenses in 2010, according to Pew, but instead they contributed just over $17 billion, or 34% of that. Only seven states funded 25% or more of their obligations: Alaska, North Dakota, Ohio, Oregon, Virginia, Wisconsin and Arizona (the last state made the only full contribution).
In a report released July 17, the State Budget Crisis Task Force, co-chaired by former Federal Reserve Board Chair Paul A. Volcker, found that three states out of the six it studied, California, Illinois and New Jersey, accounted for more than half (58%) of the annual required contribution shortfall from 2007 through 2010. The six, which also included New York, Texas and Virginia, had underpaid their contributions by more than $50 billion during those five years. To fund past promises and current benefits in the future, the group projects, the state and local governments would have to increase spending at least $25 billion annually.
A bright spot on the horizon is the progress being made in municipal oversight, which Colby attributes partly to pressure from professional investors over the past 10 years, and the capture and sharing of online data by the Municipal Securities Rulemaking Board, designated by the Securities and Exchange Commission in 2008 to receive municipal finance documents. (The board maintains the Electronic Municipal Market Access, or EMMA, Web site, where the public can view documents.)
Also, two of five new offices within the SEC, in compliance with the Dodd-Frank Act, will address municipal finances. The Office of Credit Ratings (OCR) examines and monitors the nine registered nationally recognized statistical rating companies (including S&P, Moody's and Fitch). The Office of Municipal Securities, which had been delayed for funding reasons, is going ahead under Commissioner Elisse B. Walter, and it is charged, among other things, with adopting permanent rules for the registration of municipal advisors.
The OCR issued its first annual report on September 30, 2011, which singled out two smaller rating agencies for failing to follow their policies and procedures affecting the rating of asset-backed securities. Unfortunately, according to an SEC spokesperson, the OCR will not be identifying rating agencies by name in its reports. Overall, the OCR praised the agencies for responding to the office's suggestions.
Outside of government, securities data provider Morningstar plans to launch municipal market credit information and services for registered reps, asset managers, banks and insurance firms.
But even though investors will have more access to data, it won't always be fresh. Municipalities are sluggish in getting their documents filed with the Municipal Securities Rulemaking Board, says Richard Ciccarone, chief research officer for Oak Brook, Ill.-based McDonnell Investment Management, which manages more than $13 billion in assets, largely muni bond portfolios, for institutions and high-net-worth clients. "There's just greater transparency provided in fresh documents, which helps put the appropriate price on bonds," says Ciccarone, who previously co-headed fixed income at Van Kampen Investments Inc. "At times, municipal pension information can lag by a year."
The pension data, he says, can double a municipality's net direct and total liabilities outstanding. Yet, "There's no government penalty for cities that fail to file, even on EMMA," notes Ciccarone, who is also CEO of bond research firm Merritt Research Services, in Hiawatha, Iowa, which provides an ongoing database of current municipal credit information to subscribers. The Virgin Islands can take up to two years with its information. "The best among states and territories in the past five years is New York state, which filed inside of 120 days," he says. Congress can't penalize the states because of the Tower Amendment, which prohibits the federal regulation of municipal securities. But the SEC is looking at how to shorten the reporting times, Ciccarone adds. (The commission released a 165-page report on July 31 calling for major reforms in the municipal bond market.)
A positive note on the disputed tax-free status of munis: Even if the bipartisan "Super Committee," charged by Congress with recommending cuts to the federal budget, fails to act, thus triggering automatic cuts at year's end, they won't strip munis' tax-exempt status, which costs the federal government billions annually, says Colby. "For the last couple of decades, it's been challenged at points in time." Without success ... so far.