Category Archives: State & Local Finance

Cyberattacks pose growing operational and financial risks for hospitals

Source: Jennifer Barr, Lisa Goldstein, Leroy Terrelonge, Jonathan Kanarek, Kendra M. Smith, Jessica Gladstone, Moody’s, Sector In-Depth, September 12, 2019
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Many cyberattacks result in data breaches and, in the most critical cases, endanger revenue, posing a material risk to financial performance. Small hospitals are the most vulnerable to attack with lesser financial resources.

Related:
Smaller Medical Providers Get Burned by Ransomware
Source: Adam Janofsky, Wall Street Journal, October 6, 2019
Cyberattacks are pummeling doctors, dentists and community hospitals around the U.S., causing some to turn away patients and others to shut down

Thriving cities, challenged schools: teacher strikes highlight districts’ credit issues

Source: Helen Cregger, Denise Rappmund, Naomi Richman, Leonard Jones, Alexandra S. Parker, Moody’s, Sector In-Depth, September 17, 2019
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Given enrollment declines, high housing prices, tighter labor markets and a growing proportion of legacy fixed costs, meeting teacher pay and staffing demands will continue to challenge districts, especially those with more constrained finances.

Infographic: Pension liabilities continue to trouble Illinois, Kentucky, Connecticut, New Jersey and others

Source: Moody’s Investors Service, October 3, 2019

Adjusted net pension liabilities (ANPL) declined in states’ fiscal year 2018 reporting due to healthy investment returns in fiscal 2017, though unfunded pension liabilities remain high for some states.

Pension liabilities continue to trouble Illinois, Kentucky, Connecticut, New Jersey and others

Related:
Medians – Adjusted net pension liabilities spike in advance of moderate declines
Source: Pisei Chea, Marcia Van Wagner, Timothy Blake, Nicholas Samuels, Emily Raimes, Tenzing T Lama, Moody’s, Sector In-Depth, August 27, 2019
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Adjusted net pension liabilities (ANPL) spiked in states’ fiscal year 2017 reporting due to poor investment returns in fiscal 2016, according to our state pension medians data. States typically report their pension funding levels with a one-year lag. Thus, favorable investment returns in fiscal 2017-18 will lead to a decline in pension liabilities in fiscal 2018-19 reporting.

Adjustments to Pension and OPEB Data Reported by GASB Issuers, Including US States and Local Governments Methodology
Source: Moody’s, Cross Sector Methodology, October 7, 2019

Credit FAQ: How S&P Global Ratings Will Implement Pension And OPEB Guidance In U.S. Public Finance State And Local Government Credit Analysis
Source: S&P, October 7, 2019
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On Oct. 7, 2019, S&P Global Ratings published “Guidance: Assessing U.S. Public Finance Pension And Other Postemployment Benefit Obligations For GO Debt, Local Government GO Ratings, And State Ratings Methodology.” Here, we answer the most frequently asked questions from investors and other market participants.

Elsewhere, we have also provided an overview on our approach to U.S. state and local government pensions within the context of our three government criteria: See “Credit FAQ: Quick Start Guide To S&P Global Ratings’ Approach To U.S. State And Local Government Pensions,” published May 13, 2019.

U.S. State Pension Reforms Partly Mitigate The Effects Of The Next Recession Primary Credit
Source: Carol H Spain, S&P, September 26, 2019
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Table of Contents:
• Average State Funding Levels Plateau With Notable Exceptions
• Many States Continue With Pension Reforms, Avoiding Backward Measures
• Most States Still Fall Short Of Minimum Funding Progress
• Despite Reforms Despite Improved Assumptions, Plans Remain Vulnerable To Market Volatility
• Demographics Influence The Funded Ratio And Budgetary Vulnerability
• Pension Costs Remain Affordable For Most States, With Notable Exceptions
• Policy Decisions, Not Markets, Will Likely Pose Greatest Future Risks
• Survey Methodology
• Related Research

Despite investment gains in 2018, U.S. states have made relatively slow progress since the Great Recession in improving funded ratios, with S&P Global Ratings’ most recent survey data indicating that the average weighted pension status across state plans was 72.5% compared with 83% in 2007. However, looking at the funded ratios alone falls short of understanding whether or not states have made progress toward improving the overall pension funding picture. Indeed, poor investment returns in select years and maturing pension plan populations have stunted state funding progress. Also, in the years immediately following the Great Recession, many states had reduced plan contributions as a short-term means of balancing budgets, resulting in funding setbacks from which many have yet to recover.

However, in recent years, many states have made conservative changes to actuarial methods and assumptions that, while hindering actuarial funding ratios, show a more realistic assessment of market risk tolerance for states, thus better enabling them to make funding progress. We have also witnessed that many states have learned lessons from funding discipline mistakes over the past ten years and better understand sources of pension liability and costs, and have therefore demonstrated a commitment to actuarially based funding. In this sense, states may be better prepared heading into the next recession despite weaker funded ratios. Yet, in our view, despite some progress, many plans’ current contributions, discount rate assumptions, and investment allocations still fall short of fully mitigating the market volatility that increasingly appears to lie ahead….

Intergovernmental Costs of Political Gridlock: Local Government Cash Flow Smoothing during State Budgetary Delays

Source: Lang (Kate) Yang, Public Finance Review, OnlineFirst, Published October 4, 2019
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From the abstract:
Political gridlock in state legislature often leads to a failure in adopting a budget by the start of a fiscal year. This article examines the intergovernmental implication of late state budgets, specifically the cash management problem faced by localities during the stalemate. Without legislative appropriations, the state government could delay expected transfers and payments to localities. Late intergovernmental transfers may force localities to smooth out cash flow for continued service provision through short-term borrowing. Using municipal bond market data, this article finds that when the state budget is late, the average locality’s likelihood of issuing short-term debt increases by 61 percent among those with end-of-fiscal-year short-term debt outstanding experience, and the amount of debt issuance increases by 76 percent. As short-term debt carries interest costs, state’s political gridlock and policy inactions impose direct costs on local governments.

Can Standardized Financial Data Help Government Save Money

Source: Ben Miller, Government Technology, October 5, 2019

A pair of states and the feds are moving to require local governments to submit financial data in a machine-readable format. Here’s how it could help cities.

…. Florida’s governor signed a bill last year that puts the state on a path to requiring its local governments to submit their financial information to the state in eXtensible Business Reporting Language, or XBRL, by September 2022. A similar bill sits on the desk of California’s governor, and U.S. legislators are considering two bills that could push along standardization at the federal level. ….

Stress Testing Your Reserves with Advanced Analytical Techniques

Source: Shayne Kavanagh, Government Finance Review, June 2019

Financial reserves, or “rainy day” funds, safeguard local governments against budget-straining risks like recessions or extreme events that demand a quick and decisive public safety response. The perennial question local governments have about reserves is how much is enough. Too little and you may be underprepared for the risks you face, but too much may mean you’re overtaxing the public or failing to make investments in needed infrastructure or services. …. GFOA recommends maintaining general fund reserves equal to two months of operating revenue — or, put another way, equal to 16.7 percent of annual revenue. ….

Do Targeted Business Subsidies Improve Income and Reduce Poverty? A Synthetic Control Approach

Source: Jacob Bundrick, Weici Yuan, Economic Development Quarterly, OnlineFirst, September 20, 2019
(subscription required)

From the abstract:
Interstate competition for economic development has led many states to adopt targeted economic development incentive programs known as deal-closing funds. Deal-closing funds allow state officials to provide discretionary cash grants to select businesses to attract and retain economic development projects. However, whether these targeted business subsidies increase prosperity in the local economy remains unclear. The authors use evidence from Arkansas’s Quick Action Closing Fund to analyze how effective deal-closing funds are at increasing incomes and decreasing poverty. Specifically, the causal effects of the Quick Action Closing Fund on Arkansas’s county-level per capita personal income and poverty rates are estimated using a synthetic control approach. The results largely suggest that the business subsidy program fails to increase incomes and lower poverty rates over the long term, at least at the county level. These findings should serve as a caution to policy makers who wish to improve incomes and poverty rates with targeted business subsidies.

Behavioral Health Provider Participation in Medicaid Value-Based Payment Models: An Environmental Scan and Policy Considerations

Source: Melissa Bailey, Rachael Matulis, Kelsey Brykman, Center for Health Care Strategies, September 2019

From the abstract:
Health care payers are increasingly shifting from fee-for-service payment systems that reward volume to adopt value-based payment (VBP) models that promote high-quality, cost-effective care. While increased access to and coordination of behavioral health services is a policy priority for federal and state policymakers, the extent that the behavioral health system is engaged in VBP is less well understood than its physical health counterpart. In partnership with the National Council for Behavioral Health, the Center for Health Care Strategies (CHCS) conducted interviews with representatives from behavioral health associations, community-based behavioral health providers, state agencies, Medicaid managed care organizations (MCOs), and other subject matter experts to understand the successes and challenges associated with implementing VBP in Medicaid behavioral health care.

Informed by these interviews and a review of state program guidelines, quality measures, and MCO contracts, this report provides: (1) an overview of the behavioral health system’s engagement in VBP in the U.S., with a focus on 11 states; (2) lessons on implementing VBP from the perspective of behavioral health providers; and (3) policy recommendations for how state and federal policymakers, MCOs, and other stakeholders can support the adoption of VBP within behavioral health care. It also identifies nine key themes that support successful behavioral health VBP design and implementation to inform efforts in states across the country.

Local Governments’ Responses to Revenue Changes: The Effects of Unreserved General Fund Balances

Source: Min Su, International Journal of Public Administration, Latest Articles, September 10, 2019

From the abstract:
Volatile revenues affect the quality and consistency of municipal service provision. This article investigates how cities use unreserved general fund balances to mitigate annual expenditure fluctuations when confronted with volatile revenues. Based on the analysis of a panel dataset of over two thousand American cities from 2003 to 2011, the fixed-effects regression results suggest that unreserved general fund balances reduce municipal expenditure fluctuations on a year-to-year basis. The expenditure-smoothing effects were more pronounced when municipal governments experienced large revenue changes. Results are robust when excluding large cities, using different cutting-points to define ‘moderate’ or ‘large’ revenue changes, and in recession and non-recession years. This article contributes to the local expenditure stabilization literature by recognizing the unreserved general fund balances’ expenditure-smoothing effects during ‘non-rainy days.’ It adds empirical evidence to the organizational theory that financial slack works as a crucial buffer against external changes and provides managerial discretion to local administrators.

Investigating Sales Tax Revenue Competition Among Principal Cities and Their Neighboring Cities in Texas

Source: Michael Overton & Julius Nukpezah, International Journal of Public Administration, Latest Articles, September 9, 2019

From the abstract:
While research has explored the economic importance of principal cities on regional economies, little is known about the short-run and long-run dynamic relationships between principal cities and their neighboring cities as it pertains to their sales tax revenue elasticities and the subsequent affect this has on horizontal tax competition. Using vector error correction models on data from six principal cities in Texas, the findings of this study suggest that the relationship between principal and neighboring cities is highly dynamic and unique for each principal city. The study recommends that local economic policies should reflect these unique relationships.