April 13, 2015
This week, we discuss a new measure of pension funding, examine the impact of oil prices on labor markets in oil dependent States and discuss changing levels of food stamp participation.
Moody’s: “Pensions are a Growing Source of Credit Pressure”
Last week, Lumesis (Mike and Mark) attended a presentation by Tim Blake and Tom Aaron of Moody’s to the Philadelphia Area Municipal Analyst Society: “US Public Pensions: Past Promises, Today’s Credit Challenge”.
The presentation reinforced our view that pension issues remain a key challenge facing the municipal market.
Many analysts use % of ARC Paid as a quick measure of how responsible a municipality is acting to maintain adequate future funding for its pension needs. The chart below shows that there is a positive relationship between historic ARC funding levels and current plan funded ratios.
While the relationship between the two measures is positive, it is weaker than might be expected. Tim and Tom pointed out some reasons why this might be the case. They described the “Stealth budgetary risk from the ARC standard” (Slide 18). A key variable they identified is the amortization assumption embedded in the ARC calculation.
To address the shortcomings of % of ARC Paid, Moody’s is developing a new measure using data becoming available under GASB 67/68.
Moody’s refers to this new measure as “treading water”. A municipality is “treading water” if it is covering the actuarial present value of benefits earned in current year as well as interest on its existing pension liability.
Moody’s compared “treading water” to the amount of Actuarial Determined Contribution (ADC is analogous to ARC) received for a sample of 54 large plans that have reported under GASB 67. Roughly a third of the sample received 100% of ADC, but only a third of those were actually treading water (Slide 30).
We agree with Moody’s that pensions will “remain a broad credit challenge for the state and local sector”.
Pension issues will be the focus of several other muni analyst gatherings this week: Dean Mead of GASB will be speaking to the BMAF on Thursday; and MAGNY is hosting a debate between Kemp Lewis of Raymond James and Thomas Mayer of Kramer Levin regarding the pros and cons of Pension Obligation Bonds on Friday.
Jobless Claims Reflect Oil Patch Weakness
We have been monitoring incoming economic statistics for signs of weakness in the oil patch. The weekly unemployment claims data from the U.S. Department of Labor for the oil patch States began to show signs of weakness starting mid-January.
According to claims data released last week, the States showing the worst job market performance relative to last year are all oil dependent.
The relative stability of the labor market in Texas likely reflects the larger, more diversified economy that has been cited by many as a buffer insulating the Texas economy from oil price weakness. While we are sympathetic to the diversification argument, we believe that the more oil dependent local areas within the State could suffer.
We will be watching next week (4/21) as the Bureau of Labor Statistics releases State-level unemployment rates and the week after (4/29) when the county and city statistics are released. We think these will incorporate the growing labor market weakness reflected in the claims data.
Food Stamp Participation Driven by Economy and Policy
Last week, The New York Times published an article highlighting dramatic declines in food stamp participation in some States. As we discussed in a previous Commentary, while the number of food stamp participants has historically been a good indicator of poverty levels, since the recession the relationship to poverty indicators has weakened. This is primarily due to a loosening of eligibility requirements in the post recession years.
Food Stamp Participation and Poverty Levels
Source: USDA Office of Policy Support
Perhaps most notable about the national trends depicted in the chart above is that that during 2013, the number of food stamp participants exceeded the number of individuals defined as being in poverty.
Many analyses of public policy responses to the recession propose that we have been overly dependent on monetary policy, but this example demonstrates that fiscal policy has not been dormant.
The map above illustrates the State-by-State differences. Maine is a focus of the New York Times article. Policy changes in Maine lead to a -14.5% decline. The large declines in many other States are also due to reversals of the post-recession loosening of eligibility.
Have a great week,
Michael Craft, CFA
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