Taxes on vices are tempting but unreliable source of revenue
Substantial investment in complex and risky assets exposes funds to market volatility and high fees.
From the overview:
State and local public retirement systems held $3.8 trillion in assets in 2016, the most recent year for which comprehensive data are available. With the retirement security of 19 million current and former state and local employees at stake, sound and transparent investment strategies are essential.
In a bid to boost investment returns and diversify portfolios, plans in recent decades have shifted away from low-risk, fixed-income vehicles in favor of stocks and alternatives such as private equity, hedge funds, real estate, and commodities. In 2016, half of plan assets were invested in equities, a quarter in alternative investments, and another quarter in bonds and cash.
Investment performance over the last five to six years has, for the most part, tracked plan target rates, with average returns of about 7 percent. However, during the same time frame the fiscal position of public funds has not improved, and in most cases has declined. And while equities and alternatives can provide higher financial returns, they also leave funds vulnerable to market volatility and the risk of shortfalls. Furthermore, as our population ages and the number of retirees grows, cash outflows increase, adding more pressure to pension fund balance sheets.
Because earnings on these investments are expected to pay for about 50 to 60 percent of promised retirement benefits for public workers and retirees, careful attention to reporting and transparency has become increasingly important. In particular, understanding the impact of market volatility on public plans and their sponsoring governments’ budgets is critical for policymakers and stakeholders. Mandatory stress test reporting and full disclosure of asset allocation, performance, and fee details are therefore essential to determining whether public pension plans have the ability to pay promised retirement benefits…..
States often depend on their rainy day funds, more formally known as budget stabilization funds, to help them weather economic downturns and uncertainty. These funds act as savings accounts that allow states to set aside above-normal revenue growth when the economy is strong so it can be used in times of recession when revenues drop sharply. With significant reserves, states can rely less on program reductions or tax increases to close a budget gap when their residents can least afford it.
For many states, the Great Recession, which ran from late 2008 through the middle of 2010, served as a wake-up call to re-evaluate their savings policies. In total dollars, state budget shortfalls outstripped savings nearly 2 to 1 in the first year of the downturn alone. A decade later, many states have improved their reserve policies, but more remains to be done as governments prepare for the next recession. For example, a September 2018 analysis by Moody’s Analytics found that 32 states fell short of having enough reserves to offset even a moderate recession.
As states work to balance saving for future needs against funding other important priorities, an increasing number are using evidence-based approaches to determine how much they want to have on hand to navigate the next recession. ….
Source: UN-Habitat, 2018
From the press release:
A Global Municipal Database (GMD) launched by UN-Habitat provides standard indicators for municipal budgets and includes data on per capita expenditures, revenues and debt in cities worldwide. The GMD is the first database to provide standardized local level per-capita budget data and covers more than 100 cities, highlighting the importance of focusing on financial data at municipal level.
The data which is based on core mandates with a standard set of budget responsibilities identified and noted for each government in the database was compiled with cooperation from city-based researchers and technical staff of municipalities in developed and developing countries. Selection of cities and original points of contact for city-based researchers was derived from the Atlas of Urban Expansion project which contains data on spatial layout of cities but none on municipal finance….
….The visitor boom — while great for the local economy — is putting a strain on the public lands that are, ultimately, the reason people vacation, day-trip and retire to the Vail Valley. The cash-strapped U.S. Forest Service isn’t equipped to handle the more than 12 million people who now come to the 2.3-million-acre White River National Forest each year.
So, this year, Vail and other Eagle County governments are planning to set aside as much as $120,000 to pay for Forest Service employees to monitor trails and campgrounds and enforce backcountry rules next summer.
Communities across the country are facing similar challenges as more people visit public lands, outdoor recreation becomes more important to rural growth, and federal land managers struggle with tight budgets. The growth in tourism and population has led local governments to set aside tax dollars for a purpose they might never have considered before: boosting federal agencies. ….
From the summary:
The 2018 City Fiscal Conditions survey indicates that slightly more finance officers than last year are optimistic about the fiscal capacity of their cities. However, the level of optimism is still far below recent years. Furthermore, tax revenue growth is experiencing a year-over-year slowdown, with the growth in service costs and other expenditures outpacing it. Taken together, the survey results suggest that cities are approaching the limits of fiscal expansion.
– Finance officers from the smallest cities are least likely to report that their cities are better able to meet the fiscal needs of their communities this year over last (63%). Meanwhile, finance officers from cities in the South are most likely to report feeling confident this year (81%).
– General fund expenditures are outpacing revenues, a trend anticipated to continue into next year. Although revenues are not in decline, they grew only 1.25 percent in FY 2017, and are expected to stagnate in FY 2018. Expenditures grew 2.16 percent in FY 2017, with growth for FY 2018 budgeted at 1.97 percent.
– All major tax sources grew slower in FY 2017 than in FY 2016, and all are expected to grow less than one percent in FY 2018. In FY 2017:
– Property tax revenues grew 2.6 percent, compared to 4.3 percent in FY 2016
– Sales tax revenues grew 1.8 percent, compared to 3.7 percent in FY 2016
– Income tax revenues grew 1.3 percent, compared to 2.4 percent in FY 2016
– Cities continue to rely on the same revenue generating actions as they have in the past, namely increasing service fee prices (41%) and property tax rates (28%). This year, fewer cities are instituting new types of fees (18 percent this year versus 26 percent last year).
– Employee wages (88%), public safety (78%) and infrastructure (71%) are the most common areas for which cities increased spending. Fewer cities this year are contracting or privatizing city services and more are increasing spending on personnel and workforce expansion.
– By and large, it is too soon to tell specifically how provisions of the Federal Tax Cuts and Jobs Act of 2017 will impact city finances, except for advance refunding bonds. Thirty-five percent of city finance officers are already seeing negative fiscal impacts associated with the elimination of tax-exempt advance refunding bonds. Sixty one percent report that the loss of this fiscal tool will have negative impacts on future fiscal health.
These trends come at a time when cities have not yet regained losses from the Great Recession and face uncertainty from federal and state partners. Despite these challenges, cities continue to balance their budgets, remain resilient and serve as engines of national economic growth.
Budget cuts have created a vicious circle of decreasing enrollment in Puerto Rican universities.
$27.5 million in marijuana tax revenue transferred to the state Distributive School Account
With June’s marijuana revenue figures now on the books, Nevada closed out the first full year of adultuse sales with marijuana tax collections totaling $69.8 million for the fiscal year—about 140 percent of what the state expected to bring in. The last four months of the fiscal year proved to be the most robust months for marijuana tax revenue, with each month’s totals topping $6.5 million. At the end of June, there were 64 medical marijuana dispensaries open in Nevada, with 61 of those licensed to also sell adult-use marijuana. For the fiscal year, these state-licensed dispensaries and retail stores saw total taxable sales—which includes adult-use marijuana, medical marijuana, and marijuana-related tangible goods— of $529.9 million. Adult-use marijuana sales totaled $424.9 million for the year, generating $42.5 million in tax collections through the 10 percent Retail Marijuana Tax. The 15 percent Wholesale Marijuana Tax brought in close to $27.3 million for the fiscal year. Revenues from the wholesale tax, along with application and licensing fees, go primarily to education in Nevada, via the state Distributive School Account. With the closing of the fiscal year, the Department of Taxation transferred a total of $27.5 million to that education account. All revenues from the Retail Marijuana Tax have been distributed to the state’s Rainy Day Fund…..
Recently released records show districts budgeting up to six figures on insurance policies, safety training, and police presence
High profile school shootings in recent years have offered enterprising insurance companies with a business opportunity – and burdened districts budgets with thousands of dollars in new expenses.
This school year, some Florida public school districts have invested in active shooter protection insurance policies and other security-related programming, such as active shooter response training.
According to the insurance policy obtained in a recent public records request, Palm Beach Public School District has paid a $100,000 premium to McGowan Program Administrators, a leader in the active shooter insurance industry, for active shooter protection this academic year.
As of May 3, 2017, Puerto Rico had approximately $74 billion of bond debt and $49 billion of unfunded pension liabilities. For an economy of Puerto Rico’s size, the burden of this debt has been catastrophic—it has been a financial, and ultimately a humanitarian, catastrophe. The toll it has taken on the people of Puerto Rico begs a pressing question: How did it happen?
This Report, like the Independent Investigation upon which it is based, aims to answer that question based on the facts. On the same basis, it offers recommendations for the people of Puerto Rico, and the policymakers who represent them, to consider in making sure they never have to go through all this again…..