NEW YORK — The municipal securities market is beset by problems that defy easy solutions, academics and experts told municipal analysts Friday.
The comments came at a symposium about municipal fiscal stress, bankruptcy, and pensions that was sponsored by the National Federation of Municipal Analysts and the Municipal Analysts Group of New York.
The groups gathered to parse what they viewed as an ill-informed debate — spurred in part by analyst Meredith Whitney’s prediction of “hundreds of billions” of dollars of muni bond defaults when she appeared on “60 Minutes” last year — about the muni market’s overall strength and the specter of muni bond defaults stemming from unfunded public-sector pension obligations.
“We’ve got a camp of people who believe this is just an overblown, hyped crisis,” said Bob Donahue, a director at Deutsche Asset Management. “[But] as much as Meredith Whitney has been beaten about, there is some kernel of truth that has resonated.”
Several of the panelists suggested that recession-battered state and local governments have eased their pension problems, which remain serious in some cases, by increasing employee contributions and trimming future benefits.
“States haven’t just been sitting and ignoring these issues,” said Liz McNichol, a senior fellow at the Center on Budget and Policy Priorities. “And the current problems are manageable.”
On a separate panel, David Bean, director of research and technical activities at the Governmental Accounting Standards Board, declined to comment about the Public Employee Pension Transparency Act.
That bill, introduced in February by Rep. Devin Nunes, R-Calif., would require state and local governments to submit annual reports to the Treasury Department disclosing detailed information about their pensions plans, including unfunded liabilities determined on the basis of a Treasury rate, roughly 4% to 5%, rather than the more commonly used market rate of return on investments, which is roughly 7% to 8%.
Under the bill, and a companion bill in the Senate introduced by Sen. Richard Burr, R-N.C., any state or local government whose public-sector pension fails to provide the required information would be barred from issuing new tax-exempt bonds as well as taxable bonds that receive federal subsidy payments, such as Build America Bonds, until it files the necessary report.
In his presentation to the analysts’ groups, Bean noted that in June, GASB is slated to release an exposure draft governing employers’ pension accounting and financial reporting. GASB released its preliminary views on the subject last June, and accepted public comments.
GASB’s proposal calls, in part, for state and local governments to discount their future pension liabilities using the long-term expected rate of return on the plan.
“This is not a number that’s pulled out of the air,” Bean said. “This is based on solid science.”
An idea posed by some Republican lawmakers to give states facing severe fiscal distress the authority to file for bankruptcy protection, however, did not attract support from the panelists.
“I don’t think states will go quote unquote bankrupt,” said Eileen Norcross, a senior research fellow at George Mason University’s Mercatus Center. “I don’t know that it’s necessary.”
Still, even among regulators, uncertainty remains.
Lynnette Hotchkiss, the executive director of the Municipal Securities Rulemaking Board, said the MSRB is just beginning to weigh how its new oversight of municipal entities, an outgrowth of the Dodd-Frank Wall Street Reform and Consumer Protection Act, might translate into public-sector pension regulation.
“We’re really trying to get our arms around that,” she said in response to a question from the audience. “To some extent, we’re just starting to scratch the surface.”
Since Dodd-Frank, the board has focused primarily on issuing rules to regulate municipal advisers, Hotchkiss said.
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