Category Archives: State & Local Finance

City Fiscal Conditions 2020

Source: National League of Cities, August 2020

From the summary:

In its 35th year, the City Fiscal Conditions report continues to provide insight into the fiscal health of cities, towns and villages from across the nation. The findings in this year’s report reveals that America’s cities are experiencing the fiscal consequences of this pandemic-downturn at an unprecedented speed – and like recent recessions, it will take years for municipal budgets recover from the impact of COVID-19.

By diving deeper into the survey results from 485 cities from across the country, we can see just how the coronavirus pandemic has affected the lives of residents and why direct funding is critical to the financial health of our nation.

Implications of the Covid-19 Pandemic for State Government Tax Revenues

Source: Jeffrey Clemens, Stan Veuger, NBER Working Paper No. 27426, June 2020
(subscription required)

From the abstract:
We assess the Covid-19 pandemic’s implications for state government sales and income tax revenues. We estimate that the economic declines implied by recent forecasts from the Congressional Budget Office will lead to a shortfall of roughly $106 billion in states’ sales and income tax revenues for the 2021 fiscal year. This is equivalent to 0.5 percent of GDP and 11.5 percent of our pre-Covid sales and income tax projection. Additional tax shortfalls from the second quarter of 2020 may amount to roughly $42 billion. We discuss how these revenue declines fit into several pieces of the broader economic context. These include other revenues (e.g., university tuition and fees) that are also at risk, as well as assets (e.g., pension plan holdings) that are at risk. Further dimensions of context include support enacted through several pieces of federal legislation, as well as spending needs necessitated by the public health crisis itself.

Fiscal Survey of the States – Spring 2020

Source: National Association of State Budget Officers, 2020

From the summary:

Note: This report is based primarily on data from governors’ budget proposals for fiscal 2021 and reflects state fiscal conditions before the COVID-19 pandemic and economic crisis. NASBO expects the data in this report will serve as an historical baseline for comparison to post-COVID fiscal conditions. Read more about the post-COVID-19 state budget outlook.

This report shows that before the COVID-19 pandemic and economic crisis, state fiscal conditions were strong overall and rainy day fund balances were at an all-time high. Governors’ (pre-COVID) budgets for fiscal 2021 were focused on investing in key priorities while calling for modest spending growth, with an emphasis on fiscal discipline and preparing for the next recession.

Risks Rise for State and Local Budgets: COVID Stress Test Update

Source: Dan White, Emily Mandel, and Colin Seitz, Moody’s, June 24, 2020
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• States and local governments will need approximately $500 billion in additional aid over the next two fiscal years to avoid major damage to the economy.
• Timing is of the essence, as state and local policymakers face several important budget deadlines in the weeks and months ahead.
• If action is not taken quickly enough, the spending cuts and tax increases that would need to be undertaken could cost several million additional jobs and further delay the recovery.
• The specter of a second wave of widespread infections is broadening the distribution of potential downside scenarios.

States will cut K-12 education funding, pushing budget pain to school districts with varying ability to cope

Source: Moody’s, June 23, 2020
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Many states suffering revenue declines because of the coronavirus outbreak will cut K-12 funding, leaving school districts having to raise revenue, reduce expenses or draw down reserves. Raising revenue or reducing expenses generally lowers credit risk the most, while spending reserves, particularly large single-year drawdowns, tends to carry the greatest risk. ​

Pension investment losses are poised to inflict material damage on US municipal credit

Source: Moody’s, March 24, 2020
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Recent US public pension investment losses are likely to severely compound the pension liability challenge facing many state and local governments. At the same time, the economic fallout from the coronavirus is reducing revenue levels and threatening the ability of governments to afford higher pension costs.

Coronavirus-driven filing extension will delay income tax revenue, but states have resources to bridge the gap

Source: Moody’s, March 27, 2020
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The Internal Revenue Service (IRS) extended the deadline for filing federal income taxes and tax payments by three months, and many if not all states that levy personal income taxes will follow suit. States will therefore receive a large portion of their income tax revenue in July rather than April, which will force them to make adjustments to bridge budget gaps, but most have considerable financial flexibility to blunt the credit-negative effects of the delays.

Revenue securing certain US state and local debt will weaken as coronavirus slows economy and travel

Source: Moody’s, March 30, 2020
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Tax revenue used to repay state and local special tax debt — debt secured by specific tax revenue streams such as hotel or car rental taxes — will rapidly decline amid the coronavirus-related economic downturn. A state or local government with a dedicated reserve fund or the ability and willingness to cover a gap in pledged revenue bolsters the credit quality of certain special tax debt.

Tax incentives for business leave states worse off

Source: Matt Shipman, Futurity, February 27, 2020

The vast majority of tax incentives aimed at attracting and retaining businesses ultimately leave states worse off than if they had done nothing, researchers report.


For the study, researchers examined data from 32 states from 1990-2015. The researchers evaluated all of the state and local tax incentives available in the 32 states, as well as an array of economic, political, governmental, and demographic data.


A computational model assessed the extent to which the effects of attracting or retaining businesses in a state offset the state’s related tax incentives.


“We found that, in almost all instances, these corporate tax incentives cost states millions of dollars—if not more—and the returns were minimal,” says corresponding author Bruce McDonald, an associate professor of public administration at North Carolina State University.


“In fact, the combination of costly tax incentives and limited returns ultimately left states in worse financial condition than they were to begin with.”


The two exceptions to the finding were job creation tax credits and job training grants.

Related:
You Don’t Always Get What You Want: The Effect of Financial Incentives on State Fiscal Health
Source: Bruce D. McDonald III, J. W. Decker, Brad A. M. Johnson, Public Administration Review, Early View, First published: February 27, 2020
(subscription required)

From the abstract:
Governments frequently use financial incentives to encourage the creation, expansion, or relocation of businesses within their borders. Research on financial incentives gives little clarity as to what impact these incentives may have on governments. While incentives may draw in more economic growth, they also pull resources from government coffers, and they may commit governments to future funding for public services that benefit the incentivized businesses. The authors use a panel of 32 states and data from 1990 to 2015 to understand how incentives affect states’ fiscal health. They find that after controlling for the governmental, political, economic, and demographic characteristics of states, incentives draw resources away from states. Ultimately, the results show that financial incentives negatively affect the overall fiscal health of states.

An Introduction to Police and Fire Pensions

Source: Jean-Pierre Aubry and Kevin Wandrei, Center for Retirement Research at Boston College, SLP#69, February 2020

The brief’s key findings are:

  • Pension and retiree health benefits for public safety workers are more expensive than those of other local government workers, largely due to earlier retirement ages.
  • Perhaps surprisingly, though, their retirement benefits make up only a very small share of total local government spending.
  • Some evidence suggests that public safety workers could work longer, which may have implications for plans’ retirement age.
  • However, raising retirement ages would have little impact on government finances, particularly since it might involve higher wages to maintain a quality workforce.