In South Dakota, a Test Case for Online Sales Taxes

Provoked by legislators, online retailers have filed a lawsuit against the state that could have taxing consequences nationwide.
BY  | MAY 3, 2016

In a lawsuit that could have taxing consequences nationwide, online retailers are suing South Dakota for trying to collect a sales tax from them. If the suit makes it to the U.S. Supreme Court -- as many believe it will -- governments would finally get an answer to their long-awaited question of whether they can collect a sales tax from online purchases.

South Dakota lawmakers essentially provoked the suit by passing a law they knew would be challenged by retailers. The law allows the state to collect a sales tax on Internet purchases from remote retailers who have a so-called “economic presence” in the state. Retailers had to start complying with the law by May 1. It challenges a 1992 Supreme Court case that ruled states can only tax retailers who have a physical presence there.

“[Lawmakers] were intent on getting this to the U.S. Supreme Court, and we are obliging that intent,” said Steve DelBianco, executive director of NetChoice, a trade association promoting e-commerce and one of the plaintiffs in the lawsuit against South Dakota.

In Online Sales Tax Fight, States Adopt New Tactics

States are passing laws that -- they hope -- will lead to lawsuits that land the issue before the U.S. Supreme Court.
BY  | MAY 2016

Tired of waiting for Congress to approve a tax on Internet sales, nearly two dozen states are moving to pass bills or change regulations in ways that deliberately invite lawsuits from Internet retailers. The goal? Landing the issue before the U.S. Supreme Court.

On May 1, South Dakota became the first state to implement new legislation allowing it to collect a sales tax from out-of-state retailers who sell products over the Internet to South Dakotans. Because the legislation calls for an expedited path for judicial challenges, experts believe the law will produce a crucial first test case that the nation’s top court could take up as soon as the end of this year.

Putting the issue of taxing online sales before the courts is part of a new coordinated effort by state legislators across the country. All told, 34 bills in 22 states have been introduced this year that would allow states to collect sales taxes from remote retailers, according to the National Conference of State Legislatures. About a half-dozen of those bills have moved forward in some fashion.

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The Week in Public Finance: Broke Puerto Rico, Slow Financial Disclosures and Trouble in Kansas

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A roundup of money (and other) news governments can use.
BY  | APRIL 29, 2016

Broke in Puerto Rico

Congress stalled this week on legislation that could help Puerto Rico restructure its debts. That leaves the financially strapped U.S. territory continuing to try and piece together agreements with its creditors.

The commonwealth’s next debt payment, which is nearly a half-billion dollars in securities, is due Monday, and it's expected to default. There are reports that Puerto Rico’s main financing arm is negotiating a deal with creditors to pay slightly less than half of what is owed. But even so, credit rating agencies still view such negotiated cuts as a default on debt.

Puerto Rico, however, won't get out of its jam with a series of deals. In total, the territory owes about $70 billion in debt that it can’t pay.

Congress is considering installing a federal oversight board, among other financial reforms, but lawmakers this week said they don’t expect to move on that legislation until July. Absent a federal oversight board, Puerto Rico is vulnerable to lawsuits from creditors. If that happens, that would likely drag down any restructuring process even further, according to an analysis this week by Moody’s Investors Service.

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Pension Envy: Lessons From Well-Managed Plans

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Bad press has blurred the fact that not all public pension plans are underfunded and overly generous.
BY  | APRIL 28, 2016

Public pension plans have gotten a lot of bad PR in recent years. And while some of that bad press is certainly warranted, it's wrong to assume they're all a failure. In fact, there are many plans across the country that are humming along fine.

Case in point: Missouri's Local Government Employees Retirement System, or LAGERS. Last year, a reporter for the Springfield News-Leader wanted to know why the city's pension plan was just 80 percent funded -- far below the fund's aggregate 94 percent funding level. LAGERS has the ability to compel payments from cities, so the reporter, Amos Bridges, wondered if the fund was letting Springfield off the hook.

As it turned out, LAGERS wasn't. The current funding level only reflected active employees; It was closer to 90 percent when incorporating retirees. Additionally, LAGERS had Springfield on a payment plan to get back to a fully funded status.

"Defeated in my search for a scandal, I had to admit: These LAGERS people seem to know what they're doing," Bridges wrote.

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The Week in Public Finance: CalPERS' Rethinks Tobacco Divestment, Fact-Checking Illinois' Exodus and Income Recoveries

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A roundup of money (and other) news governments can use.
BY  | APRIL 22, 2016

Smoking or Non-Smoking?

The California Public Employees’ Retirement System (CalPERS) struck a controversial note this week when its board announced it would study whether to get back into the tobacco industry. The nation’s largest pension fund divested from tobacco companies in 2001 on the premise that making money off a product known to cause cancer was in conflict with the fund’s social responsibility.

But a study by a consulting firm showed that CalPERS forfeited an estimated $3 billion in investment profits since 2001 because of that decision. The board will take its time -- two years -- reconsidering its decision, citing its fiduciary duty to make the best investment choices possible for retirees.

The announcement has already drawn fire from those who say CalPERS would violate its role as a health insurer by getting back into tobacco. State Treasurer John Chiang, who sits on the board and voted against the majority, said in a statement that investing in tobacco companies is harmful to public health and to the fund’s fiscal bottom line.

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Term Limits Don't Lead to More Women in Politics

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Term limits were billed as a way to get more women to run for office. It hasn't worked out that way.
BY  | APRIL 22, 2016

In Oklahoma, half of its women legislators aren’t running for re-election this year because they're term-limited out. That rate may seem high, but in a state that ranks 49th for the percentage of women currently serving in the state legislature, it doesn’t take a lot to get there.

“Our numbers to begin with are very low,” said Cindy Simon Rosenthal, director of Oklahoma University’s Carl Albert Congressional Research and Studies Center. “This is a major turnover of women in the legislature.”

In total, eight women are leaving -- seven because their terms are up and one because she is running for another office and would vacate her seat if successful.

When term limits were implemented in the early 1990s, the policy was billed, among other things, as a way to get more women elected to the legislature. The idea was that term limits would periodically force open races, where women candidates have historically fared better.

But in the early 2000s, it became clear that term limits were not the panacea for increasing women’s representation in politics. Since they were passed in Oklahoma and a number of other states in the 1990s, the level of female representation in state legislatures has stayed at roughly 25 percent.

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Illinois May Target Predatory Lending to Small Businesses

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A first-in-the-nation bill would regulate loans made to small businesses by alternative lenders mostly found online.
BY  | APRIL 18, 2016

Illinois could be the first state to regulate predatory lending to small businesses, an emerging threat that some have called the next credit crisis.

The bill, SB 2865, targets many of the complaints that small business owners and researchers have made in recent years about loans made by online lenders and other non-traditional institutions. The legislation, which amends the Illinois Fairness in Lending Act, would require more transparency from lenders regarding the annual interest rate and terms applied to the loan.

“Many of the so-called four D’s of predation -- deception, debt traps, debt spirals and discrimination -- stem from a lack of transparency,” Chicago Treasurer Kurt Summers told the state Senate's financial institutions committee last week. “Today in Illinois, a company selling timeshares for $100 a month is required to have more clearly articulated loan terms in their contracts than an online lender would for a $200,000 business loan.”

The legislation, which the full Senate is now considering, would also set standards for making the loan, such as requiring lenders to consider a business owner’s ability to pay. Specifically, the measure would prohibit loans to a small business if the monthly loan payments would exceed 50 percent of the borrower’s net monthly revenue.

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The Week in Public Finance: Puerto Rico Drama and a Corn-y Kind of Tax Credit

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A roundup of money (and other) news governments can use.
BY  | APRIL 15, 2016

Beyond the Numbers in Puerto Rico

The drama over whether Congress should allow financially strapped Puerto Rico to restructure its debts has kicked up a notch after the recent announcement that the territory’s main financier was putting a moratorium on paying its debt, among other things. This week, a group called Main Street Bondholders launched an ad campaign calling the proposed federal legislation a “bailout” that “removes any incentive for Puerto Rico to remain at the table with bondholders.” The group says it represents the interest of retiree investors.

In response, House Speaker Paul Ryan issued a lengthy statement charging that “big-money interest groups on Wall Street” were dumping “a lot of money toward sabotaging this legislation in order to force a last-minute bailout upon Puerto Rico.” That would put U.S. taxpayers on the hook for creditors’ “bad loans,” Ryan said, which is what Congress is trying to avoid.

Anytime someone mentions “big-money interest groups on Wall Street,” it can be tempting to assume they're referring to Republican mega-donors Charles and David Koch. In this case, that's correct: The Main Street Bondholders were formed by the 60 Plus Association, a conservative small-government group that spent millions in the 2012 and 2014 election cycles to help elect conservative or Tea Party candidates. Much of its funding came from conservative groups with ties to the Koch Brothers. The group has been quiet until recently and no information is readily available yet on its funding and expenses this election cycle.

College Savings Accounts Aren’t Just About the Money

Missouri's treasurer says 529 programs are only one piece of the college puzzle.
BY  | APRIL 14, 2016

Every summer, staff at the nonprofit Scholarship Foundation of St. Louis spends the majority of their time in painful conversations with low-income families whose oldest child has been accepted to a college they can’t afford. The families bring their financial aid offers to these meetings with the hopes that the foundation will help them find a way to make it work.

But what they often learn, says Faith Sandler, the foundation’s executive director, is that paying back the loan would strain them to the breaking point. It’s crushing news. The Scholarship Foundation, she says, can’t “award to a needy student if that’s the kind of situation we’re contributing to. It’s a really difficult position for us to be in.”

That’s why the foundation jumped at a chance to partner with Missouri when it began offering matching grants in 2011 to lower-income families that start an account in MOST, the state's 529 college savings plan. The foundation set up and began contributing money to savings accounts for needy eighth graders. The idea wasn’t necessarily to significantly offset the cost of college for those kids, but was to set their families’ expectations and get them to start planning. “I think what we really want to do is to try and have smarter conversations earlier so we can avoid those horrible moments,” Sandler says.

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Panama Papers Unlikely to Lead to Reforms in Corporation-Friendly States

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A recent document leak revealed that four states were targeted by a Panamanian law firm to hide assets.
BY  | APRIL 13, 2016

States like Delaware and Nevada have long been criticized by transparency advocates for allowing Americans to use them as tax havens. But a recent document leak revealed that such corporation-friendly states may be helping foreign nationals hide potentially illicit assets as well.

Earlier this month, 11.5 million confidential documents were leaked from a Panamanian law firm, exposing how some of the world's richest people hide assets in shell companies to avoid paying taxes. It’s the largest leak in history, and among the so-called Panama Papers' many revelations was that the seventh most popular place to set up shell corporations was in Nevada.

More than 1,000 companies have used Nevada to hide their money. Delaware, South Dakota and Wyoming also emerged as popular places to stash cash.

Some of these states actively market themselves as quick and easy places to set up corporations. Take Nevada. Its website points visitors to its WhyNevada.Com to find out “why NV ranks as a top state for commercial filings," highlighting its favorable tax structure. Meanwhile, Delaware’s most recent financial report touted another record year for the number of new entities registered in the state. Delaware’s 1.1 million registered corporations outnumber the people who actually live there.

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The Week in Public Finance: Rating Downgrades, the War on Cities and More

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A roundup of money (and other) news governments can use.
BY  | APRIL 8, 2016

Downgrade Week

Louisiana and Atlantic City, N.J., were slapped with credit rating downgrades this week as both continue to struggle with revenue shortfalls and other budget problems.

In the Bayou State, lawmakers are still stuck with a $750 million budget gap for the 2017 fiscal year, which starts on July 1, even after approving some tax hikes this year. Fitch Ratings said the current budget deficit has been caused in part by “overly optimistic revenue expectations” and by not budgeting enough for Medicaid. The agency downgraded Louisiana’s rating from a AA to a AA-, noting the budget problem has only worsened thanks to a prolonged plunge in oil prices.

The rating downgrade affects nearly $4 billion in outstanding debt. It will also play a role in the interest rate the state gets later this month on about a half-billion in bonds it plans to refinance. The rating comes after Moody’s Investors Service downgraded Louisiana earlier this year, citing the state’s budget issues.

Gov. John Bel Edwards, who pushed for and won some tax hikes this year, largely laid blame with his predecessor Bobby Jindal and the state legislature. Edwards plans to call a special session to address the shortfall, the second in a year.

Municipal Bond Market Faces New Pressure

A new federal rule could make it more expensive for governments to issue debt in a financial crisis.
BY  | APRIL 5, 2016

Selling government bonds could become more difficult during the next credit crunch, thanks to a new federal rule outlining the kind of liquid assets that banks must hold in case of an emergency.

The rule, issued Friday, greatly limits the kinds of municipal bonds that qualify in a big bank’s investment portfolio as "highly liquid" -- in other words, assets that can be sold quickly for cash. The new regulation was issued by the U.S. Federal Reserve, and is a modification of its previous proposal with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation.

There's no immediate negative effect for government issuers. But if and when the next credit crunch hits, it could become more expensive for states and localities to issue debt. That's because if fewer bonds qualify as highly liquid, there would be less market demand for them. And lower demand would mean higher interest rates for governments.

“As long as munis continue to have a good risk-adjusted return for banks, they’ll continue to invest," said Chris Mauro, who leads RBC Capital Markets’ municipal strategy team. “It’s really when you’re entering a liquidity crisis and banks are running up against their limit: Unfortunately they may liquidate some of their municipal [bonds] as a result. And they’ll use those proceeds to buy highly liquid assets.”

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A Missing Opportunity to Fix Government Finances

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Most places focus on pensions for cost-cutting. But a new study argues it would be easier for governments to reduce the collective $1 trillion they owe in retiree health care.
BY  | MARCH 31, 2016

Pension liabilities have been a high-profile issue in recent years, and they remain a major budget burden for state and local governments. States and cities have tried to rein in expenses by issuing less bond debt, and they've tried to mitigate further increases in their pension liabilities.

But a new study released Thursday says governments are missing a key opportunity to reclaim billions in annual revenue by not making severe cuts to retiree health care, commonly referred to as other post-employment benefits, or OPEB.

“There continues to be a lot of emphasis on pensions, and rightly so,” said Stephen Eide, a co-author of the report produced by the Manhattan Institute. “But we wrote this report to say it might make more sense to focus more on OPEB reform than pensions -- the simple reason being, legally speaking, you’re more likely to get further in bringing down OPEB costs than pension costs.”

In other words, states have more flexibility in restructuring retiree health-care benefits, and doing so could save hundreds of billions of dollars.

Eide and co-author Daniel DiSalvo argue that retiree health-care costs are just as big a culprit for crowding out other government priorities as pension costs have been, although the latter has received much more of the blame.

As Pension Prospects Worsen, Kentucky Lawmakers Spar Over Worst-Funded Plan

Nowhere are the problems with pension funding more evident than in Kentucky, where the state lost millions because of the stock market. Lawmakers are now debating how to recover.
BY  | MARCH 29, 2016

Amid new predictions that public pensions are facing another downturn, at least one pension plan may be heading toward life support.

Since several plans' fiscal year started last July, the stock market has been extremely volatile. As a result, Moody’s Investors Service predicts pension plans are likely to report 10 to 50 percent increases in liabilities when they close out their 2016 fiscal years on June 30.

The bad forecast comes just after most plans reported meager investment returns in fiscal 2015. The two-year hit, warned Moody’s, will effectively wipe out the funding progress that many plans made in 2013 and 2014.

The situation could force governments to put in more money over the next few years than was previously forecast. That notion, in turn, could trigger lawmakers to discuss other solutions for funding pensions or ways to control future pension costs.

Nowhere is this more evident than in Kentucky, where the state lost nearly $53 million in investments during the last six months of 2015 because of the stock market dip and lawmakers are now debating how to recover.

For years, lawmakers have shorted the state's annual payment into the Kentucky Employees Retirement System (KERS). That's played a big part in turning the state employee plan into the worst-funded among the 50 states. As of last summer, it reported holding just 19 percent of the assets it needs to meet nearly $12.4 billion in total liabilities.

As Pension Prospects Worsen, Kentucky Lawmakers Spar Over Worst-Funded Plan

Nowhere are the problems with pension funding more evident than in Kentucky, where the state lost millions because of the stock market. Lawmakers are now debating how to recover.
BY  | MARCH 29, 2016

Amid new predictions that public pensions are facing another downturn, at least one pension plan may be heading toward life support.

Since several plans' fiscal year started last July, the stock market has been extremely volatile. As a result, Moody’s Investors Service predicts pension plans are likely to report 10 to 50 percent increases in liabilities when they close out their 2016 fiscal years on June 30.

The bad forecast comes just after most plans reported meager investment returns in fiscal 2015. The two-year hit, warned Moody’s, will effectively wipe out the funding progress that many plans made in 2013 and 2014.

The situation could force governments to put in more money over the next few years than was previously forecast. That notion, in turn, could trigger lawmakers to discuss other solutions for funding pensions or ways to control future pension costs.

Nowhere is this more evident than in Kentucky, where the state lost nearly $53 million in investments during the last six months of 2015 because of the stock market dip and lawmakers are now debating how to recover.

For years, lawmakers have shorted the state's annual payment into the Kentucky Employees Retirement System (KERS). That's played a big part in turning the state employee plan into the worst-funded among the 50 states. As of last summer, it reported holding just 19 percent of the assets it needs to meet nearly $12.4 billion in total liabilities.

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Chicago’s Shockingly Bad Finances

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You’ve probably read about the Windy City’s money problems. But chances are they're worse than you thought, and a recent ruling didn't help.
BY  | MARCH 25, 2016

You’ve probably read headlines about the Windy City’s financial woes. About how Chicago’s years of borrowing to pay for its operations has finally caught up to it. About how inadequate funding of its pensions has saddled it with huge annual payments.

But unless you’ve been paying close attention, chances are Chicago is worse off than you think.

The numbers are staggering. The city has about $34 billion in outstanding debt, with roughly $20 billion of that coming from its five pension plans. That’s compared with a little more than $9 billion total annual budget. The teachers’ retirement fund is short about $9.6 billion and owes an additional $6 billion to bondholders. The outstanding bonds alone exceed the system’s annual $5.8 billion budget. Overall, Chicago Public Schools has struggled to sell enough bond debt to get through the current year, and the system is even facing a possible state takeover. Both the city and the school system’s credit ratings have been downgraded to junk status.

A New Twist on ‘Pay for Success’ Programs

A variation on the existing model would provide a money back guarantee should a project fail.
BY  | MARCH 24, 2016

This year has already seen a flurry of activity when it comes to governments and the private sector partnering on social programs. Fewer than three months into 2016 and three governments have announced so-called pay for success or social impact bond projects, boosting the total number of such programs to 11 across the country.

Now, there may be a new option for governments interested in the model, but wary of its complicated nature. Under a pay for success or social impact bond program, private funders finance a preventive social or health program and only get paid back if the project meets its goals over the course of a predetermined set of years. The new model, announced by Third Sector Capital Partners on Thursday, offers a money back guarantee.

With a “social impact guarantee” or SIG project, governments front the money (instead of a private investor) and get paid back if the project doesn’t meet its goals. Specifics are sparse, but Third Sector co-founder George Overholser says he's currently working with two states on creating the country’s first SIG projects and hopes to announce them by the end of this year.

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The Week in Public Finance: Court Strikes Down Chicago Pension Reforms, Pennsylvania Ends Budget Standoff and More

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A roundup of money (and other) news governments can use.
BY  | MARCH 24, 2016

What Will Chicago Do Now?

The Illinois Supreme Court on Thursday ruled unconstitutional Chicago’s attempt to reduce its massive pension liabilities.

The decision, which affirms lower court rulings, doesn't come as a big surprise given that the state's highest court issued a similar ruling 10 months ago regarding Illinois’ proposed pension cuts. Still, it’s a blow to Chicago and its mayor, Rahm Emanuel, who had hoped the cuts would save the city hundreds of millions of dollars. Chicago is short $20 billion across five pension plans (including public schools), and the poor financial health of the retirement system has resulted in downgrades from credit ratings agencies.

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The Week in Public Finance: Good and Bad News for Pensions and for Atlantic City

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A roundup of money (and other) news governments can use.
BY  | MARCH 18, 2016

Pension Plan Peril

The stock market has been kind to pension plans in recent years. But that ended last year: Pension plan returns for fiscal 2015, which mostly closed on June 30, were meager. Many were below 5 percent, lower than their target rate of 7 or 8 percent. To make matters worse, that was before the stock market turmoil that began late last summer, which means that when most pensions close out fiscal 2016 at the end of June, their returns will again fall short.

The two-year hit will effectively wipe out the funding improvements seen in 2013 and 2014, predicts Moody’s Investors Service. In a report released Thursday, the agency analyzed 56 state and local government pension plans with total assets of more than $2 trillion. The report says that under the most optimistic scenario, where investment returns average 5 percent for the year, plans’ overall liabilities will still increase by 10 percent. This is because returns are falling short.

The most pessimistic scenario? That plans report an investment loss of 10 percent. In those cases, Moody’s says that could bump up liabilities by more than half, forcing governments to have to put in more money over the next few years than was previously forecast. With a number of governments already balking at their pension costs, that’s going to be a problem. A little over half of the plans Moody’s sampled already aren’t receiving their full payments from their contributing governments.

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The Week in Public Finance: Pension Buyouts, a New Way to Pay for Family Leave and More

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A roundup of money (and other) news governments can use.
BY  | MARCH 11, 2016

San Jose’s Never-Ending Pension Battle

A former San Jose, Calif., councilman who was instrumental in convincing voters to approve pension changes in that city four years ago is now filing papers in court to protect his legislation.

Pete Constant, who's now a senior fellow with the libertarian-leaning Reason Foundation, is challenging San Jose officials’ request pending before a judge to strike down Measure B. City officials are now in talks with unions to abandon it in favor of other changes they're negotiating that wouldn't require voter approval.

By doing so, Constant said in a press release Wednesday, the city will “abandon its obligation to defend Measure B and is poised to sell-out the voters.”