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NEW THIS WEEK,  September 17th, 2018: 

Use of Foreign Trade Zones and Economic Development Projects to Help Deal with Financial Challenges
Cincinnati — Taking a Look at One City’s Approach to Alleviating the Burden of Pension Legacy Costs
Daily Municipal Bond Yield Curve  — Interest Rates on the Rise
New Issue Muni Bond Weekly Calendar   – Week of September 17, 2018  

MuniNet Weekly Featured Bond:  State of Colorado Certificates of Participation


Use of Foreign Trade Zones and Economic Development Projects to Help Deal with Financial Challenges and Lack of Sufficient Tax Revenues

 

by James E. Spiotto, Co-Publisher of MuniNet
The new reality of tariff wars and 20% surcharges on foreign manufactured parts and goods

The tax reform of 2018 created a 20% surcharge on foreign manufactured goods or parts coming into the United States. Recent U.S. tariffs on imported steel and aluminum has triggered reciprocal tariffs on U.S. exports to foreign countries. The ability to attract new business and help current businesses in the Midwest to expand will depend on the states’ ability to deal with this new reality. One such method is the use of foreign trade zones.

What is a Foreign Trade Zone?

Around the world there are specially designated areas within countries’ borders that are established and controlled by national legislation and through which the receiving, handling, manufacturing, repurposing, and exporting of goods can occur free from import duties and taxes.  These areas are usually known as free trade zones.

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Cincinnati — Taking a Look at One City’s Approach to Alleviating the Burden of Pension Legacy Costs

 

Cincinnati Retirement System Funding Ratio

Legacy costs, especially for mature cities, can carry a long lasting burden on the finances of municipalities challenged by massive unfunded pension liabilities and retiree health care costs.   Those cities most affected by these burdens also typically experience high levels of fixed costs required for debt service and OPEB payments in addition to their pension contribution requirements.   Measured against their total spending (i.e. governmental activities expenditures), high fixed costs place a squeeze on current tax dollars to cover operations, provide for public safety and the costs to repair and replace infrastructure.

Once they are in place, trying to lower legacy costs by restructuring public pensions can be like moving a mountain whenever benefits and expectations are already locked into the mindset of active and retired employees.   The city of Cincinnati serves as a good example of a city that in recent years has tried to tackle the problem.  In its case, it took nearly seven years of confrontation and negotiation to make the effort happen.

Cincinnati’s Collaborative Agreement 

Out of the city’s four pension plans, the City of Cincinnati maintains one single employer plan, the Cincinnati Retirement System (CRS), which has been in place for the benefit of its employees since 1931.  The CRS is the largest of all its plans and the source of the city’s highest unfunded pension liability.   The city’s other three plans are smaller liability cost sharing multi-employer plans.

In the aftermath of the credit crisis, subsequent to 2007, it became evident that the  CRS pension plan was headed on a serious negative path that threatened to spiral downward.   Taking the initiative to stem a potential fiscal crisis, the city initiated negotiations with its unions, which led to a contentious standoff.  After nearly five years of litigation to reach a Collaborative Agreement, it took another 15 Months of negotiations to reach a final deal. On October 5, 2015, U.S. District Court Judge Michael R. Barrett granted final approval.  Coming to terms was no easy task but the issue gained traction as a recognized crisis when the Governmental Accounting Standards Board’s new accounting rules went into effect in 2015, which required the plan to automatically reduce its discount rate from 7.5% to a blended discount rate of 5.59%.  Under GASB’s new pension rules, a reduction in the discount rate is required and triggered whenever the plan’s assets were deemed insufficient to cover all of the plan’s retirement benefits.  The net impact of the discount rate change on Cincinnati’s Retirement System plan reduced the overall funding rate to only 57.5% as reported in the 2015 CAFR from 64% in the previous year, a trend that threatened to go even lower in future years.

The agreement that went effective immediately was designed to “share the pain” across all parities with the city making major new contributions and the retirees receiving reduced benefits.

Key actions taken as a result of the negotiation to resolve the $862 million unfunded pension liability were:

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Combined State Pension Plan Funding Ratios Decline For Second Straight Year Since New GASB Rules Effective


The chart below shows the combined Single/Agent and Multi-Employer pension plan funding ratios (state liability share only) since 2015, when the Governmental Accounting Standards Board made effective Rules 67 and 68.  These new rules made it possible to calculate the state liability share for multi-employer cost sharing plans as well as the single or agent plans that are most frequently cited when assessing state pension plans.  The chart below shows the median consolidated pension plan funding ratios for the states.  The state with the highest combined pension funding ratio is Wisconsin with a 99% ratio,  while the lowest is New Jersey at 23%.  Alabama was not yet available at the time of this compilation.


Combined State pension funding ratios


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