Municipal Finance Implications of Strong Dollar; 2015 Year of Muni Pensions?

Categories: Commentary, Uncategorized |

January 28, 2015

This week we highlight the potential implications of a strong dollar for municipal budgets and revenues, and ponder whether 2015 will be an even bigger year for municipal pension issues.

Strong Dollar and Low Energy Prices Could Lead to Revenue Issues

We (Mike C. and Mark H.) were in Houston last week for the NFMA’s Advanced Seminar on America’s Urban Agenda.  While the Houston site was likely chosen many months ago, it was a particularly good choice for a gathering of municipal analysts who monitor the economic health of our cities and States.

Houston is both a major maritime port, and a leading oil refining and energy distribution center.  The prominence of these two industries means that Houston is exposed to the two major economic drivers likely to have the most impact on municipal economic (and potentially fiscal) health in the near to medium term:  the impact of a strong U.S. dollar on international trade and low oil prices.

While the Federal Reserve has indicated a desire to raise short-term rates based primarily on domestic economic conditions, international developments will have more of an impact on those domestic conditions and U.S. rates than the Fed would like to admit.

The most direct channel for international conditions impacting the U.S. is the currency market.  A strong dollar will inhibit exports (hurting domestic industries) and, through lower prices for imports, put downward pressure on domestic inflation.


Fourteen States derive greater than 10% of their GDP from exports.  Export leaders Louisiana and Texas are already likely to see declines due to lower energy prices.  Pressure on Washington’s economy from lower exports due to dollar strength could be even greater if lower fuel prices reduce demand for new, more fuel-efficient planes.

Fiscal problem child Illinois (9.81%) is #15 on the U.S. State exporters list.

We are concerned that many States have not adequately planned for the impact of negative currency and energy development on their revenues.  We suspect that revenue assumptions in FY15 budgets are in some cases likely to prove too optimistic.

2015 Could be Bigger Year for Municipal Pension Issues than 2014

While at the NFMA Seminar in Houston, Mike C. moderated a panel on the pension challenges facing our cities.  Panelist Les Richmond from Build American Mutual pointed out that the impacts of increasing life-expectancies and the smoothing process of valuing fund assets is leading to higher ARC’s (annual required contribution) for city pension plans.  Unfortunately, many cities are responding by lowering the percentage of their annual ARC paid.  These trends have lead to lower pension funded ratios.

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Of the ten largest U.S. cities by population, only three have seen improved pension funding levels:  San Antonio, San Diego, and Philadelphia.

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At the State level, the situation is not much better.  We complied a list of the States with the worst pension situations (low funding ratio, low ARC % paid, or both).  While the list contains few surprises, we thought it worth sharing.

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It is perhaps hard to believe, but we think pensions will likely be an even more important issue in 2015 than in 2014.  With newly elected leaders trying to address problems, potential resolution of legal challenges to reform, and the implementation of GASB 68, pension issues will likely bring additional volatility to municipal credit this year.

This week the Lumesis team will be mostly local, with a couple of trips to NYC.


Have a great week,

Michael Craft, CFA


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