MuniLand

Political moves have drawn some financial data to the surface about Detroit as the city’s long spiral downward continues. Detroit’s Financial Review Team, appointed by Michigan Governor Rick Snyder, filed its report after a study of the ailing city’s finances.

The review team essentially gave the city an “F” and pointed to multiple instances where actual spending did not match budgeted spending (see Table 3 in the Report). Part of this is because Detroit public officials had very little control of the budget process and the city has substantial deficits and declining revenues. However, one bright spot in the numbers is how city’s expenditures have been declining. You can see this in the chart below:

These numbers don’t look like the city has problems, but they also don’t tell the entire story. There are other expenses that have created deficits. There have been bond offerings to fill the deficits, which have increased annual debt service to about $150 million per year. But operationally a lot of credit must be given to Detroit Mayor Dave Bing for tightening the fiscal ship.

The Detroit News ran a groundbreaking story on Thursday, “Half of Detroit property owners don’t pay taxes,” that found that $246 million in property taxes went unpaid last year. From the story (emphasis mine):

Nearly half of the owners of Detroit’s 305,000 properties failed to pay their tax bills last year, exacerbating a punishing cycle of declining revenues and diminished services for a city in a financial crisis, according to a Detroit News analysis of government records.

In his State of the Union address, President Obama sketched a broad outline of the need to rebuild 70,000 “structurally deficient” bridges and other infrastructure in the country, but never got more specific. In a follow up, the White House announced the specifics of his infrastructure proposal.

The sum of his proposal, $50 billion, is barely enough to excite a huge amount of support or a significant fight in Congress. For 2013 the budget of the Department of Transportation is $98 billion. State and local governments issued $54 billion of municipal bonds to fund transportation last year. The president’s proposal is about 1/3 of current annual transportation spending, and he proposes no way to pay for it. It’s rhetorical fluff meant to sound good to voters, but it has little chance of going anywhere.

One part of the Obama proposal is a replay of his “National Infrastructure Bank,” which has been proposed twice and received no traction in Congress. The NIB would begin with $10 billion of federal funds to guarantee private investments made for public infrastructure. The main Senate sponsors – Massachusetts’ John Kerry and Texas’ Kay Bailey Hutchinson – have both left the Senate, and no sponsor has stepped forward to take over, according to Politico. It is unlikely that any prominent sponsor will step forward, seeing as the National Infrastructure Bank seems like a ruse to give public guarantees to private investors. Using the nation’s balance sheet to increase private profits would be a very unpopular political position to defend at election time. There are other concerns, which Politico details:

The credit rating agency Moody’s is in a very delicate position. Its arch rival, Standard & Poor’s, was recently charged by the U.S. Department of Justice alleging that S&P committed mail and wire fraud by defrauding investors with faulty ratings. Moody’s was not charged, but there are a lot of questions about why it was left out of the investigation. At the same time, Moody’s is responsible for judging the creditworthiness of the U.S. government’s debt. There is little wonder that the rating agency is being very transparent in the benchmarks it is using.

Moody’s current rating for U.S. debt is Aaa (negative), which means that it could be downgraded. Unlike Paul Krugman and others who want the nation to issue more debt to attempt to spur economic activity, Moody’s wants the U.S. to reduce its debt-to-GDP ratio to improve its credit quality. In a detailed analysis, Steven A. Hess, Moody’s Senior Vice President, lays out what the agency is watching and the metrics it will use to judge the actions of Congress and the President.

First Hess describes how the recent tax increases on those earning $400,000 per year or more does not raise enough revenue to square up fiscal issues:

WMT had the worst sales start to a month in seven years as payroll-tax increases hit shoppers – @bloombergnews mobile.bloomberg.com/news/2013-02-1…

— Lauren Lyster (@LaurenLyster) February 15, 2013

We don’t need to wait around for the macro data to tell us that the economy is slowing. The signals are coming loud and clear from the micro data. Bloomberg reports:

Wal-Mart Stores Inc. had the worst sales start to a month in seven years as payroll-tax increases hit shoppers already battling a slow economy, according to internal e-mails obtained by Bloomberg News.

In the media appearance above, Pennsylvania Attorney General Kathleen Kane announces that the contract drawn up by Governor Tom Corbett to privatize the state’s lottery management “contravenes the Pennsylvania Constitution and is not statutory authorized.” Translation: Pop- Bam- Take that, governor – You don’t have the power that you think you have.

This is one of democracy’s more glorious moments.

I wrote in early December around when Corbett’s deal to privatize the lottery became public:

There is a lot of darkness and a web of connections around the efforts to privatize the Pennsylvania state lottery. Tom Corbett, the governor of Pennsylvania, is attempting to force through the privatization before the legislature comes back into session in January and has a chance to review the terms of the 20-30 year deal. Democrats are howling.

An increase in the minimum wage and universal pre-kindergarten education were part of the centerpiece of Barack Obama’s State of the Union address this week. These proposals address both income inequality and low academic achievement. Expanding pre-k education would benefit all states that would be willing to participate. According to the Council of State Governments:

Today, 39 states provide funding for 4-year-old kindergarten. Nine states plus the District of Columbia offer pre-K to all 4-year-olds. No state provides universal pre-K programs for 3-year-olds, although 26 states provide pre-K for some 3-year-olds, according to the National Institute for Early Education Research.

This provides a good foundation to build on. What is gained by educating four-year olds? From the Council of State Governments again:

The need for more infrastructure must be brought back to center stage. Creating middle-class jobs “must be the North Star that guides our efforts,” President Obama said in his State of the Union address on Tuesday. More improved bridges, tunnels, ports and other shared infrastructure would be a great way to boost the economy, create jobs and improve the hard assets that support business and public activities.

Many infrastructure projects are taking place under the radar, guided and funded by state governments. These projects are usually designed and driven by states with some funding from the federal government as well as municipal bonds and toll or user fees. The bridge that carries I-75 and I-71 traffic over the Ohio River between Ohio and Kentucky is a perfect example of a joint project. This is a bridge in Senate Minority Leader Mitch McConnell and House Leader John Boehner’s districts that President Obama stood in front of last year to sell his $467 billion jobs bill. The bill was never approved by Congress. The bridge highlights the difference between the two parties on funding infrastructure. Bluegrass Politics blog covered the story:

Obama joked that it was “just coincidental” that he came to the bridge in the backyards of McConnell and Boehner.

In 2012, municipal debt issuance totaled $367 billion, just shy of the 10-year average ($381 billion) and a level last seen in 2003 ($378.5 billion). The blue line in the graph above shows that about 65 percent of this debt was issued to refund previously-issued debt (to get a better interest rate or other term). The balance, about 35 percent, was “new money” debt issuance to fund projects that previously had not been funded. The market sees a slight increase in issuance for 2013. According to SIFMA’s 2013 Municipal Issuance Survey, volumes are expected to be $393 billion.

New York outpaced all other states in the amount of debt issued for 2012. Of New York’s $48 billion in debt, $11.6 billion went to general obligation bonds and $36.7 billion went to revenue bonds. (See the full list of debt issuance by state on page 7 – PDF).

Here is part of a SIFMA chart that shows the amount of debt that is outstanding for each state government and the other public entities that issue debt within that state (page 13 – PDF). If you add up the “Due in 13 months” column you can get an idea of how much debt will need to be issued this year to re-issue that debt if it is not being paid off.

Muniland ground rule number one: Never use the state of Rhode Island as example of national issues. The state has been poorly managed and dominated by union interests for decades. Rhode Island is a high school dropout when it comes to fiscal management. The underfunding of its public pensions is exhibit one.

Josh Barro of Bloomberg has broken muniland’s number one rule and used Rhode Island’s public pension system to argue about systems nationwide. He writes:

This lack of attention has meant that local plans are much more likely than statewide plans to have become deeply underfunded. Of the 110 statewide pension systems covered by the Public Funds Survey, the worst-funded is the Illinois State Employees’ Retirement System, with a funding ratio of 35.5 percent. Sixteen of Rhode Island’s 36 local plans are worse funded than Illinois SERS.

Texas Watchdog.org explains how Texas is mounting the transparency pony:

A quartet of the most powerful legislators in Texas filed bills Thursday to make available to the public detailed financial information from most local taxing entities and pension systems across the state.

Senate bills 14 and 13 and their identical House counterparts establish, at the request of state Comptroller Susan Combs, new requirements for the posting of public debt, unfunded liabilities, borrowing and project costs on websites maintained by state and local agencies.

This new legislation, if passed and signed by the governor, has the potential to set the gold standard for public accounting of spending and taxpayer liabilities. The legislation would require the posting of all tax rate information: