Muni Credit News November 25, 2014

Joseph Krist

Municipal Credit Consultant


A Sangamon County Circuit Court judge in Springfield found that the pension overhaul enacted in December 2013, which reduced some benefits, violated a clause in the State Constitution that makes pensions “an enforceable contractual relationship” that cannot be impaired. The decision was not unexpected nor was the subsequent announcement by the state’s attorney general, Lisa Madigan, that she would appeal the decision to the State Supreme Court.

The core issue to be decided is the meaning of  a provision in the State Constitution that reads: “Membership in any pension or retirement system of the state, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.”

Illinois argued that the constitutional clause was not airtight based on the authority known as their “police power,” which gives them the duty and the legal tools to protect the safety and well-being of their citizens. The state argued that the pension system’s breakdown was pulling money away from other essential services and making it harder for the state to borrow, causing an emergency that justified the use of such powers. In its brief, the State asserted that opponents wanted to elevate pensions “to the status of ‘supercontracts’  that were exempt from the state’s duty to use its policing powers. That premise is without any support, as the text, history and legal precedent surrounding the pension clause all make clear.”

The judge did say in a court hearing on Thursday, that no court had used the “police powers” argument to authorize changes in public pensions. The changes enacted last year tried to save money by raising the retirement age for many public workers and reduced cost-of-living adjustments. As an offset, it also lowered employees’ required contributions toward their pensions and gave the system’s trustees the power to go after the state if it failed to make regular pension contributions, as it often has in the past. The mix of cuts and inducements was designed in the hope of reducing the likelihood of litigation. Over all, the package of changes was said to produce savings of $160 billion over 30 years, but many people questioned that estimate.

Governor-elect Bruce Rauner released a statement after the decision in which he said “Today’s ruling is the first step in a process that should ultimately be decided by the Illinois Supreme Court. It is my hope that the court will take up the case and rule as soon as possible. I look forward to working with the Legislature to craft and implement effective, bipartisan pension reform.”.


The University of California Board of Regents gave preliminary approval last Wednesday to a plan to raise tuition 27.6 percent over five years.  Gov. Jerry Brown  has insisted that if the Regents went ahead with the increase, they would get less from Sacramento, not more, and he bolstered his position by appointing two allies this week to vacant seats on the board. Under the plan, undergraduate tuition and fees for California residents would rise from $12,192 a year to as much as $15,560 in 2019-20. Out-of-state students, who now pay more than $35,000 in tuition and fees, could see those charges rise to nearly $45,000. Those figures do not cover room and board, now about $14,000 for all students.

California’s prices are far above the national average of about $9,100 in tuition and fees for public four-year colleges, but below some, including elite public institutions like the University of Michigan and the University of Virginia. And California officials say that with financial aid to low- and middle-income students, more than half of California residents pay no tuition, and that would remain true after the increases. A committee of the board voted 7 to 2 to approve increases of up to 5 percent in each of the next five years. A vote of the full board is expected Thursday and it appeared likely that the plan would pass.

The governor, who sits on the board, asked the Regents to delay voting on the plan until their next meeting in January, and to form a committee to find ways for the university to overhaul the way it does business. Starting during the recession, California cut support for the university system by $1 billion a year, prompting tuition increases of more than 60 percent, after inflation.

Systemwide, state support has rebounded partly in the last two years, and now supplies $2.8 billion of the university system’s nearly $7 billion core operating budget. But as Regents and university trustees noted repeatedly, it remains well below its peak, despite increased costs and enrollment that has grown to more than 230,000 students.

Nationwide, many State governments reduced support for public universities during the recession, driving big tuition increases and drawing criticism from political leaders. In several states, university administrators have frozen tuition, while protesting that they are still underfunded by their states.

Gov. Brown called on the university to look into changes like three-year bachelor’s degrees, concentrating some specialties at specific campuses, raising the number of students admitted as transfers from community colleges, sharply increasing online courses, and giving college credit for work experience. Those ideas are being debated across the country as cost-savers and ways to get more people through college, but many educators see them as an erosion of standards.

Gov. Brown has proposed 4 percent annual increases in state support for the system, but others contend that is not nearly enough. They said that if the state gave more, they would shrink the tuition increase. The governor said he would withhold the 4 percent increase if the regents went ahead with raising tuition.


In the face of a revolt by townspeople, the Board of Health in Westminster, Mass., voted Wednesday to drop a proposal to ban the sale of all tobacco and nicotine products. The ban would have made the small town in north-central Massachusetts the only place in the country where no one could buy cigarettes, cigars, e-cigarettes and related products. The health board felt it had a moral obligation to restrict young people’s access to tobacco. But at a public hearing a week ago, 500 people attended, almost all of them to protest the proposed ban. The hearing became so raucous that the board ended the proceeding just 20 minutes after it began.

Local citizens said that they did not approve of smoking but saw the ban as an encroachment on civil liberties. They were also worried that it would drive smokers to spend their money elsewhere, hurting the eight merchants in Westminster who sell cigarettes. The board had planned to accept written comments on the proposal until Dec. 1 and then make a decision on whether to impose the ban. But at its regular meeting Wednesday afternoon, the board voted 2 to 1 to rescind the proposal, saying it had already heard the town’s objections loud and clear.

After the aborted public hearing, angry citizens had begun to circulate a petition to hold a recall election of the board members; it was not clear whether that effort would continue after the board’s vote to drop the ban.


State Controller John Chiang released his monthly report covering California’s cash balance, receipts and disbursements in October 2014.  Total revenues for the fourth month of Fiscal Year 2014-15 were $6.0 billion, coming in above Budget Act estimates by $662.2 million, or 12.3 percent. For the fiscal year to date (July 1-October 31), total revenues reached $27.9 billion, beating estimates by $1.2 billion, or 4.5 percent.

“Four months into the fiscal year, California’s coffers overflow by $1.2 billion. The news comes on the heels of two other positive developments:  the vote to strengthen California’s rainy-day fund through Proposition 2, and the credit upgrade that followed one day later,” Chiang said. “To further boost California’s credit worthiness and sustain prosperity on a long-term basis, we must next tackle the growing $64 billion unfunded liability stemming from providing health benefits to our retired public workforce. To not only protect taxpayers, but also the retirement security promised to our firefighters, teachers, and other providers of critical public services, we can no longer deny, delay, or equivocate.”

Income tax collections for the month of October came in $363.5 million, or 8.4 percent, above estimates.  Corporate tax revenues came in $303.6 million, or 1,222 percent, above estimates. Sales taxes fell short of estimates by $37.4 million, or 4.1 percent, for the month. As of October 31, the General Fund accumulated outstanding loans of $17.8 billion, which was down $2.6 billion from what the State expected to need by the end of October.  This total was financed by $15.0 billion of borrowing from internal state funds and $2.8 billion of borrowing from banks and other outside investors.


In yet another attempt to address the municipal market’s well-known disclosure opacity, issuers face a Dec. 1 deadline to report disclosure violations to the Securities and Exchange Commission. In March the Commission launched an initiative, called MCDC, where issuers and underwriters could self-report inaccurate statements in bond documents and receive favorable settlement terms.  By law, issuers must describe in bond sale documents when they did not comply with federal disclosure requirements within the previous five years. It requires issuers to scour documents that were posted before the Municipal Securities Rulemaking Board centralized disclosures on a single web platform. Issuers must also find out if underwriters disclosed violations, including underwriters that may be out of business. Smaller issuers with fewer resources are struggling to figure out if they even have any violations to report. In the last two years, the SEC has charged cities, school districts and a state with failing to disclose required information. The SEC will likely review submissions and issue cease-and-desist orders.

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