Category Archives: State & Local Finance

Keeping State Lottery Revenue Alive

Source: Olivia Berlin and Jackson Brainerd, LegisBrief, Vol. 25, No. 35, September 2017
(subscription required)

Did you know?
– Education receives the majority of dedicated state lottery revenues.
– Lotteries were illegal in every state in the country until 1964.
– Instant scratch ticket games are generally state lotteries’ most popular product.

For the 44 states that have them, state lotteries represent a small but valuable source of revenue. On average, about 1 percent of state revenue comes from lotteries. Sometimes that money goes into the general budget, but most legislatures use it to fund certain projects, like schools, senior services or environmental protection. In crafting the current state budget, West Virginia lawmakers used some lottery money to fund Medicaid, rather than raise other taxes to cover that cost. …

Related:
State Revenues from Gambling: Short-Term Relief, Long-Term Disappointment
Source: Lucy Dadayan, Rockefeller Institute of Government, Blinken Report, April 2016

Consumption Taxes, Income Taxes, and Revenue Sensitivity: States and the Great Recession

Source: Howard Chernick, Cordelia Reimers, Public Finance Review, OnlineFirst, Published November 30, 2017

From the abstract:
This article uses an income-distributional approach to state tax sensitivity to examine the assumption that consumption taxes are more stable than income taxes. We estimate the 2007 to 2009 change in tax revenues as a function of state income distributions and tax burdens by income class. We estimate tax burdens as a function of income tax shares and consumption tax shares. We then simulate the change in tax revenues with tax shares at the national average. If high-income-tax states were to lower their reliance on this tax, the revenue decline during the recession would have been greater. For high consumption tax states, the revenue decline under higher income tax shares would have been smaller. Had they shifted toward consumption taxes, income tax reliant states would not have reduced the cyclical sensitivity of tax revenues during the Great Recession. The interaction between tax burdens and recession shocks by income class is key to these results.

Don’t Dismantle Public Pensions Because They Aren’t 100 Percent Funded

Source: National Conference on Public Employee Retirement Systems, NCPERS Research Series, November 2017

From the press release:
State and local pension plans have consistently been able to meet their benefit and other payment obligations over the past quarter century, according to a data analysis published November 16 by the National Conference on Public Employee Retirement Systems.

Between 1993 and 2016, contributions and investment earnings by 6,000 public pension plans exceeded benefit obligations in all but four years. And during those four years – 2002, 2008, 2009, and 2012 – all plans met their obligations in the aftermath of recessions because they had built up cushions during normal times, according to the analysis conducted by Michael Kahn, director of research for NCPERS.

The findings offer a striking counterpoint to initiatives under way in some states and municipalities to dismantle public pensions because they are considered under-funded, said Hank H. Kim, NCPERS’ executive director and counsel. ….

Critics of public pensions often cite funding ratios of less than 100% as evidence of pressing financial problems, but this is faulty logic, Kim said. Contributions and earnings continue to flow into plans even as benefits are being paid out, he noted. ….

Kahn found that individual states – regardless of whether their pension plans were underfunded or fully funded – had between five and eight years in which income fell short of obligations, and had to draw on their cushion to pay benefits. Far from being a cause for concern, “this is exactly what public pensions are designed to do – to provide a steady income over the long haul,” Kahn noted. “Pension assets typically are invested over a 30-year time horizon, so plans aren’t blown off course by short-term market shifts.”

NCPERS offered four recommendations for public pension plans:
– Stop dismantling plans on grounds that they are not fully funded.
– Improve funding by determining the appropriate levels of required employer contributions.
– Establish a pension stabilization fund that can set aside money from a certain revenue stream to be used in special circumstances such as a recession.
– Implement a mechanism to ensure that full employer contributions are made on a timely basis, perhaps by making employer contributions a nondiscretionary part of the budget.

Employee Contributions to Public Pension Plans

Source: National Association of State Retirement Administrators (NASRA), Issue Brief, September 2017

From the introduction:
Unlike in the private sector, nearly all employees of state and local government are required to share in the cost of their retirement benefit. Employee contributions typically are set as a percentage of salary by statute or by the retirement board. Although investment earnings and employer contributions account for a larger portion of total public pension fund revenues, by providing a consistent and predictable stream of revenue to public pension funds, contributions from employees fill a vital role in financing pension benefits. Reforms made in the wake of the 2008-09 market decline included higher employee contribution rates in many states. This issue brief examines employee contribution plan designs, policies and recent trends.

Governing Through Police? Housing Market Reliance, Welfare Retrenchment, and Police Budgeting in an Era of Declining Crime

Source: Brenden Beck, Adam Goldstein, Social Forces, Advance articles, Published: October 31, 2017
(subscription required)

From the abstract:
The United States witnessed a dramatic expansion of the penal state from the 1970s to the Great Recession of 2008. One key puzzle is why penal state growth continued unabated long after crime levels peaked in the early 1990s. We focus on local policing and consider the relationship between growing city-level law enforcement expenditures and two shifts: first, the move toward an economy increasingly organized around residential real estate; and second, city-level welfare retrenchment. We argue that increasing economic reliance on housing price appreciation during the late 1990s and the 2000s heightened demand for expanded law enforcement even as actual risks of crime victimization fell. At the same time, cities increasingly addressed social problems through criminal justice—rather than social service—capacities. We assess these arguments using a dataset of 171 cities’ police expenditures between 1992 and 2010. Results of a dynamic panel model indicate that places with more pronounced reliance on housing price growth and mortgage investment exhibited correspondingly greater growth of local law enforcement, as did places with decreased social service spending.

Understanding Muni Bonds: Prospects for Funding Infrastructure Improvements

Source: Ed Friedman, Regional Financial Review, August 2017
(subscription required)

Both monetary and fiscal policies will affect the municipal bond market over the coming year. Anticipated further tightening by the Federal Reserve will raise all interest rates, including the borrowing costs of state and local governments. The Trump administration’s goal of boosting infrastructure spending will potentially magnify this movement to the extent that it stimulates overall growth. Moreover, the municipal bond market will be one of the alternatives considered for the financing, the others being an infrastructure bank and one or more public-private partnerships.

This article assesses the structure of the muni market, macroeconomic trends in the market, and the role it may play in federal fiscal policy. The costs and benefits of using the muni market are weighed against the other alternatives…..

The Economic Impact of Harvey, Irma and Maria

Source: Adam Kamins, Ryan Sweet, Regional Financial Review, September 2017
(subscription required)

The late-summer spate of three major hurricanes making landfall in U.S. states or territories within a month is unprecedented in recent history. This paper focuses on the short- and long-term economic ramifications of the three late-summer storms to hit the U.S. and includes a review of the local impact on affected areas, as well as implications for the U.S. as a whole.

Pension Math: Public Pension Spending and Service Crowd Out in California, 2003-2030

Source: Joe Nation, Stanford Institute for Economic Policy Research (SIEPR), Working Paper 17-023, October 2017

From the abstract:
California public pension plans are funded on the basis of policies and assumptions that can delay recognition of their true cost. Even with this delay, local and state governments are facing increasingly higher pension costs—costs that are certain to continue their rise over the next one to two decades, even under assumptions that critics regard as optimistic. As budgets are squeezed, what are state and local governments cutting? Core services, including higher education, social services, public assistance, welfare, recreation and libraries, health, public works, and in some cases, public safety.

Giving or Getting: New York’s Balance of Payments with the Federal Government

Source: Donald J. Boyd, Lucy Dadayan, and Jim DeWan, Nelson A. Rockefeller Institute of Government, September 2017

From the press release:
Today, the Rockefeller Institute of Government released a new report, Giving or Getting: New York’s Balance of Payments with the Federal Government, to examine what states gave in tax dollars versus what states got from the federal government.
Modeled off of the “Fisc” reports issued by Daniel Patrick Moynihan, the former United States senator from New York, the Rockefeller Institute of Government report found that:
• Thirteen states had a “negative” balance of payment with the federal government. From worst to least they are: New York, New Jersey, Illinois, California, Massachusetts, Connecticut, Minnesota, Texas, North Dakota, Colorado, New Hampshire, Nebraska, and Wyoming. New York’s residents and economy contributed approximately $48 billion more in taxes to the federal government than New York received in federal spending —- the largest of any state.
• New York’s negative balance of payments roughly equals the combined shortfalls of 2nd ranked New Jersey and 3rd ranked Illinois. California and Massachusetts rounded out the list of top five states.
• On a per-capita basis, New York had the third-worst balance of payments, after New Jersey and Connecticut. New York’s people and economy paid the federal government $2,425 more per person than they received. By contrast, the average state experienced a positive balance of payments of about $1,305 per capita.
• New York’s negative balance of payments is driven primarily by federal taxes, rather than spending. Payments from New York to the federal government were $12,820 per capita, or approximately $3,401 higher than the national average.
• Federal spending in New York was $329 lower than the U.S. average, adding to the revenue disparity, but the revenue difference is much larger than the spending difference. ….