Category Archives: State & Local Finance

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
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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.

Tax Break Tracker

Source: Good Jobs First, 2020

Discover How Much Revenue Governments in the United States Lose Every Year to Tax Abatement Programs

TAX BREAK TRACKER is the first national search engine for tax abatement disclosures per Statement No.77 of the Generally Accepted Accounting Principles (GAAP) for governmental entities – set forth by the Governmental Accounting Standards Board (GASB). For more information about this new accounting rule, visit our GASB-77 Resource Center.

This database already includes nearly 20,000 individual entries extracted from Comprehensive Annual Financial Reports (CAFRs) – each represents a reduction in tax revenue due to one or more economic development tax abatement programs as reported by a jurisdiction in a particular year, or the lack thereof: Many jurisdictions failed to comply with GASB 77.

Search by state or local governments from the drop-down menus below to find out the cost of economic development incentive programs to public services. For additional explanations, check out this user guide. If you do not see the locality you are looking for, you might find it here in this list of localities that failed to disclose their revenue losses: 1/6/2020

Taxation by Citation? Exploring Local Governments’ Revenue Motive for Traffic Fines

Source: Min Su, Public Administration Review, Volume 80 Issue 1, January/February 2020
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From the abstract:
Anecdotal evidence suggests that local governments may have a revenue motive for traffic fines, beyond public safety concerns. Using California’s county‐level data over a 12‐year period, this article shows that counties increased per capita traffic fines by 40 to 42 cents immediately after a 10 percentage point tax revenue loss in the previous year; however, these counties did not reduce traffic fines if they experienced a tax revenue increase in the previous year. This finding indicates that county governments probably view traffic fines as a revenue source to offset tax revenue loss, but not as a revenue stabilizer to manage revenue fluctuation. This article also finds that low‐income and Hispanic‐majority counties raised more traffic fines. Counties that generated more revenue from the hotel tax—a tax typically paid by travelers and visitors—raised more traffic fines, indicating a possible tax‐exporting behavior by shifting the traffic fine burden to nonlocal drivers.

Stress Testing States 2019

Source: Sarah Crane, Regional Financial Review, October 2019
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The business cycle is at a critical juncture. Recession risks in the U.S. are as high as they have been since the record-long economic expansion began more than a decade ago. Recessions and their place in the business cycle are an accepted fact of life in any organization, especially government. Therefore, preparing for recessions is an equally inescapable concept, with potentially devastating consequences for those who treat it as an afterthought. To help state governments better prepare for the next recession, Moody’s Analytics has taken to performing annual stress tests on their budgets. This paper will serve as an update to our 2018 state stress-testing exercise. We estimate the amount of fiscal stress likely to be applied to state budgets under different recession scenarios and compare that stress to the amount of money that states have set aside in reserve.

In the Shadow of State Government: Changes in Municipal Spending After Two Recessions

Source: Rebecca Hendrick, Robert P. Degnan, The American Review of Public Administration, OnlineFirst Published November 6, 2019
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From the abstract:
This research estimates a model of own-source revenue diversification and a model of changes in operational spending in municipal governments from 1997 to 2012 to determine how these governments have adapted to the two significant recessions that occurred during this time period. The first model examines factors that affect revenue diversification, focusing on the state–local fiscal context and how the level of urbanization of the area surrounding the municipalities impacts the effect of state–local context and other factors. The second model examines how municipal governments in the United States have adapted their spending to the two severe recessions of the 2000s, focusing on how state context, revenue diversification, and other factors affect changes in operational spending. Finally, this research also looks at the conditional effects of the size of government on the impact of state context, environmental pressures, and revenue structure on changes in operational spending.

Nudging Early Reduces Administrative Burden: Three Field Experiments to Improve Code Enforcement

Source: Elizabeth Linos, Lisa T. Quan, Elspeth Kirkman, Journal of Policy Analysis and Management, Early View, November 5, 2019
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From the abstract:
In the past decade, public sector organizations around the world have worked to simplify administrative processes as a way to improve user experience and compliance. Academic evidence on administrative burden supports this approach and there is a strong body of research showing that learning costs, compliance costs, and psychological costs help to explain why residents do not always take up programs for which they are eligible. This article considers the role of these types of costs in a different set of resident‐state interactions: compliance with regulations. We present the results of three large field experiments aimed at improving resident compliance with municipal housing codes using targeted behavioral interventions. We find that contacting property owners earlier, redesigning first notices, and proactively communicating with previous violators, can significantly improve compliance by 14.7 percent, 3.3 percent, and 9.2 percent, respectively, with costs savings ranging from 6 to 15 percent of a city’s annual enforcement budget. Our results counterintuitively suggest that sometimes adding steps to an administrative process can reduce the costs associated with the resident‐state interaction.