Category Archives: State & Local Finance

Stress-Testing States: COVID-19—A Year Later

Source: Dan White, Emily Mandel, Colin Seitz, Moody’s, February 19, 2021
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In the spring of 2020, Moody’s Analytics adapted its state stress-testing methodology in response to the COVID-19 pandemic to estimate the potential for government budget shortfalls that could harm the eventual economic recovery. Through periodic updates over the past year, the picture of state and local government fiscal conditions, blurred at times by the evolving economy and shifting estimates of federal aid, has slowly pulled into focus. With almost a year of hindsight, this paper updates those initial estimates and attempts to explain some of the impacts of the pandemic on the public sector.

Public Corruption and Pension Underfunding in the American States

Source: Cheol Liu, John Mikesell, Tima T. Moldogaziev, American Review of Public Administration, OnlineFirst, Published February 16, 2021
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From the abstract:
Unfunded public pension obligations represent a great challenge for policy makers in the American states. We posit that a part of pension underfunding relates to the level of public corruption. Empirical findings in the article show that funding ratios in public pension funds are inversely related to the incidence levels of corruption in the state, with other fiscal, political, and institutional covariates held constant. We show that this can happen through higher pension benefits, lower actuarially required contributions (ARCs), lower percentage of actual ARC contributions, and poorer investment outcomes. Based on empirical estimates, we find that a reduction of corruption by one standard deviation around the mean would permit the states to save on pension benefits by 10.24% annually (or US$1,894.64 per recipient), increase required ARC by 4.40%, increase actual ARC contributions by 8.46%, and improve investment returns by 4.72%. Therefore, policies to reduce public-sector corruption, or to improve the insulation of pension funds in relatively more corrupt environments, can make a significant contribution toward tackling the public pension underfunding crisis in the American states.

2021 Credit Outlook For U.S. Public Finance: Back On Track?

Source: Robin L Prunty, S&P Global, January 29, 2021

Key Takeaways:
Active management has supported credit quality. Across sectors, the pandemic and associated economic and fiscal pressures have been actively managed, and that has supported credit quality, but the magnitude and duration of this crisis will contribute to credit pressure for many.

The health and economic recoveries will continue to be uneven. Different state and local protocols to manage the pandemic and the vaccine rollout continue to influence the economy generally and consumer demand–especially for transportation and higher education—in particular.

Federal policy will influence credit trajectory. A new administration will mean a new policy and funding priorities in key areas, which will influence sectors in different ways. In addition to general fiscal and monetary policy, issues such as stimulus funding, health care initiatives, regulatory changes, and prospects for a funded infrastructure initiative are key things we are watching for 2021.

What Having No Income Tax Gets a State During a Pandemic

Source: Harold Meyerson, The American Prospect, TAP blog, February 16, 2021

….The states with the most progressive income taxes, it turns out, have been able to ride out the pandemic with little if any fiscal disruption. California, perpetually derided by right-wingers for having the most progressive income tax, actually saw no reduction in revenues between 2019 and 2020, as the wealthy have been doing just fine financially during the plague and paying their regular share of taxes. Likewise New York, Massachusetts, and Pennsylvania, which saw revenues dip by just 3 percent. Florida and Texas, by contrast, are by far the largest states that have no income taxes, and they saw their revenues decline by 10 percent. As for reduction in public-sector jobs, good old “Live Free or Die” New Hampshire—another state with no income tax—saw its state workforce shrink by a mind-boggling 26 percent, a full nine percentage points more than the second-ranked state…..

State Employee Health Insurance: Assessing the Scale of State Purchasing Power

Source: John Kaelin, Jim DeWan, Rockefeller Institute of Government, December 2020

From the introduction: https://rockinst.org/issue-area/state-employee-health-insurance-assessing-the-scale-of-state-purchasing-power/
Across the nation, state governments are major purchasers of health insurance for their employees. According to the US Census Bureau, 100 percent of state governments offered health insurance benefits to their employees in 2018. The Census Bureau further reported that state governments provided health insurance benefits to 67.6 percent of their 5.4 million employees in 2018. This total of approximately 3.7 million employees does not include the number of dependents, retirees, or enrollees of local governments, and other public employers that also participate in states’ health insurance programs. In 2012, based on a report published by Pew Charitable Trusts and MacArthur Foundation, total spending exceeded $30 billion covering 2.7 million households.

Between employee benefits and Medicaid programs, states’ spending on health insurance represents a major budgetary item. In 2018, the federal Center for Medicare and Medicaid Services (CMS) reported that health insurance spending for all state and local governments totaled $433.6 billion and that spending has experienced an average annual increase of 3.9 percent over the past five years. In Fiscal Year 2019-20, the state of New York itself spent $22.1 billion on Medicaid and $4.3 billion on employee and retiree health insurance costs. To alleviate these escalating costs, some states have examined options to coordinate purchasing across state programs in an attempt to achieve economies of scale. Recently, California proposed policies to leverage their purchasing of prescription drugs by combining employee health insurance programs with other state programs such as Medicaid and Correctional Health.

The purpose of this policy brief is to examine the extent to which the states in their role of purchasers drive the evolution of the healthcare delivery system. This brief examines the availability of basic financial and cost data relating to state employee insurance programs. It assesses the scale of state health insurance purchasing using existing data and presents results from a preliminary survey of states. We also review the degree to which employee purchasing decisions are coordinated with other state health policy purchasing goals such as Medicaid and the Affordable Care Act (ACA) insurance marketplaces.

Fiscal Survey of the States: Fall 2020

Source: National Association of State Budget Officers, December 2020

From the overview:
State general fund spending in fiscal 2021 is projected to decline for the first time since the Great Recession, based on enacted budgets. After nine consecutive years of budget growth, states saw revenue fall in fiscal 2020, and greater declines are expected in fiscal 2021. Weakening revenue projections resulting from the COVID-19 recession led states to reduce general fund spending by 1.1 percent compared to fiscal 2020 and by 5.5 percent compared to governors’ budgets proposed before the pandemic.

Other key findings from the report:
• State general fund revenue is projected to decline by 4.4 percent in fiscal 2021 compared to already depressed fiscal 2020 levels, or by 10.8 percent compared to revenue projections in governors’ pre-pandemic budget proposals, based on the most current estimates available when data were collected.
• Fiscal 2020 general fund revenues declined 1.6 percent compared to fiscal 2019, or by as much as 2.9 percent when only counting the 45 states that operated on a July to June fiscal year. 35 states reported general fund collections for fiscal 2020 from all sources came in lower than original budget projections.
• The tax deadline shift from April to July affected fiscal 2020 revenue collections in 19 states that counted these delayed payments as fiscal 2021 revenue. Among these states, 17 were able to provide estimated deferral amounts totaling $10.2 billion, revenue that would have otherwise been collected in fiscal 2020.
• Rainy day fund and total balances were at record highs before the pandemic hit but are now on the decline as states turn to reserves to address budget shortfalls. Total balances are already projected to decline by $33.3 billion in fiscal 2021 compared to fiscal 2019 levels.

Note: The fiscal 2021 data in this report represent a point in time, as spending and revenue projections continue to be moving targets. State-by-state data also reflect differing points in time depending on when a state enacted its budget for fiscal 2021 and how often a state revises its revenue forecast.

Related:
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U.S. State and Local Shortfall Update: December 2020

Source: Dan White, Emily Mandel, and Colin Seitz, Moody’s, December 17, 2020
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Will the money come from taxpayers over time funding federal debt or more immediately in tax hikes and austerity measures?

  • Without additional federal assistance we project states and local governments will be forced to raise taxes or cut spending by between $171 billion and $301 billion over the next year and a half.
  • Though nearly every state will see significant fiscal stress this year and next, the consequences of these shortfalls will vary even more than usual from one state to another.
  • How federal policymakers choose to react to these shortfalls will have significant implications for the economic outlook.

Fiscal Effects of COVID-19

Source: Alan Auerbach, Bill Gale, Byron Lutz, Louise Sheiner, The Brookings Institution, Brookings Papers on Economic Activity, BPEA Conference Drafts, September 24, 2020

The COVID-19 pandemic and the associated policy responses have had a significant impact on government budgets. Federal spending has skyrocketed. State and local governments, almost all of which face some form of annual balanced budget rule, confront fiscalshocks on both the revenue and spending sides that threaten to make the recession deeper and slow the recovery. This paper examines the impact of COVID on the fiscal status of the federal government and the states.

Section II provides new projections ofthe federal budget outlook, with five main results. First, we document that the pandemic and the policy responses to it rapidly and substantially raised federal deficits, but only on a temporary basis. Spending and revenue are projected to return to pre-COVID baseline values relatively quickly. Second, the long-term fiscal outlook through 2050 has deteriorated somewhat. Under the Congressional Budget Office’s (CBO 2020f) assumptions for GDP growth and interest rates, we project that the debt-to-GDP ratio, currently 98 percent, will rise to 190 percent in 2050 under current law, compared to a pre-COVID baseline projection of 180 percent. CBO (2020f) obtains a similar projection – 195 percent –using a slightly different set of assumptions.

Third, although the economic downturn and COVID-related legislation raise debt permanently, sharply lower projections of interest rates for the next dozen years help moderate future debt accumulation. Nevertheless, even during the period when interest rates are projected to be low, the projected debt-to-GDP ratio rises steadily due to substantial and rising primary deficits, driven largely by rising outlays on health-related programs and Social Security. As the economy grows and debt accumulates, interest rates are projected to rise and to exceed the nominal GDP growth rate by increasing amounts starting in the early 2040s.

Fourth, under a “current policy” projection that allows temporary tax provisions –such as those in the Tax Cut and Jobs Act of 2017 –to be made permanent, the debt-to-GDP ratio would rise to 222 percent by 2050 and would continuing rising thereafter. Fifth, the long-term projections are sensitive to interest rates. If interest rates remain low (that is, at their projected level for 2025), rather than rising as in the CBO projections, the debt-to-GDP ratio would equal157percent in 2050 under current policy.

We discuss several aspects of these results – including how the current episode compares to past debt changes, the role of historically low interest rates, and recent Federal Reserve Board policies. Because of the macro-stabilization effects of fiscal tightening, and because low interest rates create “breathing room” for fiscal policy, we do not see the large, short-run debt accumulation resulting from the current pandemic as necessitating any immediate offsetting response. But the long-term projections show that significant fiscal imbalances remain and will eventually require attention.

Section III discuss the effects on state and local governments. We examine several recent estimates of the effects of the pandemic on state and local budgets — some of which find relatively modest effects and others which find effects that dwarf those experienced during the Great Recession. We note that the very unusual nature of the current recession meansthat relying on the historical relationships between the state of the economy and state and local tax revenues may produce misleading results. We instead attempt to calculate the impact on state and local government using a “bottom-up” approach that accounts for the geographic variation in the distribution of unemployment and consumption declines, the fact that low-wage workers have been particularly hard hit this recession while higher-income workers have been much less affected, and the fact that the stock market has not responded to the economic downturn as it has in the past.

Our findings suggest that this pandemic is indeed having very unusual effects on state and local revenues. We estimate far smaller income tax losses than would have been expected on the basis of historical experience, which we attribute to the fact that employment losses have been unusually concentrated on low-wage workers, the unprecedented increases and expansions of unemployment insurance benefits and business loans, which will shore up taxable income in 2020, and the fact that the stock market has held up so far, unlike most of the prior economic downturns. On the other hand, our estimates of the losses in sales and other taxes and fees are much larger than one would have expected—the decline in use of transportation services alone seems likely to depress revenues by over $45 billion this year. In aggregate, we estimate that state and local own source revenues, excluding fees to public hospitals and institution of higher education — which we view as somewhat distinct —will decline $155 billion in 2020, $167 billion in 2021, and $145 billion in 2022. Including lower fees to hospitals and higher ed would bring these totals to $188 billion, $189 billion, and $167 billion.

We then turn to a discussion of federal aid. We estimate that the legislation enacted last spring provides about $212 billion in aid to state and local governments, excluding aid to public hospitals and higher ed, and $250 billion including that aid. While this appears to be larger than the total revenue declines expected thisyear, that doesn’t mean that the aid has been sufficient to preclude tough budget choices and poor macroeconomic outcomes. First, should the economy remain below its pre-COVID baseline for many years, as the CBO projections suggest, these governments will face significant shortfalls in coming years. Knowing that, they are likely to restrain spending somewhat this year, and make additional cuts in coming years. Second, the pandemic itself has likely increased the demands on state and local governments—for public health spending, virtual schooling, help for the elderly, etc. Simply maintaining pre-COVID levels of spending may not be enough to assure that necessary services aren’t cut. Finally, our analysis shows that smaller states got much more generous aid relative to their losses, and that states like New York and California will likely be facing budget shortfalls in the current year even without consideration of the spending demands brought on by COVID-19.

Section IV provides concluding remarks.

Related:
State and Local Fiscal Conditions and COVID-19: Lessons from the Great Recession and Current Projections
Source: Congressional Research Service, CRS INSIGHT, IN11394, Updated July 8, 2020

Without Another Massive Federal Stimulus, State and Local Governments Will Face Brutal Austerity
Source: Colin Gordon, Jacobin, November 10, 2020

States Grappling With Hit to Tax Collections
Source: Center on Budget and Policy Priorities, November 6, 2020

How the COVID-19 Pandemic is Transforming State Budgets

Source: Urban Institute, December 11, 2020

The COVID-19 pandemic and resulting recession have dramatically reshaped state economies and budgets. But the severity of the pandemic and economic downturn varies significantly across states, creating unique economic and political pressures. We collected health, economic, and fiscal data for all 50 states and the District of Columbia to show how each individual state has changed during this crisis and suggest what might be needed for recovery.