Category Archives: State & Local Finance

Federal tax law to squeeze local governments in tri-state region

Source: Valentina Gomez, Nicholas Samuels, Leonard Jones, Moody’s, Sector In-Depth, April 11, 2018
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The recent federal tax legislation will have an adverse credit effect on local governments in the tri-state region of Connecticut (A1 stable), New York (Aa1 stable) and New Jersey (A3 stable). This is due to the region’s relatively high state and local taxes and unusually high home prices, particularly in the New York City metropolitan area. The impact, however, will vary from state to state depending on tax levy formulas, fixed cost burdens and state actions to blunt the effect of the federal changes

Competing spending demands and slowing revenue growth will stymie capital investment for many cities

Source: Coley J Anderson, Rachel Cortez, Alexandra S. Parke, Katie Townsend, Moody’s, Sector In-Depth, April 12, 2018
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US local governments are facing acute infrastructure needs following years of deferred maintenance. Local governments’ capital spending fell by 19% between 2009 and 2015, hastening a decline in the condition of public assets. This trend will continue through at least 2018. An increase in competing spending demands and a slowdown in property tax revenue growth will hamper many cities’ ability to stave off further deterioration in capital assets. Cities with growing revenue bases, ample financial reserves and low fixed costs are best positioned to increase capital spending. Cities with weak population growth, narrow financial reserves and high fixed costs will find it difficult to make capital investment a priority.

Municipal Bond Analyst Survey, 2018

Source: Tom Kozlik, PNC, Municipal Commentary, April 5, 2018

Key Survey Findings: Pensions still the top issue, but state government credit quality jumped to the third most important issue

State government credit quality (48%) jumped to the third-ranked “most important trend” in our survey of 168 municipal analysts. Last year, state credit quality was ranked eighth (24%).

Public pensions (92%) and federal policy uncertainty (60%) remain the first and second most important issues/trends facing the market.

The 2017 Tax Cuts and Jobs Act impact on municipals: 78% of analysts forecast 2018 municipal bond issuance will be under $350 billion versus $446 billion in 2017.

More related to the 2017 tax cut: 29% expect the elimination of advance refundings to have the greatest impact on the municipal bond market. Total 2017 issuance was a record $446 billion.

Tax-exemption threat: Only 11% of municipal bond analysts see a “strong” or “very strong” threat to the municipal bond tax exemption after the passage of last year’s tax cut legislation.

Climate change: Only 3% of those surveyed believe state and local governments are “prepared” or “very prepared” for climate change.

Infrastructure: President Donald Trump’s infrastructure proposal did not resonate well with those analysts surveyed, with 37% having a “negative” or “very negative” opinion of the plan.

Pensions: Half of the municipal analysts polled think there is a public pension funding crisis.

Recoveries: Most (79%) analysts do not expect future municipal bond recoveries to be “strong” or “very strong.”

A total of 64% of analysts polled have a “somewhat unfavorable,” “very unfavorable,” “undecided,” or “do not consider ratings” view about Kroll’s municipal bond ratings. This is a slight improvement compared with the total of 66% reported in our 2017 survey.

New Federal Tax Law Makes It Difficult for States to Provide Accurate Revenue Forecasts

Source: Lucy Dadayan, Nelson A. Rockefeller Institute of Government, April 2018

From the press release:
A Rockefeller Institute review of recent state revenue forecasts shows that states are expecting tax revenue growth to be stronger in fiscal year (FY) 2018 compared to FY 2017. Those forecasts remain highly speculative, however, as the full effects of the federal Tax Cuts and Jobs Act (TCJA) remain unknown.

The policy brief reviews forecasts for personal income, corporate income, and sales tax revenue in 42 states and finds a median forecast for personal income tax growth at 4.4 percent in 2018 and 4.7 percent in 2019 – significantly stronger than the 2.4 percent actual growth in 2017. Forecasts for corporate income and sales tax revenue are similarly strong compared to actual growth in 2017.

Forecasters in most states are facing higher-than-usual uncertainty as they do not yet have enough data to factor in the effects of the TCJA. California’s executive budget notes, for example, “These estimates do not include any impacts of the federal tax changes passed at the end of 2017…. Changes by individuals and businesses in response to the federal tax incentives will affect revenues in potentially unexpected ways.”

State revenue forecasts will continue to be updated as the effects of the TCJA become clearer.

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Louisiana Legislators Are Earning Big Money From Government Agencies — But Don’t Have to Disclose It All

Source: Rebekah Allen, The Advocate, April 13, 2018

One state senator earned $836,000 in legal fees representing a sheriff. The amount he disclosed: $13,328. “The notion that you could get public money and not report it in our flim-flammery of an ethics system is ridiculous,” an ethics expert says.

Medians – Solid financial metrics, ability to raise rates underpin stable sector

Source: Evan W Hess, Matt Jaffe, Lauren Von Bargen, Leonard Jones, Alexandra S. Parker, Moody’s, Sector Comment, Water and sewer utilities – US, April 5, 2018
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Municipal water and sewer utilities continue to demonstrate a stable to modestly positive financial performance, according our latest medians data. The steady performance is primarily driven by utility systems’ willingness and ability to raise rates to support operations and debt service. However, declining asset condition across the sector indicates an underinvestment in infrastructure. These credit factors, which are key to our stable outlook for the sector, are set to continue….

Rating changes for the 50 states from 1970

Source: Emily Raimes, Nicholas Samuels, Kenneth Kurtz, Ted Hampton, Baye Larsen, Marcia Van Wagner, Genevieve Nolan, Matthew Butler, Pisei Chea, Timothy Blake, Moody’s, Sector Comment, State government – US, April 6, 2018
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This report is part of a series that identifies changes in state general obligation (GO) and issuer ratings and outlooks. The report is produced on a quarterly basis with the last publication in January 2018. We maintain GO or equivalent issuer ratings for 49 states. Stable outlooks apply to 43 states, and six states have negative outlooks. The data included in this report reflect rating changes for each state by year, a list of all state GO or issuer ratings by category, and a list of all state outlooks.

Substantial increase in federal funding is credit positive for sector

Source: Dmitriy Plit, Florence Zeman, Moody’s, Sector Comment, Public housing authorities – US, April 4, 2018
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The recently enacted federal omnibus spending bill appropriates $2.75 billion for the Public Housing Capital Fund, a substantial increase over the $1.94 billion for federal fiscal year 2017.