MuniLand

The State Budget Crisis Task Force weighs in

Much as the Simpson-Bowles report aspired to be the foremost guide to reducing the federal deficit, the Volcker-Ravitch report on the state budget crisis that was released yesterday hopes to serve a similar purpose for state government spending. Paul Volcker, the former Fed chairman, and Richard Ravitch, who helped New York City work itself out of bankruptcy, led the State Budget Crisis Task Force, the group that produced this report. The task force also included two former U.S. Treasury Secretaries as members. The bottom line of the report is that there is less money to go around and that states should become better managers of the shrinking economic pie:

The United States Constitution leaves to states the responsibility for most domestic governmental functions: states and their localities largely finance and build public infrastructure, educate our children, maintain public safety, and implement the social safety net. State and local governments spend $2.5 trillion annually and employ over 19 million workers – 15 percent of the national total and 6 times as many workers as the federal government…

…States are grappling with unprecedented fiscal crises. Even before the 2008 financial collapse, many states faced long-term structural problems. Many economists believe that in the aftermath of the crisis, the economy will grow sluggishly for years as it works off the excesses of the credit and real estate bubbles and endures slow employment growth. Tax revenues are recovering slowly and remain well below their pre-crisis trends.

Basically states, once flush with revenues, have overpromised benefits to their retirees, set aside too little in reserves to cover their liabilities, mismanaged their books and sat idly by while their tax base eroded as a result of changes in consumer behavior. The two big issues for state budgets are public pensions and Medicaid, both of which are somewhat out of the states’ control. Although states assume about half the cost of Medicaid, decisions about the program are made at the federal level. States must apply to Washington for an exemption to make changes to their program. Pension benefits are enshrined in contracts and are generally governed by a state’s constitution. Making changes to pensions, outside of bankruptcy, is either impossible or would require constitutional amendments.

The report is a landmark for recognizing that the decades-long expansion of state and local governments must come to an end. Harsh economic conditions have collided with gross structural imbalances, and the report highlights the dimensions of the wreckage.

If you are a muniland watcher, you know that the report’s recommendations are much too idealistic for most states to adopt verbatim. The messy business of state politics generally trumps common sense as politicians who hope to get re-elected tend to resort to bestowing public largesse on special interest groups. Few state politicians have successfully stayed in office with a platform of downsizing government or going after public-worker benefits. This report is an attempt to persuade the public to support, or at least not actively resist, the fiscal downsizing that state and local governments must endure.

Governors, mayors, state legislatures and city councils fight these battles every day as they contend with unsteady and shrinking revenues and increasing demand for services. It’s the wider public that has had little understanding of the depth of these problems. Voters will face two choices: reduced services or increased taxes. Having an understanding of what the problems are is helpful, but hard decisions lie ahead.

Massachusetts sets the bar for transparency

For openness in finances, debt management and budget process, Massachusetts is the gold standard among states. The legislature and executive branch have collaboratively embraced a five-year budgeting process and committed to sharing the results with taxpayers and the public. Because of the state’s efforts to reach out to the investing community, I predict that its transparency will lead to lower borrowing costs and more stable funding sources in the future. The state is rated AA+ by credit rating agencies for creditworthiness, but I’ll assign it the highest rating, AAA, for transparency.

Several weeks ago, the state treasurer, Steven Grossman, launched a new Twitter account (@BuyMassBonds) that keeps the public informed about new financial filings and bond offerings. It’s a model of excellence for muniland in terms of keeping municipal bond investors informed through social media. Here is a recent tweet about an upcoming bond issue, the Massachusetts Water Pollution Abatement Trust State Revolving Fund Bonds:

Christie wants to cut taxes while the cashbox is empty

New Jersey Governor Chris Christie got a lot of media attention this week when he announced that Warren Buffett “should just write [the government] a check and shut up,” on CNN’s Piers Morgan Tonight. His great one-liner obscured the more profound question he was being asked, which was: Shouldn’t the wealthy pay a higher proportion of taxes? Beliefs about progressive taxation vary widely, but income taxes at every level of government are structured so that the wealthy pay a higher proportion of taxes.

If I had been asking the governor questions, I would have focused on his fetish for cutting income taxes when his state’s cashbox is nearly empty. Or as the rating agency Standard & Poor’s defined the problem:

Republican fiscal conservatism is a myth

Government has expanded tremendously at every level in the United States over the last several decades. Expenditures have risen; constituencies have gained new subsidies; and loads of debt has been taken on. It’s unstable and it’s time to go on a diet.

The Republican party declares that they are the party of fiscal conservatism which has been beating back the profligate Democrat party. Here is the war cry from their 2008 party platform:

The soft side of federal spending

It’s not clear that Congress is capable of doing its job of managing the nation’s purse strings. Capitol Hill failed at identifying a combination of tax increases and reductions in spending that would have lowered our growing debt burden. Now every constituency that draws funds from the U.S. Treasury is angling to push others away from the trough. A perfect example is the internecine warfare to come over defense cuts. Here is a slick ad against funding for the military’s nuclear arsernal obviously coming from the traditional munitions and equipment makers:

The military players are well versed at battling over the spoils. But it’s the soft side of federal spending, where social support and services are funded, that is less equipped to fight over its share of decreased funding.

State taxes on fire

State tax collections are hot, hot, hot. The taxman rustled up 16 percent more in state income taxes for the second quarter of 2011 compared to the same period in 2010. Where is this phenomenal growth coming from?

Based on the most recent data collected by the Rockefeller Institute, states are raking in about $900 billion a year from their three major tax categories: the sales tax, personal income tax and corporate income taxes. Revenues from these three taxes total about 6.25% of U.S. GDP.

What do muniland insiders think?

When the mainstream press pays attention to muniland, often it’s the most colorful and misinformed voices — think Meredith Whitney – that dominate coverage. So it was great to get some interesting data today on how municipal insiders view the market from the muni team at RBC Capital Markets. They did a survey of 116 municipal market professionals at the recent Bond Buyer’s California Public Finance Conference. Respondents included officials from federal, local and state governments; bankers; and other municipal finance professionals in attendance.

The key findings, shown in the chart above, are that industry participants worry most about the low level of bond issuance, headline risk and federal budget issues. Headline risk and federal budget problems are out of the control of everyone in the municipal space. But low issuance is a puzzler. Certainly these professionals have had their trade reduced as fewer bond issues come to market and as municipalities face harsher credit constraints than they are used to.

Who are the “job creators?”

As the congressional supercommittee begins its budget-cutting efforts, state and local governments are worried about looming cuts to their federal grants. From Bloomberg:

In statehouses across the U.S., a budget-cutting congressional supercommittee and the sputtering economy threaten a fledgling recovery from the worst fiscal crisis in more than 70 years.

To create a more balanced approach that includes revenue increases as well as spending cuts, President Obama has proposed to raise taxes on the highest earners by reducing their tax exclusions and deductions (of which the municipal bond tax exclusion is a relatively small part).

Obama proposes direct aid to local governments

Photo

Obama proposes direct aid to local governments

Among the proposals made by President Obama in his jobs speech last night was his call for the federal government to fund the costs of public school teachers, firemen, policemen and first responders fully. This appears to be the only direct cash subsidy for jobs in his plan.

The American Jobs Act, if enacted by Congress, would specifically allocate $30 billion in funds for teachers and $5 billion would support the hiring and retention of public safety and first responder personnel. Using 2010 Census data this would provide a subsidy of approximately 12% to local governments for their elementary and secondary educator’s expenses and 8% for police and firefighters. The 2009 Recovery Act allocated $47 billion to local governments for teacher salaries so this proposal is about 40% less.

The great milk cow in the sky dropped dead

The new paradigm for state and local governments is austerity.

Hard economic conditions and efforts at the federal level to achieve a balanced budget mean that funding for municipal governments will continue to contract. How will the reductions at the federal level spill over? Blunt-talking former Senator Alan Simpson, who co-chaired the National Commission on Fiscal Responsibility and Reform, was quoted recently as saying:

“(State officials) need to know the great milk cow in the sky dropped dead and that it’s over,” Simpson said in an interview for the March/April Capitol Ideas. “If they’re waiting for the next injection of some kind of funding from the feds to get the states propped up, … they probably saw the last one go by with the last compromise, which added almost $1 trillion bucks to the deficit without any reduction in spending.”

  • # Editors & Key Contributors