The Benefits of Helping Struggling Cities

For financially distressed municipalities, it’s good to be in a state that intervenes, according to a new study.
BY  | AUGUST 11, 2016

Earlier this month, New Jersey stopped Atlantic City from defaulting on its debt with a $74 million bridge loan. While there was plenty of bluster and several hollow threats from legislators that they would not step in to help the financially beleaguered gambling town, it didn’t surprise anyone when they finally did.

That’s because New Jersey has a reputation in the credit market for going to any lengths to prevent one of its municipalities from entering Chapter 9 bankruptcy. In fact, no New Jersey municipality has defaulted on debt since the Great Depression. This extra layer of protection is not only comforting to local officials in struggling cities like Camden or Trenton, it’s viewed as a big plus by those who invest in New Jersey municipal debt.

Now, preliminary research affirms the benefits of being a municipality in a more proactive state. Scholars at the University of Notre Dame and University of Illinois at Chicago have found that creditors tend to give municipalities in these states a slightly lower borrowing rate than they do municipalities in states without any kind of bankruptcy intervention program.

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The Week in Public Finance: The Netflix Tax, Another Atlantic City Rescue and More

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A roundup of money (and other) news governments can use.
BY  | AUGUST 5, 2016

Taxing Netflix

Pennsylvania this week became one of a few states that taxes online streaming video services like Netflix and and Hulu, a development that has consumers complaining but other governments watching closely.

The expansion of the state’s 6 percent sales tax was part of a revenue package passed earlier this year to fill a $1.3 billion hole in the state’s new $31.5 billion budget. Pennsylvania also extended the sales tax to digital downloads like music and ebooks. Sixteen other states already do that, but it has proven difficult to tax streaming services.

Last year, Alabama lawmakers tabled a study that would have expanded its 4 percent digital downloads tax to streaming services. Vermont looked at the issue but then the technology was more akin to a service than a tangible good. Massachusetts passed a wide-ranging technology tax in 2013 that was quickly repealed after the tech industry complained of the difficulties of complying to it. (For the record, Florida does apply a small communications tax to streaming services.)

Public Pensions Facing Worst Returns Since Recession

A volatile stock market over the past year has taken a toll on public pension assets.
BY  | AUGUST 3, 2016

Public pension plans are reporting dismal investment returns this year, a development that will likely mean governments will have to pony up more money in the coming years.

So far, no major pension plan has reported a preliminary annual investment return of more than 1.5 percent. That's thanks to a volatile stock market that's seen wild swings spurred mainly by political and economic events abroad. Some smaller plans, such as the New Mexico Educational Retirement Board, have reported earnings as high as 2.6 percent. Still for many, this year marked their worst earnings year since the Great Recession.

The slim earnings for fiscal 2016, which ended June 30 for most plans, is well below the average earnings target of about 7.5 percent. It also marks the second year in a row that plans have missed the assumed rate of return: Most reported an investment gain between 2 percent and 4 percent in fiscal 2015.

The Impact of New Overtime Rules on Government

The federal change won’t just hit state and local personnel costs.
BY  | JULY 28, 2016

A new federal rule that more than doubles the number of employees eligible for overtime pay has state and local governments scrambling. Already, governments are facing tight budgets and slow revenue growth. But the new rule, which goes into effect Dec. 1, threatens not only to increase personnel costs, but operating costs as well.

The rule change, which was issued by the Department of Labor in May, affects the earnings of both public- and private-sector workers. Governments are looking now at how much it will impact payrolls. But nonprofits are warning that the rule could also result in substantially higher rates next year for governments that contract services out.

The change is an update to the Fair Labor Standards Act and doubles the minimum salary that full-time white-collar workers must earn to be exempt from getting overtime pay to $913 a week, or $47,476 per year. The salary level was set at the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census region, which is currently the South.

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The Week in Public Finance: Hot Munis, Cooling Off Creditors and Warming Up to Facebook

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

It’s July and Muni Bonds Are Hot

The municipal bond market could be off to its best start since 2010, when federal policies helped fuel new issuance. During the first six months of this year, a total of $221 billion in bonds have been brought to market by state and local governments, according to data from the Securities Industry and Financial Markets Association (SIFMA). The total includes new bonds and refinanced ones.

Most of that activity has come from the second quarter of the year, specifically in May and June when the volume of new bonds in each month was the highest since 2008, according to an analysis by RBC Capital Markets’ Chris Mauro. Even Puerto Rico’s recent default on a $2 billion debt payment has not appeared to phase investors or hurt interest rates.

The market is currently on pace to finish the year with over $430 billion in issuance. But with more than five months to go before the end of the year, anything could happen -- particularly with a volatile presidential contest underway. Last year, the pace cooled in the second half of the year, with the value of total bonds issued finishing just shy of $400 billion. Still, Mauro said he is increasing his original prediction of new bond volume to somewhere between $400 billion and $425 billion.

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The Week in Public Finance: Unbalanced Budgets, Alaska's Tax Battle and Creditor Complaints

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

Unbalanced Budgets

Fiscal 2017 isn't starting off so well for some states.

In Mississippi, officials announced they need to withdraw up to $63 million from the rainy day fund to cover declining revenues that left it with an $85 million budget shortfall. The announcement came just two days after the legislature removed the state’s restriction on how much it can withdraw from the fund in any given year. It reduces the state’s savings to just 1.4 percent of its general fund budget. Both moves drew criticism from Moody’s Investors Services.

Pennsylvania this week was placed on a credit watch by Standard & Poor’s rating agency for passing a budget that failed to offer a spending plan for more than $1 billion of it. Lawmakers eventually agreed on a revenue plan, but it still requires borrowing more than $200 million from a separate state fund.

Moody’s also criticized Kansas this week for yet another shortfall. We recently mentioned that Kansas is one of four states in a recession, according to federal economic data. Its total tax revenue was more than 7 percent short of what it expected for fiscal 2016. The state has struggled to meet its revenue expectations ever since lawmakers approved income tax cuts in 2012 and 2013.

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Puerto Rico's Warning for States, Cities: You Might Be Next

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Gov. Alejandro Garcia Padilla said the island's rescue might simply be a harbinger of things to come on the mainland.
BY  | JULY 14, 2016

President Obama recently signed into law a highly anticipated -- and much debated -- rescue bill for debt-laden Puerto Rico. While the bill has its detractors, it marks a positive step toward the promise of recovery for the island. But the bill's impact could go far beyond the commonwealth's shores.

Puerto Rico, like states and many cities, can't legally declare bankruptcy. Saddled with $70 billion in debt, Gov. Alejandro Garcia Padilla's administration has spent the last few years unsuccessfully trying to reach an agreement with creditors. During that time, the commonwealth watched its tax base decline as residents fled stateside and Puerto Rican government entities defaulted on debt.

That's what life without bankruptcy protection is like for governments, Padilla said this week in a speech at the Brookings Institution in Washington, D.C. He went on to suggest that Puerto Rico, with its smaller economy and population size, might simply be farther along on a path other U.S. governments are also traveling. "We are only ahead of the curve -- the curve that looms for many states and municipalities," he said. "We are forced to try the route that others have not tried before, to knock on the doors that others may need to approach in the not-so-distant future."

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The Week in Public Finance: States in Recession, Higher Ed Winners and Losers, and Virtual Retirement

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

Oklahoma's in a Recession

New economic data shows what Oklahoma officials have been fearing: The state has officially entered a recession. Revised federal Bureau of Economic Analysis (BEA) data shows that the state’s gross domestic product was negative for most of 2015.

A recession starts when there are two quarters of economic contraction. Originally, the BEA reported that Oklahoma’s economy contracted in the second quarter, grew by 0.1 percent during the third quarter and contracted again in the last quarter of last year. But the third quarter figure was recently revised downward to -0.6 percent.

Data for the first quarter of 2016 is expected to be released later this month, but according to State Treasurer Ken Miller, the prospects don’t look good.

“General indicators fail to point to any marked economic recovery at this point,” he said in his latest state economic report.

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The $4.3 Trillion That States and Localities Are Missing Out On

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Economic output would get a big boost if more women were in the workplace. A new report shows how far places have to go to close that gap.
BY  | JULY 8, 2016

Want to grow your economy? Close the gender gap.

That’s the advice from a new report that says states and cities could add up to $4.3 trillion to their annual economic output simply by focusing on policies that create a more equitable environment for women in the workforce.

The report, produced by the think tank McKinsey Global Institute, looked at levels of gender equality in measurable areas like political representation; workforce participation and leadership; educational attainment and teenage pregnancy rates. Overall, researchers found high gender inequality in many states and in some of the top 50 largest metropolitan areas.

"The real opportunity here is for a state to say, 'How could we do better? What are the levers that we can pull to get motivated and begin to address this?'" said Vivian Riefberg, one of the report's authors.

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The Week in Public Finance: Rescuing Puerto Rico, Brexit Fallout and Minimum-Wage Trends

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A roundup of money (and other) news governments can use.
BY  | JULY 1, 2016

Puerto Rico’s New Path

Congress this week has reached an agreement on a rescue bill for Puerto Rico. The troubled territory is set to default for a third time over the past year on a debt payment due today. The legislation, which was signed by President Obama Thursday, follows a long-running debate about whether Congress should intervene at all.

The bill, called the Puerto Rico Oversight, Management and Economic Stability Act, or PROMESA, passed the House of Representatives earlier this month and the Senate on Wednesday. The legislation would allow the island a path to restructure its more than $70 billion in debt while installing a financial control board to govern its finances. It was modeled after similar legislation for Washington, D.C., whose finances were also subject to a control board two decades ago.

The Takeaway: The legislation won’t stop Puerto Rico from defaulting on its $2 billion debt payment Friday. But the fact that it now has a path to solvency -- however murky and long -- delivers a message of certainty to municipal market investors. To be sure, investors will take a hit and Puerto Rico’s officials will lose immediate control of the island’s financial future. But the process will be far more orderly than it has been in the past year or so. Litigation promised “to be endless and to consume scarce resources of the beleaguered commonwealth’s government," former New York Lt. Gov. Richard Ravitch pointed out in an op-ed this week

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Who Should Police Municipal Markets?

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A questionable bond sale in Illinois has left some wondering why there's no one to stop financially troubled governments from borrowing.
BY  | JUNE 30, 2016

Borrowers have long assumed that banks and other traditional lenders will only loan them as much money as they can responsibly afford. Almost a decade ago, the subprime mortgage crisis shattered that belief. But it might still persist in the municipal market.

Take Illinois, whose fiscal woes are no secret. It has the lowest credit rating (BBB+) -- by far -- of all 50 states, its pensions are among the worst-funded in the country and it's entering its second fiscal year without a budget. Yet earlier this month, Illinois borrowed more than a half-billion dollars from municipal market investors with relative ease.

The state paid a higher interest rate for its troubles. But thanks to the high demand for municipal bonds these days, the rate was actually lower than the one Illinois paid on its last bond issuance in January.

"That's the biggest weakness of the municipal market," said Matt Fabian, managing director for Municipal Market Analytics. "We will help issuers borrow as much as they say they want, whether or not they can afford it."

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The Week in Public Finance: What Brexit Means for Muni Bonds, Pension Projections and More

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

What Brexit Means for the Municipal Bond Market

On Thursday, Britain voters shocked the world by deciding to exit the European Union in a vote that became known as "Brexit," a combination of Britain and exit. The result, which prompted Prime Minister David Cameron to say he will step down in the coming months, has implications for global financial markets, which in turn can affect the U.S. municipal market.

Even before the results of the vote were in, the uncertainty of the outcome was affecting markets everywhere. Global stocks and some corporate bonds had slumped while demand for traditionally safer assets like U.S. Treasuries and municipal bonds had “soared,” according to Ivan Gulich, senior vice president of the financial firm Loop Capital Markets.

This increased demand for municipal bonds has driven down interest rates, which is good for governments looking to borrow money. For example, the interest rate on a 30-year Treasury bond is currently lower than it was even in the wake of the Lehman Brothers' 2008 bankruptcy that roiled the corporate market and drove demand toward government securities.

“What was initially seen as an issue for Europe has rattled markets around the world,” wrote Gulich this week in an analysis.

After Milestone Year of Recovery, State Spending to Slow

States' overall budgets finally surpassed pre-recession peaks this year -- but not everywhere.
BY  | JUNE 22, 2016

This year was one of milestones for state budgets, but the upward swings of 2016 will likely be dampened in the years ahead.

It took almost a decade, but total state spending and revenues finally surpassed pre-recession peaks this year, according to a new survey from the National Association of State Budget Officers (NASBO). Yet more than two dozen states haven’t reached that milestone, a sign of the recovery’s uneven progress after the worst economic collapse in more than a generation.

While fiscal 2016 also marked the highest annual growth -- 5.5 percent -- for total state spending in nearly a decade, it was primarily driven by significant one-time spending increases and technical adjustments in several large states, including New York, Ohio and Texas. The median spending growth rate across the 50 states was 3.8 percent, which is lower than last year’s but slightly ahead of expectations a year ago.

Looking ahead, spending is projected to slow down even more, to 2.5 percent next fiscal year (which begins July 1 for most states). Revenues are also projected to slow.

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The Week in Public Finance: Defending Wall Street Fees, Ranking Property Tax Rates and More

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A roundup of money (and other) news governments can use.
BY  | JUNE 17, 2016

Defending Wall Street Fees

The performance fees that public pension plans pay private equity and hedge fund managers are coming under scrutiny. Some say the high fees aren’t worth the returns on investment and complain that many costs remain hidden. Those two points were part of a critical report last month by the right-leaning Maryland Public Policy Institute on Maryland’s hidden Wall Street fees.

Now, the Maryland State Retirement Agency has issued a lengthy response questioning the institute’s conclusions. In a letter published this month by Executive Director R. Dean Kenderdine and Chief Investment Officer Andrew C. Palmer, the system’s officials attack the institute’s methodology while defending its own financials.

Maryland reported paying $85 million in performance fees in 2014, but according to the report it may have actually paid more than $250 million. The policy institute made that estimate by comparing Maryland’s disclosed performance fee rate against the rate of performance fees disclosed by New Jersey, which has a similarly sized alternative investment portfolio and fairly comprehensive fee disclosure policy.

But Kenderdine and Palmer say Maryland's $85 million in reported fees are accurate because New Jersey has been “much more aggressive in its pacing of investments.” In other words, the private equity funds New Jersey invests in are designed to start producing returns soon after the pension puts money in the fund. Maryland’s private equity funds, however, haven’t hit that so-called harvesting period when investments are sold and managers receive performance fees from that profit, said Kenderdine and Palmer. So the performance fees are smaller but could theoretically be larger in the coming years.

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Things You Didn't Know About Detroit's Historic Bankruptcy

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Nathan Bomey, author of a new book on the largest Chapter 9 filing in U.S. history, reveals the unsung heroes and true timeline of the event.
BY  | JUNE 16, 2016

Nearly three years ago, Detroit's $18 billion bankruptcy -- the largest municipal Chapter 9 filing in American history -- captured the nation's attention. Detroit, like so many other Rust Belt cities, had suffered from decades of economic decline, as well as shrinking economic support from the state; mismanagement from city leaders that hurt the public trust and shattered finances; and the exodus of more affluent and generally white residents to the suburbs.

These effects and more are captured in the new book Detroit Resurrected. It's the first book to extensively chronicle the city's story into and out of bankruptcy, and it's written by journalist Nathan Bomey, who was the Detroit Free Press' lead reporter on the city's bankruptcy and is currently a writer at USA Today. Bomey, who spoke with Governing about the book, based it not only on his extensive reporting at the time but also on revealing and frank post-bankruptcy interviews with key players.

The following interview is edited for length and clarity.

I didn't know until reading your book that bankruptcy was being talked about in Detroit several years before 2013.

It was. In Detroit, the promises to retirees were actually broken many years before the bankruptcy process. I think the problem was [that by the time bankruptcy was considered], political leaders didn't really have the political will to make the tough decisions to avoid this type of process. So they put it off. And one factor in Detroit's bankruptcy that has been widely misunderstood is that the emergency manager law was uniquely tailored to make a bankruptcy go fast. Kevyn Orr got the job about four months before the city ultimately filed for bankruptcy. I think looking back on it, most people would agree that by the time he was installed, bankruptcy was probably inevitable.

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The Week in Public Finance: Punishment for Illinois, Budget Battles and New Jersey's Win

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A roundup of money (and other) news governments can use.
BY  | JUNE 10, 2016

A Battle Over Illinois’ Downgrade

Illinois was downgraded this week to two steps above junk status by Moody’s Investors Service. The downgrade is largely due to the state’s inability to pass a budget for the past year and a half. A political stalemate has crippled lawmaking in the state and Illinois -- already the lowest-rated state -- is being docked now with a Baa2 rating. The state’s current budget gap has only worsened over the past year. The structural budget deficit, including what Illinois is supposed be spending on pensions but isn’t, amounts to 15 percent of total general fund expenditures, Moody’s said. A day after the Moody's downgrade, Standard & Poor's also downgraded Illinois.

Apparently unperturbed by the fact that its overwhelming debt is what got it into this pickle, Illinois plans to borrow a half-billion in bonds later this month. The downgrade will likely increase the interest rate Illinois will have to pay on those bonds and impact the state’s outstanding $26 billion in debt.

Not long after the downgrade, the world’s largest money manager said investors should boycott Illinois’ upcoming sale.

“We as municipal market pa

Cost of Tax Breaks for States, Localities May Be Exposed

If approved, a new rule would make it easier for groups to challenge the tax exemptions that state and local governments get from the feds.
BY  | JUNE 7, 2016

A proposed change in financial rules would shed more light on what the federal government gives up in tax breaks to state and local governments. If approved, it could provide ammunition to groups that want to reduce those benefits as a way of eliminating the federal budget deficit.

The new rule, proposed by the Federal Accounting Standards Advisory Board (FASAB), would require the feds to include in annual financial reports the "revenue impact" (but not a precise calculation) of all Washington's lost revenue from tax breaks. The U.S. Treasury Department already estimates the cost of these expenditures, but they aren't included in federal annual financial reports.

According to the Treasury Department, the provision that lets filers deduct their state and local income and property taxes from the income they declare to the federal government cost $84 billion in lost revenue just this year. An additional $32 billion accounts for state and local governments' much-beloved tax exemption for municipal bonds, which critics have been trying to repeal for years.

But the largest federal deduction by far is the one employers get for their contributions to employee health insurance premiums and medical care. That cost the feds $211 billion in lost revenue this year. For perspective, the federal budget is a little under $4 trillion, while the budget deficit is a little over $500 billion.

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The Week in Public Finance: A Demand for Diversity in the Board Room, Bad Credit News and More

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A roundup of money (and other) news governments can use.
BY  | JUNE 3, 2016

A Demand for Diversity in the Board Room

State and local finance officers across the country got together this week to pressure corporations about the lack of diversity on their governing boards. The group, made up of 14 pension fund fiduciaries -- six of whom are women or minorities -- said boards “should cast wide nets in their search for the best talent and include nominees who are diverse in terms of race, gender and LGBT status.”

Board diversification in recent years has been slow -- or even nonexistent. In fact, the percentage of all-white boards has actually increased over the past decade from 10 to 14 percent. Overall, white directors hold 85 percent of the board seats at the 200 largest S&P 500 companies, and men occupy 80 percent.

“Maintaining leadership that is primarily white and male means these companies are potentially missing out on the many benefits diversity can bring to the board room," said San Diego County Treasurer-Tax Collector Dan McAllister.

The Takeaway: This isn't the first time public finance officials have used their power to advocate for change.

Nonprofits' Tax-Exemption Battle Moves to the Courts

Legislative attempts to tax nonprofits have fallen short. But recent legal challenges could present a financial problem for nonprofits and a financial boost for governments.
BY  | JUNE 2, 2016

Faced with tight budgets and in search of new sources of revenue, municipalities increasingly have been eyeing the tax-exempt status of nonprofits. Legislators say that universities' record-high endowments and the corporate-like structure of nonprofit hospitals is making it harder and harder to swallow giving these institutions a tax break.

While many of the legislative attempts to start taxing nonprofits have failed, recent legal challenges have proved more promising. If the trend continues, it could present a financial problem for nonprofits and a financial boost for governments. So far, the focus of both legislation and legal action has been on hospitals and higher education institutions, but some worry they could spill over to smaller nonprofits and charities.

The dollars at stake are significant. According to a 2009 study by the Congressional Research Service, property tax exemption is worth $17 to $32 billion nationwide.

Also driving these challenges is the issue of tax fairness. Many nonprofits fork over an annual PILOT, or Payment In Lieu of Taxes, to help offset the governments' loss of revenue. But residents in the vicinity of hospitals or universities often feel that they still end up paying higher taxes to compensate for the revenue lost to nonprofits' exemptions.

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How Zika Could Infect the Municipal Bond Market

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Even if an area has no cases of the virus, it could feel a financial impact.
BY  | MAY 27, 2016

When you walk through Atlanta's Hartsfield-Jackson International Airport, it’s hard to ignore the solemn warnings that the city could be an entry point for the Zika virus into the United States.

Everywhere, large signs picturing a menacing mosquito warn travelers: “Don’t let this bad bug bite you.” Other signs warn pregnant travelers about a Zika health advisory. Last month, airport concessionaires began selling insect repellent with the recommended level of DEET to keep mosquitoes at bay.

But there are also financial implications of Atlanta’s status as a gateway to Central and South American travel, and for other cities like it. According to a new report by the investment firm, Loop Capital Markets, the Zika virus could make it more expensive for some municipalities to borrow money.

That's because similar to natural disasters, a virus outbreak has the potential to overwhelm local and state health departments. In 2005, Hurricane Katrina "demonstrated the enormous capacity of governments to botch disaster relief efforts,” said Chris Mier, the report's author. Since then, research has shown that a region's susceptibility to disasters now plays a role in their municipal interest rates. For example, a study of California's more earthquake-prone cities found that they paid a higher interest rate on their bonds following Hurricane Katrina.