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The Week in Public Finance: Alaska Downgraded, Low Income-Tax Revenues and Congress Meddles in Online Sales Taxes Again

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BY  | JULY 21, 2017
The U.S. Capitol (FlickrCC/Geoff Livingston)

 

Alaska Downgraded Again and Again

Just weeks after it passed yet another budget that relied on rainy day savings, Alaska was downgraded by two credit ratings agencies.

First came Moody’s Investors Service, which downgraded Alaska to Aa3, citing the state's continued inability to address structural fiscal challenges and come up with a complete fiscal plan. Just days later, S&P Global Ratings dropped its rating to AA. Like Moody’s, S&P chastised Alaska lawmakers: A reliance on reserves, S&P analyst Timothy Little said, “coupled with the state's economic contraction since 2012 and the fallout of oil prices in mid-2015, have reached an [unsustainable] level."

The Takeaway: The downgrades, while not good news, should come as no surprise. Last month, S&P outright warned officials that it would downgrade the state if the governor and legislature failed to pass a sustainable budget that fully addressed its massive decline in oil revenues.

States Get Creative on Pension Funding

The latest plans in California and New Jersey have observers asking: creative solution or accounting gimmick?
BY  | JULY 19, 2017
New Jersey Gov. Chris Christie
Gov. Chris Christie has hailed the lottery legislation as a foolproof way to immediately boost the health of the pension fund. (AP/Seth Wenig)
 

Most states have enacted some type of reform over the past decade to shore up their pension funds for the future. But such changes have typically done little to make a dent in the liabilities that governments already have on the books.

As those liabilities increase, states and localities are turning to more creative solutions to ease the burden.

California and New Jersey are moving forward with plans that would boost respective pension assets, dramatically decrease unfunded liabilities and reduce payouts for the immediate future. But critics of the plans say the two states are doing nothing more than moving numbers around on paper.

In New Jersey, the state is pledging its lottery -- which an outside analysis determined was valued at $13.5 billion -- as an asset to state pension funds. The action would reduce the pension system's $49 billion unfunded liability and improve its funded ratio from 45 percent to about 60 percent, according to State Treasurer Ford Scudder. The roughly $1 billion in annual lottery proceeds, which currently go to education and human services, among other programs, will now be divvied up among state pension funds. The largest share -- nearly 78 percent -- will go to the teachers' pension fund.

Although unions grumbled about the plan, it passed with little public debate as lawmakers were preoccupied by budget negotiations. Gov. Chris Christie and Scudder have hailed the lottery legislation as a foolproof way to immediately boost the health of the pension fund. But others have been less enthusiastic about the plan.

Municipal Market Analytics' Matt Fabian dubbed it an accounting scheme, noting it also places a roughly $970 million burden on New Jersey's general fund budget to pay for the programs formerly covered by the annual lottery proceeds. "We believe that, at best," Fabian wrote, "this transaction delays honestly confronting the pension liability problem."

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The Week in Public Finance: Lobbying Congress on the 'Tax Perk,' Chronic Deficits and the Credit Threat in Illinois

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BY  | JULY 14, 2017
Illinois Gov. Bruce Rauner speaks during a news conference. (AP/G-Jun Yam)

Tax Deductions Aren’t Just for the Super-Rich

As the Trump administration promotes a tax reform agenda that would take away the state and local tax deduction, government organizations are pushing back hard against the notion that the tax perk is utilized only by the uber-wealthy. A new report this week shows that more than half of the tax filers who take the deduction earn less than $200,000 per year. In fact, the largest group of filers who deduct their state and local taxes from their federal taxable income earn between $100,000 and $200,000 per year.

“Contrary to popular opinion, the deduction of state and local taxes does not exclusively benefit the wealthy, even though that argument has been used countless times in attempts to modify or repeal the deduction,” says the report, which was prepared by the Government Finance Officers Association.

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The Week in Public Finance: Late Budgets, Illinois' First in Years and Risky Pension Investments

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BY  | JULY 7, 2017
New Jersey Gov. Chris Christie walks from the podium following a news conference about the government shutdown that had closed state parks and beaches to the public. (AP/Mel Evans)

Better Late Than Never

They may be late, but both Maine and New Jersey finally have budgets for fiscal 2018 after shutting down their respective governments for three days.

Early Tuesday, New Jersey Gov. Chris Christie signed a $34.7 billion budget agreement and ended a shutdown. That same day, Maine’s shutdown wrapped up when Gov. Paul LePage signed a $7.1 billion budget. The deal eliminated a lodging tax increase opposed by LePage in exchange for allocating an additional $162 million to public education.

Delaware also reached a budget deal early Sunday morning. Gov. John Carney signed a $4.1 billion budget that preserved funding for nonprofits, public health programs and schools by raising taxes on real estate transfers, tobacco and alcohol.

The Takeaway: A whopping 11 states started their fiscal 2018 this month without a budget deal, an unusually high number that reflects the growing divisiveness of tax and fiscal policy. Be it dealing with budget deficits or juggling a demand to bring funding for services back to pre-recession levels, more and more of these conflicts are resulting in statehouse stalemates.

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Immigrants Cost Taxpayers, Then Pay More Than Most

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New research shows immigrants ultimately make state and local governments more money on average than native-born Americans.
BY  | JULY 6, 2017
Immigrant boy waving an American flag.
Adult children of first-generation immigrants eventually contribute more than native-born Americans in federal, state and local taxes. (AP/Jacquelyn Martin)

While the national debate rages over immigration, new research shows how much new immigrants cost state and local governments in the short-term -- and how much they pay off in the long-term.

Two studies, one by the Urban Institute and a larger one by the National Academies of Science (NAS), find that first-generation immigrants are costlier to state and local governments than native-born adults, but over time, those effects reverse. While first-generation immigrants cost an average of nearly $3,000 more per adult, the adult children of these immigrants eventually catch up and contribute the most on average to federal, state and local coffers.

Kim Reuben, a senior fellow at the Urban Institute, says the initial higher costs of new immigrants is in large part because of their children. "Education is expensive -- if you have more kids in general as a group compared to other groups, you're going to have higher costs," says Reuben, who co-authored the study and contributed to the NAS report. "But the answer isn't to not educate those kids because we also find that the people who contribute the most to society, even when you control for demographics, are these immigrant [kids]."

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The Week in Public Finance: Alaska Avoids Its Problems, More Health-Care Pain and Municipal Defaults Are Up

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BY  | JUNE 30, 2017The Alaska State Capitol in Juneau
The Alaska State Capitol, right, sits near the water in Juneau. (Flickr/Jasperdo)

Alaska Avoids Fixing Its Budget Problem (Again)

Facing a $2.5 billion budget gap, Alaska lawmakers have sent Gov. Bill Walker a budget that once again relies on one-time fixes and a massive withdrawal from the state’s rainy day fund.

Walker had proposed a compromise fiscal package that included a combination of revenue-raising measures and spending cuts, reforms to the state’s oil and gas tax credit program, modifications to the income tax, and reductions to residents’ annual dividend payments from the state's Permanent Fund. Instead, the $4.1 billion general fund spending plan passed by lawmakers caps Permanent Fund payments to $1,100 and relies on a $2.4 billion withdrawal from the state’s once-robust rainy day fund.

Walker has repeatedly warned lawmakers that they can't keep relying on the state’s reserves to fund its annual spending plans. But lawmakers have consistently done so anyway, making multibillion-dollar withdrawals for the past three budgets.

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Is Illinois on the Brink of a Financial Armageddon?

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The state's lawmakers have until the end of the week to pass a budget -- something they haven't been able to do in years. If they don't, the consequences are dire.
BY  | JUNE 28, 2017
Illinois State Comptroller Susana Mendoza sitting at her desk.
“Doomsday is right around the corner,” says Illinois State Comptroller Susana Mendoza. (AP/G-Jun Yam)

For two years, Illinois has managed to operate without a budget. Unless lawmakers pass one by the end of the week, the state is likely staring at an unprecedented credit rating downgrade to junk status. But that's just the beginning of its financial Armageddon: Illinois is also projected to not have enough cash this summer to fund all of its basic services like schools.

According to State Comptroller Susana Mendoza, Illinois' flagging revenues and shrinking liquidity likely mean the state will soon be $185 million short on meeting even its basic, court-ordered obligations. “Doomsday is right around the corner,” she says. “It means any number of things: road projects stopping, pension [payments] being skipped, employees not getting paid -- which will likely make people not show up to work.”

Mendoza is not alone in voicing her concerns.

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The Week in Public Finance: Bleak Pension Forecasts, Down on Stadium Debt and More

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BY  | JUNE 23, 2017
The 49ers stadium. (Flickr/Travis Wise)

Pensions: Best Case, Worst Case

In the best-case scenario, governments' pension costs will significantly increase over the next two years, concludes a new report by Moody's Investors Service. The report, which analyzes 56 state and local pension plans with liabilities totaling more than $778 billion, finds that under the best circumstances governments' pension bills would increase by 17 percent assuming investment returns totaling about 25 percent over three years.

Meanwhile, total unfunded liabilities would remain relatively flat, shrinking by about 1 percent. The paltry progress is in part due to some major pension plans changing their accounting assumptions which have increased their reported liabilities.

In the worst-case scenario, pension plan returns would continue to look a lot like they have in the past two years. That is, eking out a little more than a 2 percent return between 2016 and 2019. If that were the case, Moody's predicts unfunded liabilities could go up by nearly 60 percent and governments' bills would swell by roughly half.

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Uncertain of the Future, States Save and Save Some More

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Governors and legislatures are keeping spending growth at its lowest level since the recession to make sure they're prepared for the next one.
BY  | JUNE 21, 2017
(Shutterstock)

In the face of a politically and financially uncertain fiscal 2018, states are hunkering down, pulling back on spending increases and beefing up rainy day funds.

General fund revenues for fiscal 2017 are coming in below forecasts in 33 states, according to a new survey by the National Association of State Budget Officers (NASBO). That’s the highest number since the recession, and it also marks the second straight year that more states have failed to meet projected revenues than exceeded them. As a result, it’s increasingly likely that more states will be forced to make spending cuts (23 have already reported doing so).

The survey also finds that thanks to states’ “thin margins,” spending for fiscal 2018 will tick up by a mere 1 percent -- the lowest growth rate since 2010, when states were in the midst of dealing with the recession. Most of those spending increases will be targeted toward education, where many states are still trying to make up for cuts following the recession, and Medicaid.

Despite slow revenue growth -- or perhaps because of it -- governors and legislatures in many places are prioritizing saving money for the next economic downturn. After a slight dip in 2017, rainy day fund balances are expected to hit the highest total ever at more than $53 billion across 48 states. (Georgia and Oklahoma were not able to provide data.)

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The Week in Public Finance: A Rate Hike, Unpredictable Taxpayers and Stress-Testing Budgets

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BY  | JUNE 16, 2017
The Federal Reserve headquarters in Washington, D.C.
The Federal Reserve headquarters in Washington, D.C. (Shutterstock)

A Rate Hike

The Federal Reserve announced this week that it's raising interest rates by one quarter of a percentage point, which is its second short-term increase of the year. The move was widely expected but comes amid expectations that inflation is running well below the central bank’s 2 percent target for 2017.

The Fed also released more details on how it plans to unwind its $4.5 trillion portfolio of bonds that includes Treasurys, mortgage-backed securities and state and local government debt. Each month, the Fed receives billions in principal payments from its various holdings, and much of that repayment is then reinvested in more bonds and other securities. Now, the Federal Open Market Committee -- which is part of the Federal Reserve -- said it intends to gradually reduce the Fed’s securities holdings by decreasing its reinvestment of its monthly principal payments it receives.

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The Week in Public Finance: Kansas' Experiment Ends, Alaska Still Has No Budget and Keeping Track of Debt

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BY  | JUNE 9, 2017

Kansas is rolling back its controversial 2012 income tax cuts after the Republican-controlled legislature this week succeeded in overriding a veto by GOP Gov. Sam Brownback.

The state is facing a $900 million budget shortfall and has struggled under budget deficits since the tax cuts went into effect. With the new legislation, the state’s income taxes will increase, although most tax rates will still be lower than they were before the 2012 cuts. The increases are expected to generate more than $1.2 billion for the state over the next two years. Opponents of the action call it a $1.2 billion take hike on Kansans.

On Thursday, the ratings agency Moody's Investors Service applauded the legislature's move, calling it "a significant step" toward achieving a sustainable budget.The action comes four months after lawmakers failed to override another Brownback veto preserving a tax loophole that lets scores of business owners pay no income tax.

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Can a Cyberattack Cause a Credit Rating Downgrade?

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While it seems far-fetched, the danger is real for small governments.
BY  | JUNE 7, 2017
(Shutterstock)
 

Last month saw an unprecedented global ransomware attack that infected tens of thousands of computers in nearly 100 countries, including the U.S., the U.K. and Russia. Hospitals in the U.K. were the hardest hit as more than a dozen were forced to turn away nonemergency patients and doctors had to rely once again on pen and paper.

The disruption has caused many to consider how vulnerable U.S. government services are to a similar attack. But some are raising the possibility of another vulnerability: That a cyberattack has the potential to lower a government’s credit rating, making borrowing to fix the problem even more expensive for taxpayers.

The possibility seems remote: No government yet has been downgraded because of a cyberattack. But S&P Global Ratings analyst Geoff Buswick says the risk is real, particularly for smaller governments with less financial flexibility. That’s because attacks can cost a lot, but can also cost taxpayer trust. That in turn, can hinder a government’s ability to raise taxes. “As a rating analyst, I look at the willingness and ability to repay debt,” says Buswick. “Without taxpayer support you don’t have that ability.”

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The Week in Public Finance: Pension Reform in Texas, Fitch Lowers Expectations and Illinois Downgraded Again

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BY  | JUNE 2, 2017 

Even the Pension Deals are Big in Texas

There has been a big break in Houston's and Dallas' pension crises over the past week: The Texas Legislature approved reforms that require all sides to pony up big.

In Houston, the changes will cut the city’s $8 billion unfunded liability in half. Municipal and public safety unions agreed to $2.8 billion in benefits cuts. Meanwhile, Houston will issue $1 billion in pension bonds to boost the system’s balance. It will also stick to a payment plan -- that includes capping the city's future pension costs -- to pay off the remaining unfunded liability over 30 years.

Similarly, Dallas’ police and fire workers will shoulder $1.4 billion in benefit cuts over the next 30 years and more than $1 billion in additional contributions from their pay. For its part, the city will be required to significantly boost its annual payments into the fund, starting with more than $150 million next year. Mayor Mike Rawlings will also get to pick six of the 11 trustees on the currently union-dominated pension board, whose poor investments contributed to more than $1 billion in losses.

The Takeaway: The common theme to these reforms is shared sacrifice. While unions and officials are happy to have a plan in place, no one is pleased about what comes next. "This is not a time to high-five," Dallas Police Association Vice President Frederick Frazier told the Dallas Morning News. "This is a time to pull the boots up and get back to work."

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In Scranton, Pa., Fiscal Progress Comes With Political Costs

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The city is on the brink of making a speedy turnaround. Many worry that the tough financial decisions it took to get there could reverse some of its political progress.
BY  | MAY 30, 2017
Bill Courtright, the mayor of Scranton, Pa. (Photos by David Kidd)
 

After a quarter-century of being branded by the state as "fiscally distressed," Scranton, Pa., is the closest it's ever been to shedding that label. If its finances remain stable, the city is expected to exit the state’s Act 47 distressed cities program -- which it entered in 1992 -- in the next three years.

What makes the news remarkable is the tailspin that Scranton was in just a few short years ago. When Mayor Bill Courtright took office in 2014, he inherited a city that had balanced its budget for five straight years using onetime revenues and deficit financings. “In early 2014, everyone wrote us off,” says Courtright. “It was like we had a disease.”

But thanks to what observers are calling a new era of political cooperation between the mayor and council, Scranton has made considerable progress. City officials have approved several tax increases aimed at balancing the budget, including a hike in property taxes and garbage fees. Those, combined with a new commuter tax, have injected $16.2 million in new annual revenue into the $90 million general fund.

Courtright credits a team that stubbornly adhered to a financial recovery plan devised with the help of a financial consultant. The mayor, also a former councilmember, says he and the current council have communicated better and worked to move beyond the infighting that dominated public meetings in previous years. “We knew we had to change the image between past mayor and past council,” he says. “We knew we wouldn’t get the financial community to go along with us if we couldn’t cooperate amongst ourselves.”

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The Week in Public Finance: The Trump Budget Edition

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BY  | MAY 26, 2017
Someone holds a copy of President Trump's fiscal 2018 budget at the U.S. Government Publishing Office's plant. (AP/Carolyn Kaster)

Hysteria Over Cuts

President Trump unveiled his budget this week, and while it merely expanded upon an outline he submitted in March, it was still met with near-immediate outcry from state and local government groups.

In the budget, the president proposes diverting more than $54 billion from various federal agencies to boost defense spending. He also cuts $260 billion over 10 years in expected discretionary spending, a move that critics say drastically reduces federal funding and grants for vital state and local programs that create jobs, raise wages and protect low-income Americans. In total, Trump’s proposal would cut federal spending by more than $3.6 trillion over the next decade.

U.S. Conference of Mayors CEO Tom Cochran issued a statement saying that mayors across the country were "deeply troubled by President Trump’s brazen attack on the very people he promised to protect."

The Takeaway: Trump’s budget included so many drastic changes that even Republicans in Congress were uncomfortable with parts of it. It’s unlikely to pass as is, but it still has state and local governments worried.

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The Week in Public Finance: Recalculating Pension Debt, Hartford Discusses the 'B' Word and Prudent Rainy Day Policies

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BY  | MAY 19, 2017

A new analysis by Josh Rauh at Stanford University's Hoover Institution says state and local governments’ collective unfunded pension liabilities are actually about three times the amount they claim. Rauh, a finance professor who has long been a critic of public pension accounting, arrived at his figure by assigning pension plans a much lower assumed investment rate of return.

Pension plans in 2015 collectively reported about $1.3 trillion in unfunded liabilities. In other words, they have about 72 percent of the assets they need to meet their estimated total liabilities. That figure assumes plans will earn an average of 7.4 percent each year on their investments.

Rauh, pointing to the wild swings of the stock market and the fact that pensions are putting more of their assets into volatile, alternative investments, says that assumption is too risky. He argues it's more responsible to consider a rate of return closer to what long-term bonds earn: slightly less than 3 percent. Under those assumptions, Rauh says unfunded U.S. public pension liabilities would roughly triple to $3.8 trillion, or less than half-funded.

Fresh Off Another Downgrade, Connecticut Has a Plan to Lower Borrowing Costs

But observers disagree about whether it will work.
BY  | MAY 17, 2017

Besieged by budget shortfalls, Connecticut's credit rating was downgraded in recent days by Fitch Ratings and Moody’s Investors Service. The downgrades were the state’s fourth and fifth in the past year alone. But if State Treasurer Denise Nappier gets her way, that credit hit might not matter the next time Connecticut goes to sell bonds.

Nappier wants the state to start offering investors revenue bonds that are paid back directly from the state’s income tax revenues. Called tax-secured revenue bonds, these new bonds would be offered in place of general obligation bonds, which are backed by the state’s general revenue collections. Nappier’s office believes the dedicated income stream would mean the bonds would fetch ratings as high as AAA, resulting in a better interest rate and lower debt service costs.

The idea has received mixed reviews.While some observers call it a product that will offer comfort to bondholders wary of Connecticut’s troubles, others say it’s a “financial engineering gamble” designed to game the market. “To create something out of nothing -- they’re not being more fiscally responsible by doing it this way,” says Municipal Market Analytics’ Lisa Washburn.

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The Week in Public Finance: Revenue Relief in 2018, Good GDP News and the Debt-Shy

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BY  | MAY 12, 2017

A Revenue Pick-Me-Up?

For the past two fiscal years, tax revenue has lagged. A new analysis, though, predicts states may soon see some relief.

A report this week by S&P Global Ratings says the climate may be right for “a revenue rebound” in fiscal 2018. A big reason, writes analyst Gabe Petek, is that investors may have held out in 2016 on cashing out stocks because they hoped a Trump presidency would give them a more favorable tax climate for their capital gains. With tax reform now looking like it’ll take longer, investors are more likely to cash out sooner. Petek says job growth and recent interest rate hikes will also benefit state income and sales tax growth in fiscal 2018.

That's good news given that a new analysis by the Nelson A. Rockefeller Institute of Government found that state tax revenue last year grew just 1.2 percent and actually declined by one-tenth of a percent after adjusting for inflation. It’s the weakest performance since 2010 and a major drop from 4.7 percent growth in fiscal 2015.

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Why Few Cities Will Take the Supreme Court Up on Their Right to Sue Banks

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Last week's ruling leaves open a key legal question that could make cities unlikely to file suit.
BY  | MAY 11, 2017

After losing billions in property tax revenue during the foreclosure crisis, local governments notched a win last week when the U.S. Supreme Court affirmed the city of Miami’s right to sue big banks under the Fair Housing Act.

But don’t expect a flood of lawsuits to follow any time soon. The ruling leaves open a key legal question about the burden of proof cities must present to show they were financially harmed.

In the 5-3 ruling, the court sided with Miami, agreeing that the 1968 act, which prohibits racial discrimination in the lease, sale and financing of property, applied to cities as well as people. But the ruling didn’t agree that Miami had provided enough direct evidence linking discriminatory lending practices by Wells Fargo and Bank of America to the financial harms incurred by the city. It also stopped short of saying what a city must do to prove economic harm and remanded the case back to the lower court to answer that question.

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The Week in Public Finance: Puerto Rico's Quasi-Bankruptcy, Congress Meddles With State Retirement Plans and More

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BY  | MAY 5, 2017

Puerto Rico (Sort of) Declares Bankruptcy

Puerto Rico declared a form of bankruptcy protection this week that puts it in uncharted territory for U.S. governments and municipal finance.

As a territory, Puerto Rico is not eligible to file for Chapter 9 protection. But thanks to the Puerto Rico Oversight, Management and Economic Stability Act, it has a similar option available to it: Title III protection.

The act, which was passed by Congress and went into effect last July, put a temporary moratorium on litigation regarding Puerto Rico’s more than $70 billion in bond debt and created a seven-member financial oversight board with final say over the commonwealth’s finance decisions. The litigation moratorium was lifted on May 1, and with creditor negotiations going nowhere, the government is allowed to file debt restructuring petitions in federal court.

The Takeaway: Puerto Rico has been in a financial downward spiral for years. When it first started defaulting on debt, there were concerns that it could have a negative ripple effect on the municipal market. As it turns out, those concerns have not been justified. So, while this latest move by the commonwealth is a great concern for anyone with money tied up in Puerto Rico, there have been few concerns that the event will cast a shadow over other U.S. governments now issuing bonds.