Category Archives: State & Local Finance

What Is the Remedy for State and Local Fiscal Squeeze During the COVID-19 Recession? More Debt, and That Is Okay

Source: James W. Douglas, Ringa Raudla, The American Review of Public Administration, Special issue: Double Issue Dedicated to COVID-19, Volume 50 Issue 6-7, August-October 2020
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From the abstract:
The COVID-19 crisis is placing a tremendous fiscal squeeze on state and local governments in the United States. We argue that the federal government should increase its deficit to fill in the fiscal gap. In the absence of sufficient federal assistance, we recommend that states suspend their balanced budget rules and norms and run deficits in their operating budgets to maintain services and meet additional obligations due to the pandemic. A comparison with Eurozone countries shows that states have more than enough debt capacity to run short-term deficits to respond to the crisis.

Deepening Interlocal Partnerships: The Case of Revenue-sharing Infrastructure Agreements

Source: Stephanie D. Davis, Meghan Z. Gough, State and Local Government Review, Volume 51 Issue 4, December 2019
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From the abstract:
….New partnerships between individuals or organizations tend to form when the risk-adjusted expected benefits of collaboration outweigh the expected transaction costs and other costs of collaborating. How can localities, especially urban and rural areas, create or deepen and expand collaborative relationships? What factors are necessary to change localities’ expected costs and expected benefits to lower transaction costs or to raise mutual trust levels so that they begin to collaborate or deepen and expand an existing collaboration?

In this article, we address those questions via two cases of successful interlocal collaboration in a state where deep and extensive interlocal partnerships, such as revenue-sharing agreements, are not the norm—Virginia. To understand the motivation for localities to collaborate on economic development opportunities, we studied the history and context of intergovernmental relations and conducted in-person interviews with elected officials and the city or county managers in each jurisdiction. In each case, the localities changed their views of expected costs and benefits and availed themselves of a long-standing state policy to establish a new level of cooperation…..

Government Financial Management and the Coronavirus Pandemic: A Comparative Look at South Korea and the United States

Source: Sungho Park, Craig S. Maher, The American Review of Public Administration, Special issue: Double Issue Dedicated to COVID-19, Volume 50 Issue 6-7, August-October 2020
(subscription required)

From the abstract:
The novel coronavirus (COVID-19) is an infectious respiratory illness afflicting people to a degree not seen since the flu pandemic of 1968 when approximately one million lives were lost worldwide. What makes COVID-19 distinct is the rate at which it spread throughout the world, stress-testing health care systems and stymieing global economies. To confront this unprecedented crisis, nearly every country has been developing a wide range of policy responses, including fiscal measures. This study aims to discuss government fiscal responses to the pandemic from a financial management perspective. The core question is, “How does each country’s financial management system support its fiscal responses to the crisis?” We are particularly interested in reexamining commonly accepted norms about fiscal federalism and the fiscal condition of national and local governments heading into this pandemic. This study takes a comparative approach to the question, focusing on South Korea and the United States. Our findings suggest that the ability to respond to this pandemic in a comprehensive and effective manner is challenged by each nation’s financial management system that generates variation in policy coordination and responsiveness.

Hands On! Part I: The Trilemma Facing the Federal Government During State and Local Budget Crises

Source: David Schleicher, Yale Law School, Public Law Research Paper Forthcoming, Date Written: July 12, 2020

From the abstract:
The economic crisis that accompanied the COVID-19 pandemic has left state and local budgets in tatters, with revenue falling quickly while demands for public services increase. The federal government responded in a number of ways, but the public debate over what it should do if there is an acute fiscal crisis – a state or a large city on the edge of default – has been theoretically confused and ahistorical.

This is no accident. The academic literature on state fiscal crises, while very impressive in many ways, is also somewhat confused. It focuses on two contrasting problems: the moral hazard that a federal bailout of an insolvent state government would create and the macroeconomic harm that a failure to bailout an insolvent state government would create. What these two branches of the literature agree on is that the federal government, for good or ill, has since the 1840s taken a “hands off” approach to acute state and local fiscal crises.

This Article and a companion piece will show that federal government simply does not have a history of “hands off” approaches to state and local defaults. While bailouts have been rare, officials from all three branches of the federal governments have intervened repeatedly in state and local fiscal crises to aid creditors and preserve confidence in the municipal bond market. These interventions are part of a long-running federal policy of encouraging states and local governments to borrow money to build civic infrastructure. Concern for the municipal bond market has led the federal government into all sorts of otherwise hard-to-explain policies, from President Ulysses Grant threatening to send troops to Iowa in 1870 to make a small town pay its debts to the Supreme Court’s radical transformation of the doctrine of Swift v. Tyson. Federal policy has been inconsistent, toggling between policies aimed at different and incommensurable goals, even during a fiscal crisis, perhaps most famously when it offered loans to New York City after the famous “Ford to City: Drop Dead” headline suggested aid would not be forthcoming.

Recognizing their real concern for the municipal bond market changes our understanding of what is at stake for federal policymakers when they respond to acute state and local budget crises. Federal officials face a “trilemma.” Whether they promote and/or enable bailouts, austerity, or defaults on municipal debt, federal officials can avoid two of these harms, but not three: (1) moral hazard for state budgets; (2) worsening recessions; (3) reducing future state and local infrastructure investment. The companion piece will suggest how federal officials can navigate this trilemma in the current crisis.

COVID-19 and the Higher Education Quandary

Source: Dante DeAntonio, Regional Financial Review, August 2020
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COVID-19 has wreaked havoc across nearly every part of the U.S. and global economy. While higher education has typically been insulated from the business cycle—and sometimes has even been the beneficiary of economic downturns—the current pandemic-induced recession has hit the sector head on.

Better Rating Agency Relations Are Just a Few Steps Away

Source: Liz Sweeney, Government Finance Review, Vol. 30 no. 4, August 2020
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Much is at stake for public finance debt issuers that request credit ratings from Wall Street’s big credit rating agencies, which include S&P Global Ratings, Moody’s, Fitch Ratings, and Kroll Bond Rating Agency. Historically, many public finance issuers avoided credit rating agencies entirely by purchasing bond insurance, a strategy that fell off substantially after the insurers were downgraded during the financial crisis more than a decade ago. Although bond insurance has lately been making a comeback, it still represents a much smaller share of tax-exempt debt issuance than it did before the financial crisis. Similarly, direct placements with banks soared after the financial crisis, when low interest rates and lack of other lending opportunities made it attractive for banks to lend directly to municipalities. But the lower corporate tax rates established in the Tax Cuts and Jobs Act of 2017 have made tax-exempt debt less attractive to banks.

All this means that public finance issuers are finding themselves face to-face with credit rating agencies more often, and it can be a stressful and intimidating experience. Here’s the good news: Whether you are a new debt issuer dealing with credit rating agencies for the first time or you have long-standing established relationships with them, there are a few simple ways to maximize your rating agency relations, reduce the anxiety of the rating process, and maybe even get that long-wanted upgrade.

Spatial Planning and Fiscal Impact Anaylsis

Source: Linda Tomaselli, Government Finance Review, Vol. 30 no. 4, August 2020
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As part of a realistic long-range financial forecast, a finance director needs to estimate the impact of future land use—and this calls for a good picture of revenue and expenditure patterns by land use type. Spatial Planning and Fiscal Impact Analysis Method: A Toolkit for Existing and Proposed Land Use (Routledge, 2019) describes a way to link information from finance directors to planners who are using geographic information systems (GIS). It provides finance directors with information about where the revenues and expenditures in their cities are located on an annual basis, and which types of land uses generate surpluses or deficits. The planning and finance departments can also provide immediate fiscal impact information for a currently proposed development.

Balancing the Budget in Bad Times

Source: Shayne Kavanagh, Government Finance Review, Vol. 30 no. 4, August 2020

The June 2020 issue of Government Finance Review featured resources for local governments navigating the economic crisis resulting from the COVID-19 pandemic. These included an overview of retrenchment techniques and opportunities to access more cash (“Cash is King”)—early steps in GFOA’s 12 steps to recover from financial distress.

This article takes a close look at Near-Term Treatments, which build on the concepts introduced in the first four steps of the recovery process. Near-Term Treatments are the next level of treatment for the ensuing 12 to 18 months. They might be enough to resolve minor cases of financial distress. For severe cases, the Near-Term Treatments buy time for extensive changes, such as those suggested in Step 8, Long-Term Treatments.

Pension Obligation Bonds: Yes or No?

Source: Government Finance Review, Vol. 30 no. 3, June 2020
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Pension obligation bonds (POBs) are taxable bonds that some state and local governments have issued as part of an overall strategy to fund the unfunded portion of their pension liabilities by creating debt. When economic times are bad, governments sometimes consider issuing POBs to reduce their fiscal stress, but the practice is controversial. The use of POBs rests on the assumption that the bond proceeds, when invested with pension assets in higheryielding asset classes, will be able to achieve a rate of return that is greater than the interest rate owed over the term of the bonds. However, POBs involve considerable investment risk, making this goal very speculative.

For these reasons, GFOA President and Hanover County Public Schools Assistant Superintendent for Business and Operations Terry Stone sticks with GFOA’s position that state and local governments should not issue POBs. On the other hand, Girard Miller, former chief investment officer of the Orange County Employees Retirement System with a career in public finance spanning 30+ years, suggests that, at certain times and under certain economic circumstances, a pension fund can reasonably consider POBs as part of its overall strategy.