July 7, 2014
Hoping everyone had a great holiday weekend. This week, I start with a view on New Jersey’s pension mess and briefly revisit the GDP decline for the first quarter (last time until second quarter data is released). Mike Craft will then drill down into local employment statistics.
New Jersey Has a Pension Problem
The first step to recovery is admitting you have a problem. It seems Governor Christie is trying to move New Jersey towards recovery (at least on the pension side of things). Last week, Governor Christie not only made good on his promise to cut pension funding in order to close a budget gap (a really big one), he went a step further and proclaimed that changing the pension and benefits systems is his main economic priority for 2014. Christie’s message isn’t unique or new amongst elected officials at the State and local level, but his national status as a politician and potential 2016 Presidential candidate raise the stakes. New Jersey’s funded ratio of 56% for FY 2013 is among the ten worst in the country (along with Illinois, Connecticut, Kansas and Indiana) – see below.
As alluded to above, there are quite a few examples of where municipalities have revisited the sacrosanct pension and other retirement benefits in an attempt to gain control of runaway unfunded liabilities. Whether these fixes are the elixir hoped for is to be determined. The same will hold true for the Governor if he is able to successfully negotiate changes (if not what are his alternatives? Tax hikes on one of the most highly taxed States?).
This leads to the other part of the pension equation that needs (screams for) attention – the assumed rate of return or discount rate. As I have noted previously in this commentary, several prominent economists and Moody’s suggest the rate should be somewhere around 5% or lower. New Jersey’s primary pension plans are at 7.9% (DIVER tracks the individual plan data for all State plans and plans of cities with populations greater than 100,000). Perhaps more needs to be addressed than the structure of benefits.
The Bond Buyer on June 30 reported a real life example of the importance of assumed return rates (“Illinois Pension Return Rate Change Could Cut Savings”). Three of Illinois’ pension funds revised their investment rate of return to 7.5% (from 8% in 2012 and 9% before then) and, as a result, the fiscal 2015 payment (had it not already been set) would have been some $500 million higher – I guess that means factor the additional $500 million in the FY 2016 number. Think of what New Jersey didn’t contribute this year and what will happen if there is a budget shortfall, a change in discount rate or who knows what else (even with plan changes). Implementation of the new GASB pension reporting standards, while increasing transparency and comparability, are also likely to make the reported numbers look worse and raise pressure on politicians to address the issues they have been avoiding for so long.
DIVER Analytics subscribers can access pension data across the platform. If you are interested in obtaining plan level data for your use, please contact us at inquiries@lumesis.com.
1Q GDP
Last week we spent some time on the revised GDP numbers for the first quarter – a decline of 2.9%. After a bit more diligence, a few more tidbits and facts to contemplate.
- Roughly 2/3rds of the downward revision was from healthcare spending and the rest from falling exports and rising imports (on the exports front, please recall prior commentaries where we focused on the exports by State)
- GDP has grown only 1.6% over the past 12 months; below the 2% level many had hoped for and much less than the 3% rate the economy averaged between 1950 and 2000.
A Warning on Hospitals; What Happens to the “Unmerged”?
Healthcare Note: For those of you with exposure in the sector, courtesy of John Mauldin, ‘The New Normal of Healthcare Spending’, June 28, 2014:
“I still think the next shoe to drop may be in the third and fourth quarter when hospitals begin to realize that they have significant cash-flow problems. Estimates are that we have about 10% too many hospitals, and the creative destruction of the new healthcare system is going to relieve us of that excess. Only the strong and well-managed will survive.”
The last several years has seen many mergers in the municipal health care space as larger providers build scale and smaller providers realize that success in the post-ACA world will likely involve capital demands, systems and efficiencies they can’t provide themselves. Mr. Mauldin’s pessimism highlights the perils that face the small healthcare providers in competitive markets who have not yet found a merger dance partner.
Payrolls Surprise to the Upside; Drilling Deeper Reveals Variability in State and County Labor Markets
Last week’s non-farm payrolls release was surprisingly strong at the headline level. A closer look at employment statistics at the State and local level reveal wide differences across the country. The most recent State level unemployment rate illustrates this dispersion.
The list of States with the highest unemployment rates (yellow bars) includes several of particular interest to muni bond investors: Nevada, Michigan, Illinois, California and Connecticut. New Jersey’s presence on this list serves as a reminder that the challenge of solving the pension problem discussed above is complicated by an economy that continues to lag.
Drilling down to the county level also shows substantial differences. A look at the 50 largest counties by population reveals that Los Angeles has exhibited above average job growth during the last year. While Los Angeles contains 3.1% of the national population, it has accounted for 4.7% of national job growth since May 2013.
Despite this strong job growth, the unemployment rate in Los Angeles remains high at 8%. In addition to Los Angeles, other job growth over-achievers are Harris County, TX and Maricopa County, AZ. A notable under-achiever is Cook County, IL. Cook and Los Angeles offer an interesting contrast. Los Angeles’s DIVER Geo Score is 8.2, while Cook’s is 2.7. Cook’s peak unemployment level for this cycle was lower than Los Angeles’s (11% vs. 12%). By May of 2013 their unemployment rates were the same (10%). Currently, Cook’s unemployment rate is lower than Los Angeles’s (7.6% vs. 8%), but this is misleading. Cook’s job growth has been lackluster; the improvement in the unemployment rate is due to a shrinking labor force. The size of Cook’s labor force has declined by -1.5% over the last year. Los Angeles’s labor force has grown slightly (+.14%), while Harris (+1.6%) and Maricopa (+1%) have both experienced strong growth.
All this leads back to a point we have made time and time again – the need to look at the underlying economic and demographic data for the municipalities where you or your clients hold bonds. Examining this data on a regular basis can unearth both risks and opportunities.
This week, Gregg, Tim and Pete will be in NYC on Tuesday and Mark will be in NYC Wednesday.
Have a great week,
Gregg L. Bienstock, Esq. & Michael Craft
CLICK HERE to subscribe to our weekly commentary.
NJ’s Pension Issue, A Hospital Note and Employment Data
July 7, 2014
Hoping everyone had a great holiday weekend. This week, I start with a view on New Jersey’s pension mess and briefly revisit the GDP decline for the first quarter (last time until second quarter data is released). Mike Craft will then drill down into local employment statistics.
New Jersey Has a Pension Problem
The first step to recovery is admitting you have a problem. It seems Governor Christie is trying to move New Jersey towards recovery (at least on the pension side of things). Last week, Governor Christie not only made good on his promise to cut pension funding in order to close a budget gap (a really big one), he went a step further and proclaimed that changing the pension and benefits systems is his main economic priority for 2014. Christie’s message isn’t unique or new amongst elected officials at the State and local level, but his national status as a politician and potential 2016 Presidential candidate raise the stakes. New Jersey’s funded ratio of 56% for FY 2013 is among the ten worst in the country (along with Illinois, Connecticut, Kansas and Indiana) – see below.
As alluded to above, there are quite a few examples of where municipalities have revisited the sacrosanct pension and other retirement benefits in an attempt to gain control of runaway unfunded liabilities. Whether these fixes are the elixir hoped for is to be determined. The same will hold true for the Governor if he is able to successfully negotiate changes (if not what are his alternatives? Tax hikes on one of the most highly taxed States?).
This leads to the other part of the pension equation that needs (screams for) attention – the assumed rate of return or discount rate. As I have noted previously in this commentary, several prominent economists and Moody’s suggest the rate should be somewhere around 5% or lower. New Jersey’s primary pension plans are at 7.9% (DIVER tracks the individual plan data for all State plans and plans of cities with populations greater than 100,000). Perhaps more needs to be addressed than the structure of benefits.
The Bond Buyer on June 30 reported a real life example of the importance of assumed return rates (“Illinois Pension Return Rate Change Could Cut Savings”). Three of Illinois’ pension funds revised their investment rate of return to 7.5% (from 8% in 2012 and 9% before then) and, as a result, the fiscal 2015 payment (had it not already been set) would have been some $500 million higher – I guess that means factor the additional $500 million in the FY 2016 number. Think of what New Jersey didn’t contribute this year and what will happen if there is a budget shortfall, a change in discount rate or who knows what else (even with plan changes). Implementation of the new GASB pension reporting standards, while increasing transparency and comparability, are also likely to make the reported numbers look worse and raise pressure on politicians to address the issues they have been avoiding for so long.
DIVER Analytics subscribers can access pension data across the platform. If you are interested in obtaining plan level data for your use, please contact us at inquiries@lumesis.com.
1Q GDP
Last week we spent some time on the revised GDP numbers for the first quarter – a decline of 2.9%. After a bit more diligence, a few more tidbits and facts to contemplate.
A Warning on Hospitals; What Happens to the “Unmerged”?
Healthcare Note: For those of you with exposure in the sector, courtesy of John Mauldin, ‘The New Normal of Healthcare Spending’, June 28, 2014:
“I still think the next shoe to drop may be in the third and fourth quarter when hospitals begin to realize that they have significant cash-flow problems. Estimates are that we have about 10% too many hospitals, and the creative destruction of the new healthcare system is going to relieve us of that excess. Only the strong and well-managed will survive.”
The last several years has seen many mergers in the municipal health care space as larger providers build scale and smaller providers realize that success in the post-ACA world will likely involve capital demands, systems and efficiencies they can’t provide themselves. Mr. Mauldin’s pessimism highlights the perils that face the small healthcare providers in competitive markets who have not yet found a merger dance partner.
Payrolls Surprise to the Upside; Drilling Deeper Reveals Variability in State and County Labor Markets
Last week’s non-farm payrolls release was surprisingly strong at the headline level. A closer look at employment statistics at the State and local level reveal wide differences across the country. The most recent State level unemployment rate illustrates this dispersion.
The list of States with the highest unemployment rates (yellow bars) includes several of particular interest to muni bond investors: Nevada, Michigan, Illinois, California and Connecticut. New Jersey’s presence on this list serves as a reminder that the challenge of solving the pension problem discussed above is complicated by an economy that continues to lag.
Drilling down to the county level also shows substantial differences. A look at the 50 largest counties by population reveals that Los Angeles has exhibited above average job growth during the last year. While Los Angeles contains 3.1% of the national population, it has accounted for 4.7% of national job growth since May 2013.
Despite this strong job growth, the unemployment rate in Los Angeles remains high at 8%. In addition to Los Angeles, other job growth over-achievers are Harris County, TX and Maricopa County, AZ. A notable under-achiever is Cook County, IL. Cook and Los Angeles offer an interesting contrast. Los Angeles’s DIVER Geo Score is 8.2, while Cook’s is 2.7. Cook’s peak unemployment level for this cycle was lower than Los Angeles’s (11% vs. 12%). By May of 2013 their unemployment rates were the same (10%). Currently, Cook’s unemployment rate is lower than Los Angeles’s (7.6% vs. 8%), but this is misleading. Cook’s job growth has been lackluster; the improvement in the unemployment rate is due to a shrinking labor force. The size of Cook’s labor force has declined by -1.5% over the last year. Los Angeles’s labor force has grown slightly (+.14%), while Harris (+1.6%) and Maricopa (+1%) have both experienced strong growth.
All this leads back to a point we have made time and time again – the need to look at the underlying economic and demographic data for the municipalities where you or your clients hold bonds. Examining this data on a regular basis can unearth both risks and opportunities.
This week, Gregg, Tim and Pete will be in NYC on Tuesday and Mark will be in NYC Wednesday.
Have a great week,
Gregg L. Bienstock, Esq. & Michael Craft
CLICK HERE to subscribe to our weekly commentary.