The Municipal Securities Rulemaking Board (MSRB) is a Congressionally
chartered, self-regulatory organization that ensures the integrity of
one of the country’s most important capital markets. Accessed for
centuries by state and local governments to finance trillions of dollars
in infrastructure projects, the municipal securities market is essential to
meeting the local needs of the nation’s residents.

Created in 1975, the MSRB oversees the $3.8 trillion municipal market
and ensures that investors, state and local governments and other
municipal entities can participate in this market and engage in fair
and efficient transactions to finance projects in the public interest.

Development and maintenance of the country’s infrastructure is
primarily a function of state and local governments that issue municipal
bonds. This paper is intended to:

1) Clarify the role of the municipal securities market in financing
U.S. infrastructure;

2) Serve as a primer on municipal securities and their relationship to
federal programs and private partnerships; and

3) Provide considerations for policymakers seeking to optimize
municipal securities and integrate private investment with the
public finance of infrastructure.

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Financial pressure from pensions, other expenditure needs and slow revenue growth has
prompted many state and local governments to attempt pension benefit reforms. State court
decisions that uphold or overturn reform efforts, and the extent to which benefit changes
are an option for improving pension funding, can significantly affect the credit quality of
governments within a given state. The pace of legislative reform efforts and corresponding
judicial decisions is elevated and ongoing across the country.

Key legal questions often center on the flexibility to alter prospective benefits
for current employees and/or cost-of-living adjustments (COLAs) for current
employees and retirees. Benefit changes that affect only new employees generally take
years to produce material savings. Some governments, such as the State of New York (Aa1
stable), are limited by their state constitutions to only these types of changes. Courts have
decided that other governments, such as Oregon (Aa1 stable), may not impair accrued
benefits, but can reduce prospective benefit and COLA accruals for current employees.

Judicial decisions on benefit changes can have material credit effects for
governments. For example, the State of New Jersey (A3 stable) averted a substantial
liability increase in 2016 when its highest court upheld a COLA suspension, while Arizona
(Aa2 stable) governments face substantial pension cost increases associated with two legal
decisions by the state’s Supreme Court. A ruling on the breadth of constitutional pension
benefit protections by the Illinois (Baa3 negative) Supreme Court was a driving factor
when we lowered the City of Chicago’s (Ba1 negative) rating below investment grade.

Legal flexibility to achieve reforms does not necessarily translate into practical
feasibility or political willingness to curtail liabilities. Governments such as the
State of Ohio (Aa1 stable) and the City of Dallas (A1 negative) have implemented
pension benefit reforms to avoid or limit rapidly growing costs. The extent to which these
governments can rely on additional reforms to prevent pensions from pressuring budgets
in the future is uncertain. Conversely, facing a legal prohibition, the State of Arizona
obtained voter approval for a constitutional amendment that enabled modest changes to
certain COLA-type benefits.

New strategies unrelated to benefit changes are gaining momentum, with varying
credit impact. The City of Jacksonville, FL (Aa2 stable), among others, has sought to
address rising pension liabilities and costs with dedicated, future revenue streams. The
State of Missouri (Aaa stable), for example, is seeking liability reductions through voluntary
buyout offers.

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New research shows that funding status has little correlation with a pension fund’s ability to pay its promised benefits, and NCPERS urges policymakers to stop trying to shut down public pensions.

Some policymakers want to close participation in a public pension plan to all new hires, cut benefits and increase employee contributions, or convert defined benefit (DB) plans pensions into defined contribution (DC) plans. They usually cite the underfunding of public pension plans as the reason for these ideas.

New research shows that funding status has little correlation with a pension fund’s ability to pay its promised benefits. Michael Kahn, director of research for the National Conference on Public Employee Retirement Systems (NCPERS) used data from the annual survey of public pensions by the U.S. Census Bureau for 1993 to 2016 and other data and found that during the last quarter century or so, state and local pension plans have always been able to meet their benefit and other payment obligations.

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Every state has a substantial number of laws that require private market health insurance to cover specific benefits and provider services. An introduction to such laws is provided below, titled Understanding Mandated Health Insurance Benefits.

State Mandated Benefits

Traditionally states counted health mandate laws to include required categories of up to 70 distinct “benefits” as well as “health providers” (such as acupuncturists or chiropractors) and “persons covered” (such as adopted children, handicapped dependents or adult dependents). Adding up these laws, there are more than 1,900 such statutes among all 50 states; another analysis tallies more than 2,200 individual statute provisions, adopted over a 30+ year period.

Federal “Essential Health Benefits (EHB)

The Patient Protection and Affordable Care Act (ACA) provides for “essential health benefits,” defined as health treatment and services benefits in sections 1302(a) and (b). These combined benefit requirements apply to all policies sold in Exchanges and in the small group and individual markets, effective October 1, 2013. The benefits are covered for individual patient treatments beginning January 1, 2014 and continuing at least through policy plan years 2017 and 2018. ^1,2

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Key Points

 In past findings, public funds struggled to outperform endowments and foundations (E&Fs), as reported in our paper titled “Can Public Funds Compete?” dated Winter 2003/20041.

 In a study conducted in 2011, we confirmed that public funds can compete with returns above E&Fs2.

 An update on this study through 2016 concluded that public funds have continued to outperform E&Fs on average by 100 basis points over the last five years ending December 31, 2016.

 Public funds had larger allocations to public equities—namely U.S. equities versus E&Fs, which has contributed to outperformance.

 Public funds’ preference for private equity versus hedge fund exposure helped boost relative returns.

 Public funds typically have a cost advantage given their size (economies of scale).

Past Studies

Our original 2003 research1 indicated that public funds underperformed E&Fs. In an update with data through 20112, a reversal occurred where public funds outperformed E&Fs, as shown below. We compared public funds to E&Fs given that, while they are very different in many areas, they are very similar in their total return approach to investing.

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The Milliman Public Pension Funding Study annually explores the funded status of the 100 largest U.S. public pension plans and reports the plan sponsor’s own assessment of how well funded a plan is. As of June 30, 2017, the aggregate funded ratio is estimated to be 70.7% as assets experienced healthy growth. Market performance since the last fiscal year ends have been strong, and we estimate that aggregate plan assets have jumped to $3.44 trillion as of June 30, 2017.

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Come join the IPPFA for a regional seminar being held at Jumer’s Hotel/Casino Rock Island, Illinois.

For over 30 years, the IPPFA has offered public pension trustees the best and latest in trustee training education, striving to offer the best available training. Please join us for sessions in ethics, investment procedures, fiduciary responsibilities, and legal and legislative updates, all presented by nationally renowned speakers.

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The brief’s key findings are:

• Bond rating agencies have begun accounting for public pension funding and have cited pensions in several downgrades.
• As a result, state and local governments see that their pension finances could threaten their ability to borrow at affordable rates.
• This study examines the impact of both pension finances and pension reforms on borrowing costs from 2009 to 2014.
• The results show that a higher ratio of unfunded pension liability to government revenue is related to increased borrowing costs.
• Pension reforms appear to reduce borrowing costs but the result is not statistically significant, perhaps because those making changes also had poor general finances.

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Come join the IPPFA for a regional seminar being held at NIU Campus in Hoffman Estates, Illinois.

For over 30 years, the IPPFA has offered public pension trustees the best and latest in trustee training education, striving to offer the best available training. Please join us for sessions in ethics, investment procedures, fiduciary responsibilities, and legal and legislative updates, all presented by nationally renowned speakers.

Register NOW