Category Archives: State & Local Finance

State Tax Actions 2016

Source: National Conference of State Legislatures, Special Fiscal Report, 2017

From the overview:
Following the same trend as in 2015, this past year saw net reductions in personal and corporate income taxes and increases across most other tax categories. This is a result of a continued phase-in of major tax reduction packages passed during previous legislative sessions. Increases in sales and use, health, tobacco, and motor-fuel-related taxes led to a $2.3 billion revenue increase across all reporting states. Illinois did not enact a FY 2017 budget during the 2016 legislative session, and some states—such as Texas, Montana and Nevada, where the legislature only convenes biennially—did not have significant tax changes to report.

This report includes tax actions taken during regular and special legislative sessions in 2016, as well as actions approved by voters during the November 2016 general election. Fifty states provided information, which was obtained through a survey of the National Association of Legislative Fiscal Offices.

Highlights include:
– Collective actions taken by the 50 states resulted in a net tax increase of $2.3 billion, representing 0.3 percent of the prior year’s tax collections. This compares to relatively little activity in 2015 and a $3.1 billion, or 0.4 percent, decrease in 2014.
– Illinois did not enact a FY 2017 budget during the 2016 legislative session, but Pennsylvania, which did not enact a budget during the 2015 legislative session, passed an extensive tax package in 2016, increasing net tax revenue for the state by $633 million, or 1.9 percent.
– Across the nation, the multiyear trend of lowering personal and corporate income taxes continues. Tax increases included motor fuel taxes to fund state infrastructure projects, substantial sales tax increases in two states, increased health care provider taxes to offset insurance costs and tax increases on many tobacco products.
– Of the 50 reporting states, five—Georgia, Indiana, Mississippi, New Mexico and Wisconsin—reduced net taxes by more than 1 percent. There were six states—Louisiana, New Jersey, Oklahoma, Pennsylvania, South Dakota and West Virginia—that reported a net tax increase of more than 1 percent. Thirty-nine states made no significant net tax changes in 2016. see Figure 2 above.
– In addition to tax changes, states approved nontax revenue changes, including fee increases or decreases, revenue accelerations or decelerations, and tax compliance initiatives for a net increase of $426 million. This resulted in a combined total revenue increase of about $2.8 billion in 2016.
Related:
Executive summary

The Price of Prisons: Examining State Spending Trends, 2010 – 2015

Source: Chris Mai and Ram Subramanian, Vera Institute of Justice, May 2017

From the overview:
From the early 1970s into the new millennium, the U.S. prison population experienced unprecedented growth, which had a direct influence on state budgets. In recent years, however, lawmakers in nearly every state and from across the political spectrum have enacted new laws to reduce prison populations and spending. This report, which builds upon the information found in Vera’s 2012 publication The Price of Prisons: What Incarceration Costs Taxpayers, found that 13 states were successful in reducing both population and spending. However, no single reason explains a rise or fall in spending; instead, a multitude of factors push and pull expenditures in different directions. Read the report and explore our interactive data visualization below to learn more.
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Interactive Data Visualization
Fact Sheet

State of Preschool 2016

Source: W. Steven Barnett, Allison H. Friedman-Krauss, G.G. Weisenfeld, Michelle Horowitz, Richard Kasmin, James H. Squires, National Institute for Early Education Research, 2017

From the summary:
The State of Preschool 2016 is the latest edition of our annual yearbook report profiling state-funded prekindergarten programs in the United States. NIEER’s State Preschool Yearbook is the only national report on state-funded preschool programs with detailed information on enrollment, funding, teacher qualifications, and other policies related to quality, such as the presence of a qualified teacher and assistant, small class size, and low teacher-to-student ratio.

This Yearbook presents data on state-funded preschool during the 2015-2016 school year and documents more than a decade of change in state preschool since the first Yearbook collected data on the 2001-2002 school year. The 2016 Yearbook profiles state-funded preschool programs in 43 states, plus Guam and the District of Columbia and provides narrative information on early education efforts in states and the U.S. territories that do not provide state-funded preschool.

Nationwide, state-funded preschool program enrollment reached an all-time high, serving nearly 1.5 million children, 32 percent of 4-year-olds and 5 percent of 3-year-olds. State funding for preschool rose 8 percent to about $7.4 billion, a $564 million increase. State funding per child increased to $4,976, exceeding pre-recession levels for the first time. Six state funded preschool programs met all 10 current quality standards benchmarks. Nine states had programs that met fewer than half; and seven states do not fund preschool at all.

Current benchmarks were designed to help states build programs, focusing on resources and policies related to the structural aspects of public preschool—elements needed for a high-quality program but not fully defining one. This year, NIEER is introducing major revisions to the policy benchmarks for the first time since the Yearbook was launched. The new benchmarks raise the bar by focusing on policies that more directly support continuous improvement of classroom quality. State profiles in the 2016 Yearbook include both current and new benchmark scores…..
Related:
Executive summary
State profiles
Yearbook contents

Pensions v 401(k)s: An Illinois Case Study

Source: Kezmen Clifton, OnLabor blog, May 26, 2017

Illinois’ pension liability is estimated to stand at more than $130 billion. The reason behind Illinois’ ever-growing pension liability is one of debate. Some attribute the deficit to legislators voting on pension bills they didn’t fully understand. Others argue that politicians chose to kick the pension ball down the road to avoid raising taxes or cutting spending on their watch. Still others, like Illinois Governor Bruce Rauner, argue the structure of the pension system itself is to blame: employees change jobs as a way to qualify for more than one pension and many seek raises in their final years as that guarantees them higher payouts during retirement.

While there is much debate about the cause of the deficit, its existence is certain. Despite being in the top 1/3 of the nation’s wealthiest states, Illinois has one of the most poorly funded retirement systems in the country. Illinois has only funded 39 cents for every dollar it has promised to pay out in pensions. The pensions of similarly populated states like New York and Pennsylvania are far better funded, with New York at 89 percent and Pennsylvania at 62 percent, respectively. It is clear that Illinois needs to rethink its current pension scheme. Some groups like Illinois Policy, a conservative think tank, advocate for Illinois to adopt 401(k)s for new government workers, but the idea has not received much traction among state employees. While the traditional debate has been between keeping traditional defined benefit plans like pensions or moving to a defined- contribution plan like a 401(k), there is a lesser explored option as well: the hybrid 401(k)-pension plan. The hybrid plan combines the guaranteed income of a pension while lowering employer contributions with a 401(k)…..

Rainy Day Funds and State Credit Ratings: How well-designed policies and timely use can protect against downgrades

Source: Pew Charitable Trusts, May 2017

From the overview:

…. States generally react to the warnings of S&P and similar agencies in order to protect or enhance their ratings. The higher a state’s credit rating, the lower the cost to repay bonds the state sells to investors to finance construction and renovation of roads, schools, airports, prisons, parks, water projects, and other infrastructure.

Yet research by Pew has found that even in states with the agencies’ highest rating (triple-A), policymakers often are unsure about how best to manage their rainy day funds to earn or keep high credit ratings. As a result, some state officials are reluctant to tap reserves even during recessions for fear of a ratings downgrade.

To offer policymakers advice and insight into the relationship between budget reserves and credit ratings decisions, Pew studied documents and data on state ratings from the three major rating agencies—S&P Global Ratings, Moody’s Investors Service, and Fitch Ratings—and interviewed policymakers, rating agency analysts, and others. The study is part of Pew’s ongoing look at how states are managing their finances since the Great Recession of 2007-09. In previous reports, beginning with Managing Uncertainty: How State Budgeting Can Smooth Revenue Volatility, Pew has offered recommendations on how policymakers can strengthen their state’s financial stability, including prudent design of rainy day funds…..

2016 Annual Survey of Public Pensions

Source: U.S. Census Bureau, May 25, 2017

From the press release:
Employer pension contributions made by state and local governments increased by 6.5 percent or $8.5 billion while earnings on investments dropped by $105.7 billion to $49.9 billion, according to the U.S. Census Bureau’s newly released report.

“The 2016 Annual Survey of Public Pensions found that total contributions were $191.6 billion in 2016, increasing 6.6 percent from $179.7 billion in 2015. Government contributions accounted for the bulk of them, $140.6 billion in 2016, increasing 6.5 percent from $132.0 billion in 2015, with employee contributions at $51.0 billion in 2016, climbing 7.1 percent from $47.7 billion in 2015,” according to Phillip Vidal, chief, Pension Statistics Branch.

The other component of total revenue — earnings on investments — declined 67.9 percent to $49.9 billion in 2016, from $155.5 billion in 2015. Earnings on investments include both realized and unrealized gains, and therefore reflect market fluctuations.

In 2016, the total number of beneficiaries of state and local government pensions increased
3.3 percent to 10.3 million people, (from 10.0 million in 2015 and 9.9 million people in 2014). The benefits they received rose 5.4 percent to $282.9 billion in 2016, from $268.5 billion in 2015.
Meanwhile, total assets decreased 1.6 percent to $3.7 trillion in 2016, from $3.8 trillion in 2015.
The Annual Survey of Public Pensions provides a comprehensive look at the financial activity of the nation’s state and locally-administered defined benefit pension systems, including cash and investment holdings, receipts, payments, pension obligations and membership information. Statistics are available at the national level and for individual states. State and Locally Administered Defined Benefits data will also be released on May 25, 2017.

Making your dollars count - Top 9 states: public-sector retirees' benefits for total contributions

When Ties Bind: Public Managers’ Networking Behavior and Municipal Fiscal Health After the Great Recession

Source: Benedict S. Jimenez, Journal of Public Administration Research and Theory, Volume 27 Issue 3, July 2017
(subscription required)

From the abstract:
This study examines the relationship between managerial networking and the fiscal health of city governments in the United States that faced a serious budget crisis during and immediately after the Great Recession. Do public managers’ ties with external stakeholders help improve the fiscal health of these cities? Or do these ties bind city officials to decisions that further exacerbate the fiscal difficulties of their governments? These questions are answered using data from a survey of municipal governments across the United States with a population of 50,000 or more, and financial data from Comprehensive Annual Financial Reports (CAFR) covering more than 200 cities and for three fiscal years. Using instrumental variable regression to address possible common source bias and simultaneous causation, there is strong evidence that an external networking orientation is associated with a decline in city government fiscal health, whether the measure used is perceptual or CAFR-based.

State Public Pension Funds Increase Use of Complex Investments

Source: Pew Charitable Trusts, April 2017

From the overview:
State and locally run retirement systems currently manage over $3.6 trillion in public pension fund investments, most of which are held by states. Broadly, half of these assets are invested in stocks; a quarter in bonds and cash; and another quarter in what are known as alternative investments, such as private equity, hedge funds, real estate, and commodities.

Although governments and employees contribute to pension funds, investment earnings on plan assets are expected to pay for about 60 percent of promised benefits. In a bid to boost investment returns and diversify investment portfolios, public pension plans in recent decades have shifted funds away from low-risk, fixedincome investments such as government and high-grade corporate bonds. During the 1980s and 1990s, plans significantly increased their reliance on stocks, also known as equities. And over the past decade, funds have increasingly turned to alternative investments to achieve investment return targets.

Greater investment in equities and alternatives can provide higher financial returns but also bring heightened volatility and risk of shortfalls. Most funds exceeded their investment return targets during the bull market of the 1990s but then suffered losses during the volatile financial markets of the 2000s—leading to higher pension costs for state and local budgets. The volatility inherent in public funds’ investment strategies can be seen in more recent results as well, with large funds posting fiscal year gains of over 12 percent in 2013 and 17 percent in 2014, but only 2 percent in 2012, 4 percent in 2015, and 1 percent in 2016.

The shift toward more complex investment vehicles has also brought higher investment fees. State funds reported paying more than $10 billion in fees and investment-related costs in 2014, which amounted to their largest expense. Those fees, as a percentage of assets, have increased by about 30 percent over the past decade, a boost closely correlated with the rising use of alternative assets, which has more than doubled since 2006. Additionally, state funds are paying billions of dollars in unreported performance fees associated with these alternative investments…..

The State Pension Funding Gap: 2015 Market volatility deepens the divide between assets, liabilities

Source: Pew Charitable Trusts, Issue Brief, April 2017

From the overview:
The gap between the total assets reported by state pension systems across the United States and the benefits promised to workers, now reported as the net pension liability, reached $1.1 trillion in fiscal year 2015, the most recent year for which complete data are available. That represents an increase of $157 billion, or 17 percent, from 2014.

A state pension plan’s annual funded ratio gives an end-of-fiscal-year snapshot of the assets as a proportion of its accrued liabilities. In aggregate, the funded ratio of these plans dropped to 72 percent in 2015, down from 75 percent in 2014. Investment returns that fell short of expectations proved to be the largest contributor to the worsening fiscal position, with median overall returns of 3.6 percent.1 On average, state pension plans had assumed a long-run investment return of twice that—7.6 percent—for fiscal 2015.

Though final data for 2016 are not yet available, low returns will also be reflected there. Based on returns averaging 1.0 percent for that year, the net pension liability is expected to increase by close to $200 billion and reach about $1.3 trillion. Market volatility will also have a significant impact on cost predictability in the near and long terms.
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Downloadable data