Connecticut’s state capital, Hartford, is the latest municipality to have its debt rating cut to “junk” status.
In fact, Moody’s was the second credit agency to downgrade Hartford, and give the city a negative outlook.
The move impacts a staggering $500 million of outstanding debt.
Plus, the downgrade comes as the city faces a challenging liquidity outlook. And the city projects a 2018 fiscal deficit of $50 million.
Consequently, it’s no wonder the city is having trouble attracting capital.
Especially as officials gear up for debt restructuring talks with current bondholders. All told, debt-service costs are expected to balloon to $83 million by 2023.
As a result, Hartford wants extra funding from Connecticut to make ends meet.
Unfortunately, the Constitution State’s financial situation is also in tatters as corporations like General Electric and Aetna flee for tax-friendlier destinations.
Now the state’s left holding the bag. Consider …
- The state’s pension obligations consume half the budget.
- A plunge in tax revenues puts the state in a weak financial position.
- Connecticut has one of the nation’s highest state income-tax rates.
In the meantime, Illinois dances with a junk debt rating.
Even after cobbling together a state budget for the first time in three years, Illinois remains eerily close to being the first state with a “junk” credit rating. (I talked about the Illinois debacle last month.)
The Land of Lincoln faces unresolved issues of funding government-employee pensions, public schools and $15 billion in past-due bills. You read that right: $15 billion in bills!
It’s easy to see why the state’s in this mess: Years of political dysfunction, the inability to address long-term liabilities, and a volatile revenue stream.
Worst of all, the latest budget came with accounting tricks that paper over swelling unfunded pension liabilities.
For example, officials kicked the can down the road by jiggering pension funding requirements.
How? By maintaining an unrealistic investment return outlook — or discount rate at 7%. This rate lowers the present value of future liabilities.
Result: More money to burn by stiffing pensioners who paid into the system and greater risk for taxpayers.
The situation in Illinois resembles a highbrow Ponzi scheme: It works until officials run out of money.
Unfortunately, the underfunded pension problems go beyond Connecticut and Illinois.
Take a gander at the latest retirement stats …
According to the U.S. Bureau of Labor Statistics, the over-65 segment of the population is expected to be the fastest-growing demographic in the workplace by 2024. That’s going to place a massive amount of stress on our system — much more than we already have.
Plus, recent data from Pew Charitable Trusts tracked 73 of the nation’s largest state-sponsored pension funds and found some had more than 50% exposure to alternative investments. Those are risk-packed investments that could potentially backfire.
In fact, what happens if these aggressive bets don’t work out as planned? According to June estimates from Moody’s, total net pension liabilities (NPLs) surpassed $4 trillion in 2016. By their calculation, a negative economic turn could produce a mind-boggling 59% rise in net pension liabilities by 2019.
This is the reality we face.
And that’s why it’s more important than ever to determine your retirement objectives and make sure those revenue streams are something you can live with, even in the worst-case scenario.
Good investing,
Mike Burnick
Jim Bennett July 30, 2017
Connecticut has two main problems. First, it is the third smallest state in the nation, and an alarmingly high percentage of it is off the tax rolls for one reason or another. This severely reduces the revenue stream available. As a for instance, over 50% of the City of Hartford is tax exempt. And the same is true or worse in a number of its cities.
The second problem is that there are 169 separate towns and cities each of which has a government complete with overhead. This is not duplication, it is multiplication. The problem had its roots in colonial New England, and should have been changed long ago. The systems defenders talk nostalgically about “quaint” Connecticut, but quaint is very expensive.
As far as the underfunding goes, the Legislature has treated the pension funds as a piggy bank for generations. Shorting the contributions has been one of the standard devices for balancing the budget.
Wm H Scott Jr July 29, 2017
I don’t understand how State/ Municipal governments don’t accrue for Unfunded and Health Care Liabilities , private Business has to .
It doesn’t matter which Party we’re talking about. You can’t keep thinking this can be kicked down the road any further. Shame on all the Elected Officials
Bill Scott ( just another stupid Taxpayer)
WasteLand Warrior July 26, 2017
tick, tick, tick, tick…BOOM!
Bruce July 24, 2017
My city of 60,000 in Northern California runs out of cash in eighteen months and the Council members sit there paralyzed. There must be something we taxpayers can do to stave off bankruptcy, but there doesn’t seem to be anyone to lead the attempt before it’s too late. We need new ideas and help from any quarter.
CHUCK MO July 25, 2017
Look at all the heavy Blue States and you see the exact problem as in Conn. and Illinois etc. The Unions run California and the people constantly elect Democrats who are shills of the Unions.Look at Vallejo and San Bernardino which have already declared Bankruptcy. Look at your unfunded Pensions. You have one of the highest if not the highest Sales Tax in the Union . Your Governor Jerry Brown even commented that the Correction Union gave him the election. Look at the history of Pat Brown another Governor who was his Father. I am a Native son and couldn’t leave soon enough.
Jean July 28, 2017
You’re right about the Dems, they’re the ones responsible for paying off all the immigrants with food stamps, Medicaid, etc for votes. The Blue States are a giant sucking machine on the taxpayers, who blindly allow it all to continue because they got sucked in by political correctness.
Olcay July 24, 2017
Thank you mike:)
JEAN FLEMING July 24, 2017
WOW WE SHOULD HAVE SEEN THIS COMING.
John B. Armesto July 24, 2017
The **** is going to hit the fan as more baby boomers retire. Hopefully people are not totally dependent on fantasy pensions.