Category Archives: State & Local Finance

Offshore Shell Games 2014 – The Use of Offshore Tax Havens by Fortune 500 Companies

Source: Richard Phillips, Steve Wamhoff, Dan Smith, Citizens for Tax Justice and U.S. PIRG Education Fund, June 2014

From the summary:
Many large U.S.-based multinational cor­porations avoid paying U.S. taxes by using accounting tricks to make profits made in America appear to be generated in offshore tax havens—countries with minimal or no taxes. By booking profits to subsidiaries registered in tax havens, multinational corporations are able to avoid an estimated $90 billion in fed­eral income taxes each year. These subsidiaries are often shell companies with few, if any em­ployees, and which engage in little to no real business activity.

Congress has left loopholes in our tax code that allow this tax avoidance, which forces ordinary Americans to make up the difference. Every dollar in taxes that corporations avoid by using tax havens must be balanced by higher taxes on individuals, cuts to public investments and public services, or increased federal debt.

This study examines the use of tax havens by Fortune 500 companies in 2013. It reveals that tax haven use is ubiquitous among America’s largest companies, but a narrow set of compa­nies benefit disproportionately.

∙ Most of America’s largest corporations maintain subsidiaries in offshore tax ha­vens. At least 362 companies, making up 72 percent of the Fortune 500, operate subsid­iaries in tax haven jurisdictions as of 2013….

∙ Approximately 64 percent of the companies with any tax haven subsidiaries registered at least one in Bermuda or the Cayman Islands—two notorious tax havens. Fur­thermore, the profits that all American multi­nationals—not just Fortune 500 companies—collectively claim were earned in these island nations in 2010 totaled 1,643 percent and 1,600 percent of each country’s entire yearly economic output, respectively.

∙ Six percent of Fortune 500 companies ac­count for over 60 percent of the profits re­ported offshore for tax purposes. These 30 companies with the most money offshore—out of the 287 that report offshore profits—collectively book $1.2 trillion overseas for tax purposes.

∙ Only 55 Fortune 500 companies disclose what they would expect to pay in U.S. taxes if these profits were not officially booked offshore. All told, these 55 companies would collectively owe $147.5 billion in ad­ditional federal taxes. To put this enormous sum in context, it represents more than the en­tire state budgets of California, Virginia, and Indiana combined….

State Fiscal Constitutions and the Law and Politics of Public Pensions

Source: Amy Monahan, University of Minnesota – Twin Cities – School of Law, Minnesota Legal Studies Research Paper No. 14-24,May 13, 2014

from the abstract:
Pension plans for state and local employees are, as a whole, significantly underfunded. This underfunding creates intense fiscal pressure on governments and often either crowds out other desired governmental spending or results in employees and retirees losing earned benefits. Political theorists often explain that underfunded public pension plans are all but inevitable given the political realities that affect funding decisions. Politicians who desire to be reelected should rationally prefer to spend money on current constituents, rather than commit scarce funds to a pension plan to pay benefits due to workers decades in the future. These dynamics are exacerbated by existing state fiscal constitutions that require balanced budgets and often restrict the ability to raise taxes. Paying a pension plan less than the amount due provides an easy way to free up money in the state budget by creating a form of debt that is not reflected on the state’s balance sheet. This article presents original analysis of the effect that state fiscal constitutions – even those that contain explicit requirements to fund public pension plans – impact public pension funding dynamics. It finds that even where explicit constitutional funding requirements are in place, plans often continue to be underfunded both because of political and financial pressures, and also because of the distinct lack of an enforcement mechanism. The article concludes by suggesting that these weakness in pension funding requirements can be addressed through the creation of clear and objective funding standards and, most importantly, through the creation of enforcement mechanisms that can, where appropriate, override legislative decisions to underfund public pension plans.

Mandatory Reentry Supervision – Evaluating the Kentucky Experience

Source: Pew Charitable Trusts, Issue Brief, June 2014

From the overview:
In 2011, the Kentucky Legislature passed the Public Safety and Offender Accountability Act (HB 463), which sought to earn a greater public safety return on the state’s corrections spending. The historic measure included a mandatory reentry supervision policy that required every inmate to undergo a period of post-release supervision so that no inmates would be released from prison to communities without monitoring or support.

This brief summarizes recent state corrections data and an independent evaluation of the policy commissioned by The Pew Charitable Trusts, which found that mandatory reentry supervision:
∙ improved public safety by helping reduce new offense rates by 30 percent.
∙ resulted in a net savings of approximately 872 prison beds per year.
∙ saved more than $29 million in the 27 months after the policy took effect.

Libraries See Light After Years of Cuts

Source: Marsha Mercer,, June 4, 2014

…Buffeted by financial and cultural pressures, public libraries around the country are struggling to remain relevant and connect with patrons in the high-cost digital age. States, never a deep pocket for public libraries, have cut or even zeroed out aid, forcing libraries to rely more heavily on local funds. …

… Overall, states slashed funding to public libraries 37.6 percent from fiscal 2001 to 2010, from $1.28 billion to $799.4 million, the Institute of Museum and Library Services reported in a survey for fiscal 2010 which was released in January. The institute is the primary source of federal funds to libraries and museums. (See the institute’s 50-state interactive here.)

Meanwhile, local revenue dedicated to libraries grew 23.5 percent over the 10 years, from $7.76 billion in 2001 to $9.59 billion in 2010.

States provide only about 7.5 percent of operating revenue for public libraries; local governments shoulder 85 percent. Gifts, fines, fees and grants contribute about 7 percent and the federal government just 0.5 percent, according to the institute.

States that fail to support their public libraries risk losing federal Library Services and Technology Act grants, which are part of the 0.5 percent federal contribution. ….

Central Falls Retirees v. Bondholders: Assessing Fear of Contagion in Chapter 9 Proceedings

Source: Maria O’Brien Hylton, Boston University School of Law, Public Law Research Paper No. 14-21, May 9, 2014

From the abstract:
Modern Chapter 9 litigation has been characterized by extraordinary protections for municipal bondholders, and Central Falls is no exception. Although not well understood by politicians, fear of contagion has encouraged the adoption of legal arrangements that have limited the bankruptcy courts’ ability to include bondholders in the cost of restructuring municipal debt. This preference for bondholders (and, by extension, their insurers) has meant increased misery for taxpayers and retirees. Given that all of these actors appear to have been complicit to some degree in the creation and maintenance of the fiscally imprudent conditions that triggered bankruptcy and that evidence of true contagion is modest, it is hard to justify special protections for bondholders.

School librarians a rare find in California public schools

Source: Lillian Mongeau, EdSource, May 26, 2014

…California employed 804 school librarians in 2012-13, which translates to one certified school librarian for every 7,784 students in 2012-13, according to data from the California Department of Education. That is the lowest per-student ratio of any state in the country. The national average in the fall of 2011, the most recent year for which data is available, was one school librarian for every 1,022 students, according to The National Center for Education Statistics. The lack of certified librarians has led to a decrease in student access to books, a decline in student research skills and the loss of an important resource for teachers, said Janice See-Gilmore, president of the California School Library Association….Beginning in 2009, the funding set aside for libraries became “flexible,” meaning it could be spent on other priorities as districts scrambled to slash their budgets during the recession. Many districts now employ only one teacher librarian who oversees all the libraries in the district….

The 7 Deadly Sins of Public Finance

Source: Liz Farmer, Governing, June 2014

This is part of the ongoing Finance 101 series that breaks down the basics of public finance for public officials.

There’s no sure-fire way to get fiscal policy right. But there are a few simple ways to get it disastrously wrong.

The temptation of the quick fiscal fix has seduced just about every lawmaker at one time or another. Scraping pennies together to balance the budget? Perhaps skipping a contribution to the public employee pension plan is the best way to get through the year. Can’t afford to pay for building maintenance? Push some of it off into the following year’s liabilities. Governments have been using these and other money-shuffling tricks since balanced budgets and municipal financing were invented. But in the aftermath of the Great Recession, short-sighted gimmicks like these became more common as governments looked for any solution to combat dwindling revenues. Revenue is back up now in most places, but some of the fiscal trickery has hardened into common practice….

What follows is Governing’s list of the most tempting financial schemes that can severely weaken a government’s fiscal future when practiced as a matter of course. Although the consequences aren’t necessarily lethal, those that make heavy use of these 7 Sins of Public Finance find that they only succeed in digging deeper financial holes.

1. Balancing the Budget with One-Time Fixes ….
2. Ignoring the Long-Term Consequences of a Deal ….
3. Taking on Too Much ….
4. Misapplying a Temporary Windfall ….
5. Shortchanging Pension Obligations ….
6. Making Unrealistic Projections About Rate of Return ….
7. Ignoring Financial Checks and Balances ….

Infrastructure 2014: Shaping the Competitive City

Source: Colin Galloway, Rachel MacCleery, Urban Land Institute, EY, 2014

From the summary:
Infrastructure 2014, based on a survey of approximately 440 top public and
real estate leaders from around the world, assesses the role of infrastructure
in supporting and attracting metropolitan real estate investment and supporting urban prosperity, and identifies key infrastructure investment priorities and bottlenecks.

Among the findings in Infrastructure 2014:
∙ Good infrastructure is a key driver of where real estate investment dollars go;
∙ Improving the quality of public transit, roads and bridges, and pedestrian infrastructure is among survey respondents’ highest priorities;
∙ The public’s willingness to pay for infrastructure is a top factor that will shape infrastructure over the next decade;
∙ Funding and financing for infrastructure are seen as resting on cooperation between developers and local governments; and
∙ Long-term maintenance and operations of infrastructure are oft-neglected considerations, and concern public and private leaders alike.

Capital Budgeting in the States

Source: Michael Streepey, National Association of State Budget Officers, Spring 2014

From the summary:
State governments play a central role in building and maintaining the nation’s infrastructure. Financial decisions for infrastructure, or capital projects, impact public assets such as roads, bridges, university buildings, prisons, water resources and more. Investments in infrastructure are complex and require significant resource commitments and organizational planning. The additional considerations inherent to capital goods require different budgetary plans, concepts and practices, from those used to prioritize spending on day-to-day expenses. This report delivers state-by-state comparative information on the ways budget officers develop and implement capital spending plans.

After several years of slow recovery, states have shifted some of their focus from immediate budgetary pressures to long-term structural challenges like infrastructure. This report delivers information such as:
– how states make decisions to invest in new facilities or maintain old ones;
– ways states distinguish infrastructure spending from day to day operating expenses;
– criteria for project financing strategies and options for funding infrastructure;
– efforts to mitigate fiscal risks from debt issuance, and more.

Examples of Report Findings
– Transportation is not included in the capital budget: 19 states.
– The definition of infrastructure is being broadened to include technology: 29 states include information technology in the capital budget;
– Many states are still directly investing in university infrastructure: 26 states fund higher education capital projects with general fund dollars;
– Citizen involvement in capital infrastructure can vary: In 19 states, only voters can approve general obligation debt issuance.
– Projects are required to have an estimate of fiscal impact on future operating budgets: 43 states.

As states continue to face budgetary constraints, capital budgeting and prioritization of capital needs will continue to remain important for future infrastructure investments.

Swapping Our Future: How Students and Taxpayers Are Funding Risky UC Borrowing and Wall Street Profits

Source: Charlie Eaton, Jacob Habinek, Mukul Kumar, Tamera Lee Stover, Alex Roehrkasse, and Jeremy Thompson, Debt & Society, 2014

This report examines the role of interest rate swaps in the University of California’s massive expansion of borrowing from Wall Street over the last decade. The report highlights the costs to students and taxpayers of UC’s interest rate swaps and debt-driven profit strategies. Such strategies have been called into question for Wall Street banks, let alone for public universities. Based upon our findings, we offer recommendations regarding renegotiation of UC’s interest rate swaps and the governance practices for UC’s overall borrowing program. …