Category Archives: State & Local Finance

Making Sense Of Incentives: Taming Business Incentives to Promote Prosperity

Source: Timothy J. Bartik, Upjohn Press, 2019

From the summary:
In recent months, “Foxconn” and “Amazon HQ2” brought immediacy to a costly and lingering subject: economic development incentives. State and local policymakers regularly dangle tax breaks and other financial incentives as lures to attract and sometimes retain businesses and the jobs they say they’ll create. Oversight of these programs is often weak or nonexistent, yet tens of billions of taxpayer dollars are spent each year on these efforts. In the cases of Foxconn and Amazon, billions were offered for each project. Are these incentives worth the price? How do we know? Are they effective at promoting job growth? Is there a better way to grow good-paying jobs in a local labor market?

These questions and more are answered in a new book by Timothy J. Bartik, Making Sense of Incentives: Taming Business Incentives to Promote Prosperity (Upjohn Press, 2019). The book is relatively brief, straightforward, nontechnical, and just what state and local policymakers need to read. It is also available as a free download.

Bartik begins by explaining the basics: What are economic development incentives? Who offers them? Why are they offered? What are the political and economic considerations involved? Why are incentives often wasteful? He then delves into the recent trends in business incentives, including how generous offers have become and whether they threaten needed public services (especially K–12 education), which types of firms tend to receive incentives, and whether needy areas tend to be targeted.

Policymakers often tout the multipliers associated with jobs created via business incentives—e.g., for every one job created another two jobs will appear as a result. But Bartik shows that these numbers are often specious, and why, while providing more realistic estimates.

Then, based on his decades of ground-breaking research, he explains what policymakers can do to improve the use of business incentives. Bartik doesn’t think incentives should be ruled out, just improved, and he explains how this can be achieved. And in his chapter on how to evaluate the success of incentive programs, he describes the program details that need to be considered, and how to use them, in order to judge whether the benefits of incentives exceed the costs.

States’ Use of the Child Care and Development Block Grant Funding Increase

Source: Patti Banghart, Carlise King, Elizabeth Bedrick, Ashley Hirilall, Sarah Daily, Child Trends, October 2019

From the summary:
In 2018, Congress appropriated an increase of more than $2 billion to support states and territories in meeting the goals and requirements of the 2014 reauthorization of the Child Care and Development Block Grant (CCDBG). View the interactive maps and state profiles on this page to learn more about how states are using or planning to use this funding increase and the challenges they still face.

In 2014, Congress reauthorized the CCDBG, setting new standards around eligibility for child care subsidies, child care quality, health and safety, access to child care, and workforce supports for early childhood educators. The 2014 reauthorization law included policy changes requiring states to:
• Set provider payment rates to promote equal access to the child care market for parents receiving child care subsidies.
• Implement family-friendly eligibility policies that help families keep their subsidy without interruptions.
• Enhance health and safety practices for all CCDBG providers, including health and safety training and inspections and comprehensive background checks.
• Expand consumer education, which includes increasing online access to information on child development and other financial assistance programs and creating a hotline to report safety concerns.
• Increase the amounts of set-asides that states must spend toward supporting the quality and development of the child care workforce.
• Expand access to child care for vulnerable families and priority groups whose needs and characteristics limit the child care options currently available to them.

Related:
National Maps
1. Use of Federal CCDBG funding increase
2. Implementing specific reauthorization requirements
3. Challenges to implementing reauthorization goals and requirements
4. Increased state funding for child care assistance

State profiles
Information on how each state has used, or plans to use, increased federal funds.

Data notes (XLS) »

Reach for Yield by U.S. Public Pension Funds

Source: Lina Lu, Matt Pritsker, Andrei Zlate, Kenechukwu Anadu, James Bohn, Federal Reserve Banks, FEDS Working Paper No. 2019-048, Date Written: June 27, 2019

There are 2 versions of this paper

From the abstract:
This paper studies whether U.S. public pension funds reach for yield by taking more investment risk in a low interest rate environment. To study funds’ risk-taking behavior, we first present a simple theoretical model relating risk-taking to the level of risk-free rates, to their underfunding, and to the fiscal condition of their state sponsors. The theory identifies two distinct channels through which interest rates and other factors may affect risk-taking: by altering plans’ funding ratios, and by changing risk premia. The theory also shows the effect of state finances on funds’ risk-taking depends on incentives to shift risk to state debt holders. To study the determinants of risk-taking empirically, we create a new methodology for inferring funds’ risk from limited public information on their annual returns and portfolio weights for the interval 2002-2016. In order to better measure the extent of underfunding, we revalue funds’ liabilities using discount rate s that better reflect their risk. We find that funds on average took more risk when risk-free rates and funding ratios were lower, which is consistent with both the funding ratio and the risk-premia channels. Consistent with risk-shifting, we also find more risk-taking for funds affiliated with state or municipal sponsors with weaker public finances. We estimate that up to one-third of the funds’ total risk was related to underfunding and low interest rates at the end of our sample period.

Dissolving Village Government in New York State

Source: Lisa K. Parshall, Nelson A. Rockefeller Institute of Government, June 24, 2019

From a state-level perspective, the dissolution and consolidation of village and town governments makes fiscal sense. By examining local responses to the dissolution debate, we identify some of the noneconomic reasons that village residents are often reluctant to dissolve.

Cyberattacks pose growing operational and financial risks for hospitals

Source: Jennifer Barr, Lisa Goldstein, Leroy Terrelonge, Jonathan Kanarek, Kendra M. Smith, Jessica Gladstone, Moody’s, Sector In-Depth, September 12, 2019
(subscription required)

Many cyberattacks result in data breaches and, in the most critical cases, endanger revenue, posing a material risk to financial performance. Small hospitals are the most vulnerable to attack with lesser financial resources.

Related:
Smaller Medical Providers Get Burned by Ransomware
Source: Adam Janofsky, Wall Street Journal, October 6, 2019
Cyberattacks are pummeling doctors, dentists and community hospitals around the U.S., causing some to turn away patients and others to shut down

Thriving cities, challenged schools: teacher strikes highlight districts’ credit issues

Source: Helen Cregger, Denise Rappmund, Naomi Richman, Leonard Jones, Alexandra S. Parker, Moody’s, Sector In-Depth, September 17, 2019
(subscription required)

Given enrollment declines, high housing prices, tighter labor markets and a growing proportion of legacy fixed costs, meeting teacher pay and staffing demands will continue to challenge districts, especially those with more constrained finances.

Infographic: Pension liabilities continue to trouble Illinois, Kentucky, Connecticut, New Jersey and others

Source: Moody’s Investors Service, October 3, 2019

Adjusted net pension liabilities (ANPL) declined in states’ fiscal year 2018 reporting due to healthy investment returns in fiscal 2017, though unfunded pension liabilities remain high for some states.

Pension liabilities continue to trouble Illinois, Kentucky, Connecticut, New Jersey and others

Related:
Medians – Adjusted net pension liabilities spike in advance of moderate declines
Source: Pisei Chea, Marcia Van Wagner, Timothy Blake, Nicholas Samuels, Emily Raimes, Tenzing T Lama, Moody’s, Sector In-Depth, August 27, 2019
(subscription required)

Adjusted net pension liabilities (ANPL) spiked in states’ fiscal year 2017 reporting due to poor investment returns in fiscal 2016, according to our state pension medians data. States typically report their pension funding levels with a one-year lag. Thus, favorable investment returns in fiscal 2017-18 will lead to a decline in pension liabilities in fiscal 2018-19 reporting.

Adjustments to Pension and OPEB Data Reported by GASB Issuers, Including US States and Local Governments Methodology
Source: Moody’s, Cross Sector Methodology, October 7, 2019

Credit FAQ: How S&P Global Ratings Will Implement Pension And OPEB Guidance In U.S. Public Finance State And Local Government Credit Analysis
Source: S&P, October 7, 2019
(subscription required)

On Oct. 7, 2019, S&P Global Ratings published “Guidance: Assessing U.S. Public Finance Pension And Other Postemployment Benefit Obligations For GO Debt, Local Government GO Ratings, And State Ratings Methodology.” Here, we answer the most frequently asked questions from investors and other market participants.

Elsewhere, we have also provided an overview on our approach to U.S. state and local government pensions within the context of our three government criteria: See “Credit FAQ: Quick Start Guide To S&P Global Ratings’ Approach To U.S. State And Local Government Pensions,” published May 13, 2019.

U.S. State Pension Reforms Partly Mitigate The Effects Of The Next Recession Primary Credit
Source: Carol H Spain, S&P, September 26, 2019
(subscription required)

Table of Contents:
• Average State Funding Levels Plateau With Notable Exceptions
• Many States Continue With Pension Reforms, Avoiding Backward Measures
• Most States Still Fall Short Of Minimum Funding Progress
• Despite Reforms Despite Improved Assumptions, Plans Remain Vulnerable To Market Volatility
• Demographics Influence The Funded Ratio And Budgetary Vulnerability
• Pension Costs Remain Affordable For Most States, With Notable Exceptions
• Policy Decisions, Not Markets, Will Likely Pose Greatest Future Risks
• Survey Methodology
• Related Research

Despite investment gains in 2018, U.S. states have made relatively slow progress since the Great Recession in improving funded ratios, with S&P Global Ratings’ most recent survey data indicating that the average weighted pension status across state plans was 72.5% compared with 83% in 2007. However, looking at the funded ratios alone falls short of understanding whether or not states have made progress toward improving the overall pension funding picture. Indeed, poor investment returns in select years and maturing pension plan populations have stunted state funding progress. Also, in the years immediately following the Great Recession, many states had reduced plan contributions as a short-term means of balancing budgets, resulting in funding setbacks from which many have yet to recover.

However, in recent years, many states have made conservative changes to actuarial methods and assumptions that, while hindering actuarial funding ratios, show a more realistic assessment of market risk tolerance for states, thus better enabling them to make funding progress. We have also witnessed that many states have learned lessons from funding discipline mistakes over the past ten years and better understand sources of pension liability and costs, and have therefore demonstrated a commitment to actuarially based funding. In this sense, states may be better prepared heading into the next recession despite weaker funded ratios. Yet, in our view, despite some progress, many plans’ current contributions, discount rate assumptions, and investment allocations still fall short of fully mitigating the market volatility that increasingly appears to lie ahead….

Intergovernmental Costs of Political Gridlock: Local Government Cash Flow Smoothing during State Budgetary Delays

Source: Lang (Kate) Yang, Public Finance Review, OnlineFirst, Published October 4, 2019
(subscription required)

From the abstract:
Political gridlock in state legislature often leads to a failure in adopting a budget by the start of a fiscal year. This article examines the intergovernmental implication of late state budgets, specifically the cash management problem faced by localities during the stalemate. Without legislative appropriations, the state government could delay expected transfers and payments to localities. Late intergovernmental transfers may force localities to smooth out cash flow for continued service provision through short-term borrowing. Using municipal bond market data, this article finds that when the state budget is late, the average locality’s likelihood of issuing short-term debt increases by 61 percent among those with end-of-fiscal-year short-term debt outstanding experience, and the amount of debt issuance increases by 76 percent. As short-term debt carries interest costs, state’s political gridlock and policy inactions impose direct costs on local governments.

Can Standardized Financial Data Help Government Save Money

Source: Ben Miller, Government Technology, October 5, 2019

A pair of states and the feds are moving to require local governments to submit financial data in a machine-readable format. Here’s how it could help cities.

…. Florida’s governor signed a bill last year that puts the state on a path to requiring its local governments to submit their financial information to the state in eXtensible Business Reporting Language, or XBRL, by September 2022. A similar bill sits on the desk of California’s governor, and U.S. legislators are considering two bills that could push along standardization at the federal level. ….

Stress Testing Your Reserves with Advanced Analytical Techniques

Source: Shayne Kavanagh, Government Finance Review, June 2019

Financial reserves, or “rainy day” funds, safeguard local governments against budget-straining risks like recessions or extreme events that demand a quick and decisive public safety response. The perennial question local governments have about reserves is how much is enough. Too little and you may be underprepared for the risks you face, but too much may mean you’re overtaxing the public or failing to make investments in needed infrastructure or services. …. GFOA recommends maintaining general fund reserves equal to two months of operating revenue — or, put another way, equal to 16.7 percent of annual revenue. ….