Category Archives: State & Local Finance

Political Economy of the Parcel Tax in California School Districts

Source: Soomi Lee, Public Finance Review, OnlineFirst, Published July 16, 2019
(subscription required)

From the abstract:
This article examines the effect of home price distribution on the likelihood of parcel tax adoption in California school districts. A parcel tax is a regressive tax imposed as the same amount per unit of property regardless of property values and requires a two-thirds supermajority vote to be adopted. Despite the growing role that local parcel taxes have in funding public education, it has not been fully understood how their regressive nature influences adoption. I argue that because the regressive tax imposes different marginal property tax rates for voters, the distribution of home prices within a district determines the likelihood of parcel tax adoption. Using the Heckman selection models with California school district–level data, I find that a large gap in home values within a district significantly lowers the likelihood of parcel tax adoption.

Fiscal Consolidation and Public Wages

Source: Juin-jen Chang, Hsieh-Yu Lin, Nora Traum, Shu-Chun Susan Yang, International Monetary Fund (IMF), IMF Working Paper No. 19/125, June 2019

From the abstract:
A New Keynesian model with government production, public compensation, and unemployment is fit to U.S. data to study the macroeconomic and fiscal effects of public wage reductions. We find that accounting for the type of government spending is crucial for its macroeconomic implications. Although reductions in public wages and government purchases of goods have similar effects on total output and the fiscal balance, the former can raise private output slightly, in contrast to the substantial contractionary effects of the latter.In addition, the baseline estimation finds that exogenous public wage reductions decrease private wages. Model counterfactuals show that sufficiently rigid nominal private wages can reverse the response of private wages, as the rigidity dampens the labor reallocation effect from the public to private sector that exerts downward pressure on private wages.

Public Wealth in the United States

Source: Fabien Gonguet, Klaus-Peter Hellwig, International Monetary Fund (IMF), IMF Working Paper No. 19/139, July 2019

From the abstract:
We analyze the US public sector balance sheet and project it forward under the assumption that current policies remain in place. We first document the history of the balance sheet and its components since World War II, with a detailed account of its evolution during and after the global financial crisis. While, based on assets and liabilities alone, public sector net worth is negative, additional challenges arise from commitments to future spending implied by current legislation and demographic trends. To quantify the risks to the balance sheet, we then apply the macroeconomic scenarios from the Federal Reserve’s bank stress test to the public sector balance sheet.

Do Small Local Governments Fare Well? A Survey of Villages in New York

Source: Pengju Zhang, Marc Holzer, The American Review of Public Administration, OnlineFirst, July 25, 2019
(subscription required)

From the abstract:
Public administration studies have not adequately discussed governance challenges for small local governments. Given that more than 10% of villages have, unprecedentedly, voted on dissolution in New York over the past 10 years, this article exclusively and comprehensively investigates how well villages are faring in New York. Using a representative survey of village governments, coupled with a rich secondary data set, it finds institutional and political tensions between villages and their underlying town(s). It also suggests intergovernmental fiscal factors have threatened the organizational and fiscal health of some village governments. In addition, villages have extensively established service-sharing mechanisms with town(s) to mitigate fiscal stress. The majority of village officials remain skeptical about dissolution as an effective approach to cost savings.

US Public Pension Landscape Series – July 24, 2019

Source: Thomas Aaron, Timothy Blake, Moody’s, Sector In-Depth, June 24, 2019
(subscription required)

Many US states and local governments, though certainly not all, face heightened credit challenges stemming from exposure to pension obligations, resulting in a highly varied and complex landscape. The severity of public pension challenges can differ substantially between, and even within, states.

Unfunded liabilities in many cases have reached historic highs, rising costs increasingly pressure some budgets, and aging demographics leave government finances increasingly susceptible to pension asset volatility. Yet in some cases, low or declining levels of pension risk bolster the credit profile of a given state or local government.

Governments grappling with pension challenges must often navigate legal protections for employee benefits that can limit reform options. However, litigation on a variety of pension reforms continues to work its way through courts across the country, offering the potential for precedent-setting decisions.

This series provides a state-by-state, in-depth review of the key issues related to pensions facing state and local governments. ….

State listing:
California
Colorado
Connecticut
Florida
Illinois
Louisiana
Minnesota
New York
Ohio
Oregon
Pennsylvania
Tennessee
Texas
Wisconsin

Late budgets reflect governance weakness

Source: Genevieve Nolan, Joshua Grundleger, Pisei Chea, Baye Larsen, Marcia Van Wagner, Nicholas Samuels, Emily Raimes, Timothy Blake, Moody’s, Sector Comment, State government – US, July 3, 2019
(subscription required)

Five states lack an adopted budget more than a week after their new fiscal years began on July 1. While it is unlikely that the delays will pose any risk of missed debt payments, late budgets expose local governments to missed state aid…..

In divided Alaska, the choice is between paying for government or giving residents bigger oil wealth check

Source: Paola Banchero, The Conversation, July 15, 2019

The Alaska legislature was unable to get enough support to block the cuts through a veto override late last week.

The budget cuts will be immediate, affecting most Alaskans. ….

….. How did Alaska, one of the country’s richest states with a $65 billion savings account fueled by oil royalties and leasing revenues, get into this position?

The troubles have been a long time coming.

As the state prepared to reap the benefits of its oil reserves in the 1970s as the trans-Alaska oil pipeline neared completion, voters approved in 1976 an amendment to the Alaska Constitution establishing the Alaska Permanent Fund.

The idea was to save a slice of the current oil windfall in a special fund for future generations when the oil ran out. Meanwhile, the rest of the massive oil royalties – $391.5 million in 1976, more than four times the amount collected the previous year – flowed into state coffers. That meant less need to rely on the traditional way government raises money: taxes. So the legislature repealed a state income tax and the Alaska school tax in 1980.

Now, most Alaska communities have no sales tax and property taxes are low. The total state and local tax burden on Alaskans is the lowest in the country.

In addition to repealing state taxes, Alaska legislators in 1980 approved a payout from mineral royalties to state residents called the Alaska Permanent Fund Dividend, or “PFD.” ….

Economic incentives with risky structures hurt government credit quality

Source: Joshua Grundleger, Frank A Mamo, Emily Raimes, Rachel Cortez, Nicholas Samuels, Gregory W. Lipitz, Naomi Richman, Timothy Blake, Alexandra S. Parker, Leonard Jones, Moody’s, State and local government – US, Sector In-Depth, July 10, 2019
(subscription required)

Many state and local governments competing with each other for new jobs offer economic development incentives to lure businesses. The use of incentives, however, often heightens credit risk, which is particularly true in cases where a government issues substantial debtor assumes responsibility for a risky enterprise. A risky incentive structure is likely to have negative credit implications, regardless of the ultimate economic outcome….

Adjustments to US State and Local Government Reported Pension Data: Proposed Methodology Update

Source: Thomas Aaron, Marcia Van Wagner, Timothy Blake, Moody’s, Request for Comment, July 10, 2019
(subscription required)

In this Request for Comment, we propose a number of changes to the Adjustments to US State and Local Government Reported Pension Data cross-sector rating methodology published in December 2017. Under our proposed changes, we would add descriptions of how we calculate the pension asset shock indicator and how we adjust other post-employment benefits (OPEB). The OPEB adjustment relies on information now required to be reported by issuers under Governmental Accounting Standards Board (GASB) Statements 74 and 75. We also propose to make some editorial changes to enhance readability.