Michael Imber Talks to The Bond Buyer About Pension Funding and Public Sector Innovation

Paul Burton: Welcome back everybody. I'm Northeast Regional Editor Paul Burton at the Bond Buyers National Outlook Conference at the Metropolitan Club here in Midtown Manhattan. We hope you're enjoying our coverage of the conference. Our next guest is Michael Imber. He is a Managing Director in EisnerAmper's Public Sector Advisory Practice. Michael has extensive experience counseling clients on bankruptcies, workouts and municipal consulting. He represented major unsecured creditors in the Detroit bankruptcy and generated 100% recoveries in the largest unsecured creditor claimants in the Jefferson County in Mammoth Lakes, Chapter Nine cases. Michael is also a member of the Connecticut Pension Sustainability Commission. Michael, great to see you again. Thanks for joining us. Hope you are enjoying the coffee.
Michael Imber: I'm very much enjoying it Paul, and thank you for having me.

PB: Now you just moderated a discussion on long-term pension liabilities and trends. Tell us about it. You had some prominent people including Jim Spiodel, Bill Glasgow and some bond rating analysts, too.
MI: Absolutely. We covered two broad themes. One was what are some current trends? We talked about market volatility expected in 2019 and how this is going to be a catalyst for creating and heightening awareness of pension underfunding and the need for reform. We talked about rising employer contribution costs, the crowding-out problems seem to be getting worse. Bill Glasgow from the Volcker Alliance showed us a little heat map, and a startling statistic was that about two- thirds of the states, 33 states, are showing moderate to severe stress in the combination of pension, health care and debt service legacy obligations as a percentage of the overall budget.
PB: That's an eye opener.
MI: That is a big eye opener. So we need to get serious about finding some solutions.
PB:What are some of the takeaways from what was talked about at during your panel?
MI:Well, one of the things that is interesting is that with the advent of the change in control of Congress, there is a lot more talk about Medicare for all. The democratically controlled House is advocating an approach where the government through Medicare becomes the single payer in our health care system. Some candidates who've recently announced a run for president have even gone so far as to say they would eliminate the private health insurance market. It's still early days, but from the perspective of state and local governments, they might very much like to have Uncle Sam take the burden of health care insurance off the shoulders of these governments that are struggling on a pay-as-you-go basis to cover retiree healthcare.
PB:Jim Spiodel a bankruptcy and pension expert from Chicago—we know Jim very well—one thing he said is that you might see more commissions like the one in Michigan to oversee local pension funds and provide guidance. That was very interesting.
MI:The state of Michigan passed legislation, I think it was a year ago in November of 2017, that basically mandated all cities, towns and counties to come up with a plan on how they're going to address OPEB liabilities, other post-employment benefit, and retiree health care. Michigan took some criticism for doing that because they said come up with a plan, but they didn't offer a whole lot in the way of suggestions on what the alternatives could be that they might consider. More than that, the Michigan approach, I don't think had much in the way of teeth or at least not explicit teeth of what's the consequence if you don't come up with a plan. They'll always find a way to incentivize you somewhere down the road with municipal aid. But that wasn't part and parcel of the legislation. But, I can cite another example in Connecticut, where I live. The state is addressing part of its pension underfunding through the creation of the Pension Sustainability Commission.
PB:And you were on that?
MI:I'm on that commission. And we are evaluating the potential of using the state's owned assets to make an in-kind contribution to offset the pension underfunding. Cities in Connecticut can do a similar thing.
PB: Hartford did that with Patterson Park.
MI: Exactly right. But there are five cities in Connecticut, Danbury, Waterbury, Hartford, Bridgeport and New Haven that in the aggregate, I think have $2 billion of pension underfunding. And some of those cities have some really valuable assets that they could set up their own trust to make in-kind contributions. They could even throw in with the state if the state chose to go that path. So there is some innovation that's being explored right now. We don't have all the answers yet, but we always have hope.
PB: Well It's a very fluid situation in Connecticut, and I covered a couple of those meetings up at the Capitol.
MI:Yes, you did.
PB: Mr. Steinberg's done a very energetic job.
MI:State representative Jonathan Steinberg.
PB: From Westport, right?
MI: From Westport, and he's the chairman of the Pension Sustainability Commission.
PB: This is a subject near and dear to me. The kind assets; it's fascinating but it's also very complex. What benefits do you see and how do you navigate some of those sticky legal matters?
MI:We could be here for another hour just talking about that. I'll give you the simplest explanation of the in-kind asset contribution. Think of Antiques Roadshow. What does grandma in Connecticut have up in the attic that she's not really using that might be this hidden gem that could be used for a higher and better use? I’ll give you an example. Connecticut holds all forms of raw land, some of which you want to preserve for the forests, and that's fine, but you've also got bits and pieces here and there that you'll probably never be able to develop. What would happen if Connecticut were to assemble all of this land or at least the larger tracks of it and throw up solar panels and sell a concession to an energy provider that would pay the state or pay the pension for the privilege of putting solar panels on that land? You've got a green energy solution going on. You've created new private sector jobs for the maintenance and installation of solar panels. We've got a couple of solar panel manufacturers in Connecticut that would love to be able to sell into a situation like this, and you could just get a whole multiplier effect from creating value on raw land that didn't have much value in the first place. You'd make a non-cash- flowing asset into a cash-flowing asset, and the pension gets the benefit of the increased value of that asset over time, as opposed to trying to sell an asset today for its fair market value and letting somebody else get the upside.
PB:And one of the things worth pointing out is that other options are limited. You don't want to raise taxes, you don't want to cut services and you don't want to get into pension law.
MI:Yes, it's a way of driving the numerator without increasing taxes. In fact, one of the things I like about this approach is if we get it up off the ground, whether it be in Connecticut or somewhere else, and we see that it makes a difference, it gives the legislature an incentive to create an environment where these assets can grow and the assets grow further. And by the way, to use that tired metaphor, a rising tide lifts all boats. Everybody else benefits, too. So you can create a pro-growth business environment in a state that needs to dig its way out. And if you listen to Governor Lamont in his speech right after the inauguration a few weeks ago, he says very explicitly the way out of our troubles is to grow business. He wants to do some progressive things. He wants to raise the minimum wage; he wants to provide health care. That's all great. But at the end of the day, the only way we dig ourselves out of these legacy obligations is to grow the economy.
PB:And as Jim Spiodel said, it's much better to do it outside of a courtroom.
MI:Jim's Spiodel is right about that. You don't want to be in court, you're never going to get a happy solution there.
PB:Your in-kind thing has been done a lot worldwide. I did a podcast with a Swedish urban planner. He's got a whole boatload of fresh ideas.
MI:He's written two books, "The Public Wealth of Nations," and "The Public Wealth of Cities," and he's not worried about being sued by the descendants of Adam Smith.
PB:Now Bill Glasgow, one of the things he pointed out in this panel is that the trouble with pension bonds, depending on the state, is you could be trading a soft liability for a hard one—not something that can be negotiated versus something that's covenant. It's hard to go back on the covenant without some risk of default.
MI:That's exactly right. It's one thing to try and negotiate with the pension fund or don't negotiate with them and just simply underfund it as so many states have done. But it's another thing to solidify your obligation with a bond. You've just transferred the liability from the government's responsibility to meet it or not meet it to a bunch of bond holders who expect you to pay regularly on time. You can't default on that without fear of cross-defaulting a lot of other bonds. So you put yourself really at risk when you use pension obligation bonds. And there's all sorts of other problems with pension obligation bonds, including inter-generational risk transfer, which is a very fancy way of saying we've just given the liability that we should have been paying for the last 20 years to our grandchildren. And that's just not fair to them.
PB: I'm always in favor of plain English. Michael Imber, some final thoughts.
MI: There is a lot of smart thinking going on and some innovative thinking going on in the world of using assets. I consider myself an “asset evangelist” and there are a few of my colleagues out in the marketplace that have similar ideas. And there isn't just one idea that's going to solve it for everybody. There'll be different solutions for different situations, but I think we owe it to ourselves to really dig in and explore these ideas and take them to their logical conclusions before we throw in the towel and say we can't do this.
PB:Michael Imber, EisnerAmper's Public Sector Advisory practice. Thanks for joining us today.
MI:Thank you Paul.