Category Archives: State & Local Finance

State and Local Tax Policy

Source: Adam A Millsap, Olivia Gonzalez, George Mason University – Mercatus Center, January 12, 2016

From the abstract:
This paper provides an overview of economically efficient tax policy for state and local policy makers and contains a short literature review of papers that analyze the economic effects of state and local taxes.

Public Employee Unions and Pensions

Source: Posted on January 22, 2016 by Catherine Fisk and Brian Olney, OnLabor blog, January 22, 2016

Advocates of weakening public sector unions, both some who have filed briefs in the Friedrichs case and others who support anti-union legislation in Wisconsin and other states, assert that public sector unions contribute to state budget deficits and that public employee pensions are a main culprit. The truth is more complicated. Unionization doesn’t cause either budget deficits or unfunded pension liabilities. Bad governance does. Some unions may contribute to bad governance but they are not the sole cause, and unions can help solve the problem.

Although labor costs consume a relatively larger share of revenues in the public sector than in the private sector, studies show this is because government tends to provide more labor-intensive services, and also services that require a higher level of education and training (e.g., teachers and public health workers). Collective bargaining, in the states that allow it, is only one aspect of a complex web of law that, in every state, regulates compensation and working conditions for public employees. A bewildering array of state and local constitutional or charter provisions, statutes, and administrative rules specify pay, benefits, and pensions for government workers by job category. Elimination of collective bargaining will not eliminate the budget or pension funding deficits that exist. But it may eliminate the last defined benefit pension plans, which would be bad for workers and bad for the economy as a whole…..

GASB 68: How Will State Unfunded Pension Liabilities Affect Big Cities?

Source: Alicia H. Munnell, Jean-Pierre Aubry, Center for Retirement Research at Boston College, SLP#47, January 2016

From the key findings:
– New accounting provisions – GASB 68 – require localities in state cost-sharing plans to report their share of the plan’s unfunded liability on their books.
– This change severely increases the unfunded liabilities of the affected cities, though the states’ unfunded liabilities drop by a corresponding amount.
– The impact on our full sample of 173 cities is much more modest, because the 92 affected cities are small.
– The big question is whether cities with a portion of the state plan’s burden on their books have a greater interest in reducing the unfunded liabilities.

The Political Economy of Government Debt

Source: Alberto F. Alesina, Andrea Passalacqua, National Bureau of Economic Research (NBER), NBER Working Paper No. w21821, December 2015
(subscription required)

From the abstract:
This paper critically reviews the literature which explains why and under which circumstances governments accumulate more debt than it would be consistent with optimal fiscal policy. We also discuss numerical rules or institutional designs which might lead to a moderation of these distortions.

State and Local Government Unfunded Pension Liabilities Rise by $268 billion in the Third Quarter of 2015

Source: Donald J. Boyd and Yimeng Yin, Nelson A. Rockefeller Institute of Government, By the Numbers Brief, January 2016

Investment shortfalls in the July-September quarter of 2015 caused unfunded state and local government pension liabilities to increase by $268 billion, reaching $1.7 trillion, according to Federal Reserve Board data examined in a By the Numbers Brief of the Rockefeller Institute. The increase was a full 1.4 percent of the nation’s gross domestic product (GDP), bringing unfunded liabilities to 9.5 percent of GDP —- undoing about one and a half years of improvement. In the last 25 years, unfunded liabilities have increased by 1.4 percent or more of GDP in 13 quarters, while these liabilities have fallen by 1.4 percent or more in just two quarters. These issues are particularly important given the significant stock market declines since the start of the year, suggesting that further substantial increases in unfunded liabilities are likely.

Performance Management and Deficit Adjustment in U.S. Cities: An Exploratory Study

Source: Benedict S. Jimeneza, International Journal of Public Administration, Early View, Published online: 15 Jan 2016
(subscription required)

From the abstract:
Performance management or PM has been promoted as a tool to transform government. Claims that PM will enable governments to “do more with less,” “increase efficiency,” provide “value for money,” and make “rational budget decisions” abound. Has PM helped city governments in the United States cope with the effects of the 2007–2009 Great Recession? Theory suggests that PM can provide the informational and analytical foundation necessary for city officials to implement comprehensive but conflictive budget-cutting and revenue-raising strategies. By facilitating deep expenditure cuts and tax increases, PM can indirectly influence budget deficits. Using data from a national survey of city governments and multiyear audited financial reports, the empirical analysis shows that PM cities favored what are essentially decremental responses to fiscal crises that lead to marginal changes in revenues and expenditures. Not surprisingly, there is no evidence that PM influences the size and change in budget shortfalls.

Can Public Pensions Be Saved? A Perspective From Oregon

Source: Ed Lamb, HR News, Vol. 81 no. 11, November 2015
(subscription required) (scroll down)

…Thomas spoke realistically about the need to alter how Oregon PERS gets funded because implementing cost-containment measures has already failed. One change he advocates has the potential to address criticisms nonparticipants have that beneficiaries enjoy retirement security solely at the expense of taxpayers…

Fiscal 2014 Pension Medians – US States

Source: John Lombardi, Timothy Blake, Jack Dorer, Emily Raimes, Nicholas Samuels, Marcia Van Wagner, Thomas Aaron, U.S. Public Finance, Sector In-Depth, January 15, 2016
(subscription required)

From the Pensions & Investments article:
Twenty-seven states saw a decline in pension fund liabilities in fiscal year 2014, boosted by strong investment returns, said a report from Moody’s Investors Service.

The median annualized return for the period ended June 30, 2014, was 16.1%.

Across all 50 states, however, adjusted net pension liabilities rose to an aggregate $1.3 trillion, as 23 states reported liability increases due in part to accounting changes or lagged reporting, which did not yet reflect 2014’s strong investment performance.

Looking at adjusted net pension liability as a proportion of government revenue, Moody’s found the median ratio dropped to 59% in fiscal year 2014 from 60% in 2013 thanks to state revenue growth. Illinois, Connecticut and Kentucky continued to report the highest ratios of pension liability to revenue at 297%, 213% and 185%, respectively. Nebraska, Wisconsin, New York and Tennessee continued to report the lowest liabilities-to-revenue ratios at 11%, 14%, 23% and 23%, respectively…..

2016 State Report Cards

Source: Young Invincibles, Student Impact Project, January 2016

From the press release:
Young Invincibles has released its 3rd annual State Report Cards, grading each state on its support for public higher education. Young Invincibles looked at how each state makes higher education an accessible opportunity for its students, factoring and indexing dozens of metrics including rises in tuition, financial burden on families, and funding of need-based financial aid.

New this year, Young Invincibles also analyzed minority attainment gaps in each state. Education is a driver of socio-economic mobility and may be the best avenue to foster social and racial justice; yet disturbingly, the national higher education attainment gap has grown for both Latinos and African Americans.

Key findings include:
– Slashed budgets: Forty-eight states spend less per student on higher education than they did prior to the recession (all but Alaska and North Dakota).
– Skyrocketing tuition: Tuition is up $1,868, or 28 percent, since 2008 – that’s over twice the rate of inflation.
– Racial inequality: 18 states failed our new measure of racial attainment equity. Nationally between 2007 and 2015, the higher education attainment gap between white non-Hispanic adults and Latinos grew by 2.2 percentage points, and the gap for African Americans widened by 0.4 points.
– Failures: 19 states received an overall grade of F. This number of failing states is up from 11 last year.