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.