Category Archives: State & Local Finance

As Albany Debates a Permanent Property Tax Cap, How Is the Cap Affecting School Budgets?

Source: Jim Malatras, Nicholas Simons, Michelle Cummings, Rockefeller Institute of Government, January 23, 2019

This is the first in a series on property taxes in New York State by the Rockefeller Institute of Government. Collaborating with other organizations, the Rockefeller Institute will take an in-depth look into various issues surrounding property taxes including their impact on local governments, case studies of how the tax cap is working in school districts, the future of education financing and its reliance on local property taxes, and property tax assessments.

To Cap or Not to Cap, That Is the Question
As Albany Debates a Permanent Property Tax Cap, How Is the Cap Affecting School Budgets?

Newly minted Democratic Majority Leader and Temporary President of the State Senate, Andrea Stewart Cousins, said the Senate would take up a bill to make the local property tax cap permanent this week. New York State has some of the nation’s highest property taxes, be it in total dollars paid (in the downstate suburbs, like Nassau and Westchester Counties) or by home value (in many upstate counties, like Orleans and Wayne). In response, the state enacted in 2011 a local property tax cap law that restricted annual property tax increases to 2 percent or the rate of inflation, whichever is less. While the tax cap has limited local property taxes, it also has an effect on the distribution of school revenue (with more money coming from progressive state income taxes) and higher passage rates for school budgets.

The property tax cap was not made permanent. It was part of a larger horse-trading deal that included strengthening and extending rent regulations on housing, primarily in New York City. As part of the original deal, the local property tax cap was scheduled to sunset after four years unless reauthorized by the state legislature and signed by the governor. The tax cap was extended once in 2015 and is once again up for renewal in 2020…..

Illinois (State of) – Pension funding improves, but lags other states due to weak contributions and high payouts

Source: Ted Hampton, Thomas Aaron, Timothy Blake, Moody’s Investors Service, Issuer Comment, State government – Illinois, December 18, 2018
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Illinois’ (Baa3 stable) pension funding slightly improved under our adjustments in the year ended June 30, 2018, despite higher unfunded liability figures that the state reported December 7 (see Exhibit 1). Rising interest rates that lowered liabilities, combined with favorable investment returns, drove down the state’s adjusted net pension liability (ANPL) by an estimated 2%-5% in the year. Nonetheless, Illinois’ recent pension funding gains lag those of other states, largely because of its weak contributions and rising payouts.

Local government – Illinois: Ability to absorb pension costs supports exceptional credit quality for some cities

Source: David Levett, Rachel Cortez, Alexandra S. Parker, Moody’s Investors Service, Sector In-Depth, Local government – Illinois, December 14, 2018
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Heavy pension burdens have weakened credit quality for many Illinois cities in recent years, but some Illinois municipalities have maintained exceptional credit profiles.

Local government – New Mexico – Pension burdens will continue to weigh on credit quality, prompting potential reform

Source: Heather Correia, Roger S Brown, Naomi Richman, Alexandra S. Parker, Moody’s Investors Service, Sector In-Depth, Local government – New Mexico, December 18, 2018
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Without changes to New Mexico’s two statewide cost-sharing pension plans, municipalities’ elevated pension burdens will intensify. Although pension contribution rates are set by state statute, if rates increase through legislative reform, local governments will likely be responsible for these cost hikes.

Adjusted net pension liabilities rise for most of the 50 largest local governments in 2017

Source: Thomas Aaron, Timothy Blake, Moody’s Investors Service, Sector In-Depth, Local government – US, December 18, 2018
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Adjusted net pension liabilities (ANPLs) reached new peaks for most of the 50 largest local governments (by debt outstanding) in fiscal year 2017 reporting, due to poor investment returns and low market interest rates. Most governments report pension funding with up to a one-year lag, so favorable investment returns in fiscal 2017 and 2018 will lead to a decline in ANPLs through many of those governments’ 2019 reporting. Nonetheless, pensions continue to drive historically high leverage and elevated annual costs for some governments, and risks from potential pension investment losses are significant…..

U.S. Local Government 2019 Sector Outlook: Showers For Some, Downpours For Others

Source: S&P Global Ratings, January 9, 2019
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Although 2019 is starting out with growing economic uncertainty in the U.S., S&P Global Ratings believes the U.S. local government sector remains stable and resilient for now. Local governments benefited from positive economic trends in 2018 (such as higher GDP growth and low unemployment), but 2019 already show some signs of slowing, including lower GDP projections and higher interest rates. (For more on our 2019 economic projections, see “The New Year Will Likely Ring In A Record U.S. Expansion; Could It Be A Last Hurrah?“, published Dec. 4, 2018, on RatingsDirect.)

Slower GDP growth and mounting fixed costs can start to put pressure on states before local governments, but local governments can feel the impact relatively quickly. (For more on our state sector outlook, see “U.S. State Sector 2019 Outlook: Caution – Slower Speeds Ahead,” published Jan. 8, 2019.) Should state revenue sharing decrease, other costs be pushed down from the state level, or other localized pressures stem from federal policy changes such as the Tax Cuts and Jobs Act (TCJA) or tariff increases, we believe some local governments will need to start showing their resilience and make difficult budget choices sooner rather than later, or risk credit deterioration.

U.S. State Sector 2019 Outlook: Caution – Slower Speeds Ahead

Source: S&P Global Ratings, January 8, 2019
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For the U.S. states, S&P Global Ratings’ baseline economic forecast of slower growth in 2019 holds the potential for renewed fiscal strain. Although now long in duration, the economic expansion that began in mid-2009 has been shallow. One consequence of this was the persistence of narrow fiscal margins for many states and, relatedly, an uncharacteristically high downgrade-to-upgrade ratio lasting through 2017. This changed in 2018 when, along with stronger economic growth, state fiscal health and credit quality stabilized. However, the higher GDP growth rate in 2018—while beneficial—was driven in part by an infusion of late-cycle federal fiscal stimulus (tax cuts and deficit spending). As the effect of this stimulus fades, and in light of the Federal Reserve’s ongoing tightening, we expect the pace of economic growth to decelerate in 2019. A protracted federal government shutdown would only accentuate the drag on growth emanating from Washington (see “A U.S. Federal Government Shutdown Won’t Immediately Threaten State Credit Quality, But It Sets An Ominous Tone For 2019,” published Dec 21, 2018).

Furthermore, the Tax Cut and Jobs Act of 2017 may have caused some taxpayers to move income into (calendar) 2017. While this contributed to windfall tax collections in 2018, states can expect growth rates to decline in 2019 as revenues revert to trend.

Five U.S. State And Local Government Pension And OPEB Trends To Watch For In 2019 And Beyond

Source: S&P Global Ratings, January 16, 2019
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Key Takeaways
• Volatile markets could affect future pension costs and funding status.
• States might need to offload pension costs to local governments.
• Updated disclosure on reported retiree health care obligations could heighten awareness and spur reform.
• States continue to pass pension reform and sustainability measures in an effort to manage costs and improve system health.
• The combination of environmental, social, and governance obligations and retirement obligations could also stress long-term government costs.

In this economic recovery period since the Great Recession a decade ago, many state and local governments faced rising costs and risk further increases related to funding long-term pension and other postemployment benefit (OPEB) obligations. S&P Global Ratings incorporates a forward-looking view of pension risks to costs in its credit opinion and ratings approach. As we look forward to fiscal 2019, we believe there are five key trends related to pension and OPEB liabilities that could have implications for future government costs: market volatility; states’ offloading of costs to local governments; retiree health care liabilities; pension reform; and the management of environmental, social, and governance (ESG) obligations and retirement obligations.

Giving or Getting? New York’s Balance of Payments with the Federal Government

Source: Laura Schultz, Michelle Cummings, Rockefeller Institute of Government, January 8, 2019

From the summary:
In its second year of annual analysis, the Rockefeller Institute of Government has examined the distribution of Federal Budget receipts and expenditures across the United States. This report examines where Federal funds are generated and spent, the balance of payments differential that exists between states, the primary explanations for those differences, and how these gaps may change over time.

Our annual analysis is designed to aid policymakers as they continue to discuss whether there is too much redistribution or too little, and the impact of those redistribution decisions on states. The Rockefeller Institute examined detailed revenue and spending data for Federal Fiscal Year (FFY) 2016 and developed a preliminary data series for FFY 2017, paying close attention to New York….

Infrastructure: Elixir for Long-Term Pension Liabilities?

Source: Daniel Bauer, PA Times, January 4, 2019

Two primary drivers critically impacting both budgetary considerations and public policy processes for the foreseeable future regardless of revenue and service selection are pension liabilities and infrastructure. One tends to be historical in context while the other is futuristic in its scope. Both pension liabilities and infrastructure face headwinds. Both issues transcend interest groups. Both issues potentially advocate fairness and social equity across a broader spectrum of citizens arguably more so than others.

In this continuing series of articles exploring public infrastructure, the combination of unfunded liabilities for both public pension funds (estimates range from US$1-$3 trillion) and infrastructure (estimates ranging from US$1-$5 trillion) conjure up public policy and financial dilemmas constraining even effective discourse. Over the long-term, as difficult as it is to imagine, maybe one unfunded liability poses an opportunity to resolve the other unfunded liability. Can infrastructure be an elixir for long-term pension liabilities? ….