Category Archives: State & Local Finance

Illinois Budget Proposal Places Risky Bets On Asset Transfers and Graduated Income Tax

Source: S&P Global Ratings, February 22, 2019
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S&P Global Ratings believes that Illinois’ (BBB-/Stable) executive budget proposal precariously balances the current budget, but punts measures to address fiscal progress to future years. It prioritizes service solvency at the expense of lower pension contributions and does not make meaningful progress toward tackling the $7.9 billion bill backlog or projected out-year deficits….

How electric cars could make America’s crumbling roads even worse

Source: Jay L. Zagorsky, The Conversation, February 25, 2019

…. To fix the potholes and crumbling roads, federal, state and local governments rely on fuel taxes, which raise more than US$80 billion a year and pay for around three-quarters of what the U.S. spends on building new roads and maintaining them. ….

….If sales continue at this breakneck pace, electric cars will become mainstream in no time. In addition, governments in Europe and China are actively steering consumers away from fossil fuels and toward their electric counterparts.

In other words, the time will come very soon when the U.S. and individual states will no longer be able to rely on fuel taxes to mend American roads…..

Denver City & County S.D. 1, CO: Terms of teacher strike settlement to have minimal credit impact on Denver Public Schools

Source: Denise Rappmund, Gera M. McGuire, Alexandra S. Parker, Moody’s, Issuer Comment, February 20, 2019
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The agreement, which ended a three-day strike, calls for a $23 million bump in teacher compensation, which equates to 2% of the district’s fiscal 2018 budget. Despite lackluster growth in state aid, the district’s credit profile continues to improve with in-migration, a highly educated workforce and a rapidly expanding tax base….

State and local government — US: Market volatility underscores risk of high pension investment return targets

Source: Thomas Aaron, Timothy Blake, Moody’s, Sector In-Depth, February 20, 2019
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Equity market losses in late 2018 will translate into larger than expected pension cost hikes in 2021 for many governments because of equity-heavy investment allocations within their pension systems’ assets. Despite the long-term investment focus of US public pension systems and favorable returns in the past two fiscal years, recent market losses highlight the uphill credit challenge facing governments that rely on high-return/high-risk pension assets to cover a large portion of their pension benefit promises.

Shrinking local autonomy: corporate coalitions and the subnational state

Source: Yunji Kim, Mildred E Warner, Cambridge Journal of Regions, Economy and Society, Volume 11, Issue 3, October 2018
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From the abstract:
Using focus groups and government finance data, we explore three areas of US state rescaling at the subnational level: revenue tools, expenditure responsibilities and policy authority. Expenditure responsibilities, especially social welfare, have been devolved to the subnational level, while local revenue tools and policy authority are preempted. This decoupling of responsibility and power is cracking the foundations of fiscal federalism. At the behest of corporate-legislative coalitions, subnational state governments are shrinking local capacity and authority to govern. This is not state shrinkage; it is a fundamental reshaping of the subnational state to the detriment of democracy and the social contract.

Who’s afraid of sunlight? Explaining opposition to transparency in economic development

Source: Nathan M. Jensen, Calvin Thrall, Washington Center for Equitable Growth, February 2019

From the abstract:
Why do some firms oppose transparency of government programs? In this paper we explore legal challenges to public records requests for deal-specific, company-specific participation in a state economic development incentive program. By examining applications for participation in a major state economic program, the Texas Enterprise Fund, we find that a company is more likely to challenge a formal public records request if it has renegotiated the terms of the award to reduce its job-creation obligations. We interpret this as companies challenging transparency when they have avoided being penalized for non-compliance by engaging in non-public renegotiations. These results provide evidence regarding those conditions that prompt firms to challenge transparency and illustrate some of the limitations of safeguards such as clawbacks (or incentive-recapture provisions) when such reforms aren’t coupled with robust transparency mechanisms.

Related:
Amazon HQ2: Texas experience shows why New Yorkers were right to be skeptical
Source: Nathan M. Jensen, Calvin Thrall, The Conversation, February 14, 2019

New York offered Amazon close to US$3 billion to build a “second” headquarters in Long Island City on the promise of 25,000 jobs.

Since the deal was joyfully announced in November, however, many local residents and some politicians in the area have been questioning whether it’s worth it, both in terms of the price tag and the impact on housing and traffic congestion. And on Feb. 14, Amazon backed out of the deal, citing political opposition to its plans.

The research supports those who question the wisdom of cities and states incentivizing economic development. Studies suggest the jobs and economic gains are usually not worth the tax breaks since the majority of companies would have come even without incentives.

And that’s when the companies try to live up to the promises they made. They don’t always do so, with the latest example being Foxconn’s announcement that it is reconsidering plans to build a factory in Wisconsin – less than a year after agreeing to create up to 13,000 high-tech jobs in exchange for more than $4.5 billion in incentives.

But how often do companies that agree to build factories and create jobs in exchange for economic incentives back away from their promises? And when they do, do taxpayers ever learn about it?

To shine light on these questions, we conducted a study of a Texas economic development program. Taxpayers in any American city considering luring a company with cash should take heed…..
Opinion: Amazon, New York and the End of Corporate Welfare
Source: Mene Ukueberuwa, Wall Street Journal, February 18, 2019
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Special tax breaks do little to spur the economy. Now they’re becoming politically unpopular too

Are New Yorkers better off after Amazon’s decision Thursday to cancel its planned headquarters in the Queens neighborhood of Long Island City? It’s a complicated question, weighing the benefits of new high-earning residents against the added strain on local services. Yet the pullout could lead to a decisive triumph for taxpayers across the nation, as city and state officials start to reckon with the popular backlash against corporate tax incentives…..

Opinion: New York Did Us All a Favor by Standing Up to Amazon
Source: David Leonhardt, New York Times, February 17, 2019

Yes, Amazon’s departure will modestly hurt the city’s economy. But it’s also a victory against bad economic policy.

New York Labor Didn’t Shrink from Confronting Amazon
Source: Steven Greenhouse, American Prospect, February 18, 2019

But unions were sharply divided about how to deal with the tech giant.

Local government – Connecticut – Financially strained municipalities face continuing fiscal challenges

Source: Lauren Von Bargen, Thomas Jacobs, Leonard Jones, Joseph Manoleas, Moody’s, Sector In-Depth, February 11, 2019
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Cities and towns in Connecticut have faced several credit challenges in recent years, including negative demographic trends such as aging population and limited labor force growth, anemic economic expansion and modest tax base increases. For some municipalities, these issues are compounded by limited operating flexibility due to elevated tax rates and high fixed costs per capita. To counter these obstacles, local governments have turned to short-term fixes, including funding pensions at less than required levels and using fund balance to fill budget gaps, but such tools will not be sustainable over the long run. This report focuses on seven financially strained municipalities— Bridgeport (Baa1 stable), Hamden (Baa2 negative), Hartford (B2 stable), New Britain (Baa2 stable), New Haven (Baa1 negative), Waterbury (A2 stable) and West Haven (Baa3 negative)— and outlines the economic, revenue and expenditure challenges they face as well as the tools they use to manage budgetary pressures. The wide range of ratings reflects differences in local economic trends, debt and fixed cost burdens and current financial positions, among other factors…..

Emerging Iterations on State Free College Policy in the 2019 Legislative Sessions

Source: Sarah Pingel, Education Commission of the States, January 31, 2019

State legislatures are officially in full swing, with 44 states plus the District of Columbia in session. At Education Commission of the States, we’re cleaning our glasses and diving into the thousands of pieces of education-related legislation spilling into our inboxes. Not surprisingly, free college maintains its position on state legislators’ minds. We are already tracking 45 pieces of legislation in 19 states plus the District of Columbia…..

Local Governments and Economic Freedom: A Test of the Leviathan Hypothesis

Source: Adam A. Millsap, Bradley K. Hobbs, Dean Stansel, OnlineFirst, February 6, 2019
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From the abstract:
Brennan and Buchanan’s Leviathan hypothesis states that “potential for fiscal exploitation varies inversely with the number of competing governmental units” (p. 211) and that “total government intrusion into the economy should be smaller, ceteris paribus, the greater the extent to which taxes and expenditures are decentralized [and]…the smaller the jurisdictions” (p. 185). Using data for US metropolitan statistical areas, we provide the first local-level test of that hypothesis (that we are aware of) that uses “economic freedom” as the dependent variable, which provides a better measure of “total government intrusion into the economy” than the less comprehensive measures (taxes or spending) used in the previous literature. We find mixed support for the Leviathan hypothesis. The number of competing jurisdictions is positively associated with economic freedom, driven largely by the labor market freedom component as opposed to the government spending and tax components (the very measures used in the previous literature).

State Rainy Day Funds and Government General Fund Expenditures: Revisiting the Stabilization Effect

Source: Wenchi Wei, Dwight V. Denison, Public Finance Review, OnlineFirst, February 8, 2019
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From the abstract:
This study explores the stabilization effect of state rainy day funds (RDFs) on government general fund expenditures (GFEs). We discuss and explicitly illustrate the concept of stabilization effect. Moreover, we utilize the current year’s actual RDF usage as the explanatory variable of interest rather than the previous year’s RDF balance, which most existing studies focus on. A panel data set of states for fiscal years 1998 to 2014 is used in the empirical analysis. Due to the pro-cyclicality of the defined GFE gap and the countercyclicality of RDF usage, their positive correlation revealed in the empirical results demonstrates that the actual RDF usage helps to stabilize state government GFEs in both economic recessions and expansions. We also verify that the previous year’s RDF balance, when interacted with RDF deposit and withdrawal rules, can influence government GFEs, thus demonstrating the importance of RDF rules.