MuniLand

Obama proposes direct aid to local governments

Among the proposals made by President Obama in his jobs speech last night was his call for the federal government to fund the costs of public school teachers, firemen, policemen and first responders fully. This appears to be the only direct cash subsidy for jobs in his plan.

The American Jobs Act, if enacted by Congress, would specifically allocate $30 billion in funds for teachers and $5 billion would support the hiring and retention of public safety and first responder personnel. Using 2010 Census data this would provide a subsidy of approximately 12% to local governments for their elementary and secondary educator’s expenses and 8% for police and firefighters. The 2009 Recovery Act allocated $47 billion to local governments for teacher salaries so this proposal is about 40% less.

President Obama’s plan also includes “$25 billion investment in school infrastructure that will modernize at least 35,000 public schools.” While sounding good it’s important to point out this would give each school about $715,000 in funds for renovations. It’s helpful but not really a substantial amount.

Several economists are out lauding the large impact in gross domestic product the plan will have. For muniland the proposal is helpful but not earthshaking. Of much greater fiscal importance will be the changes the President and supercommittee propose for Medicaid. Stay tuned.

State tax collections up 11% for 2Q over last year

Although the national economy continues at stall speed, state tax collections are rocketing ahead. From the Rockefeller Institute:

One of America’s oldest institutions is facing default. The United States Post Office could be forced to stop delivering mail at the end of September. The rhetoric around the issue is beginning to sound like the potential default of U.S. government debt obligations during the debt ceiling debate. A report from the Government Accountability Office (GAO) tells the fiscal tale:

USPS has experienced a cumulative net loss of nearly $20 billion over the last 5 fiscal years. USPS does not now have—nor does it expect to have—sufficient revenue to cover its costs without legislative changes.

Every nation on earth has a postal service. Some countries have combined mail and phone services, although many have been privatized in recent decades. In Japan the post office is combined with the world’s largest deposit bank and mail carriers serve as bank tellers as they do their delivery rounds. Postal service is indispensable to an economy and society.

I dialed into a press conference today held by U.S. Congressman Brad Miller, a Democrat from North Carolina. He wanted to share his views on the suits filed by the Federal Housing Financing Agency (FHFA) against 17 banks over recovery on fraudulently misrepresented subprime mortgages. FHFA is seeking to cover losses on approximately $200 billion of mortgages purchased by Fannie and Freddie prior to their takeover by the government in the summer of 2008. Taxpayers have already covered $140 billion of FHFA losses from these bad mortgages and the amount is expected to go much higher.

The topic is pretty far afield from my regular Muniland content but I had met Congressman Miller several times on Capitol Hill when I lead Riski, the open source financial reform project, and I’d always been very impressed with his forward-looking efforts on the housing crisis. Once you are around Congress for a while it’s easy to see what special interests various members of Congress are promoting. Congressman Miller seemed genuinely independent and interested in America as a well-governed and fair nation. Sad to say these are not common traits on the Hill.

Congressman Miller is not new to the mortgage issue. In March 2007 he penned a letter to Forbes magazine about the scourge of predatory lending and its devasting effect on families:

The new paradigm for state and local governments is austerity.

Hard economic conditions and efforts at the federal level to achieve a balanced budget mean that funding for municipal governments will continue to contract. How will the reductions at the federal level spill over? Blunt-talking former Senator Alan Simpson, who co-chaired the National Commission on Fiscal Responsibility and Reform, was quoted recently as saying:

“(State officials) need to know the great milk cow in the sky dropped dead and that it’s over,” Simpson said in an interview for the March/April Capitol Ideas. “If they’re waiting for the next injection of some kind of funding from the feds to get the states propped up, … they probably saw the last one go by with the last compromise, which added almost $1 trillion bucks to the deficit without any reduction in spending.”

I’m sure that former Senator Simpson echoes the beliefs of many conservatives in Congress. Money is tight at the federal level, and much of the funding to states is targeted at very low income areas. It’s hard to predict how broad-based the defense of programs such as tenet-based rental assistance and child-nutrition programs will be. But the word is that the big federal program to states, Medicaid, has escaped cuts. So this potentially leaves the other programs very vulnerable. Let’s take a look at where federal dollars flow through to the states:

The U.S. Chamber of Commerce has published a letter to Congress’s new Joint Select Committee, aka the supercommittee, with the changes they would like to see made to the budget and tax code. The supercommittee’s brief is pretty broad; it will be looking at ways to balance the federal budget by raising taxes and/or reducing expenditures.

The Chamber, which represents business interests, strongly insists that the supercommittee slash entitlements and reform the tax code by lowering tax rates. From the Chamber letter:

The Chamber urges you to consider how the current tax laws act as an impediment to worldwide competitiveness, a deterrent to saving and investment, and an obstacle to innovation and entrepreneurship. Accordingly, the Chamber believes that the current code needs a comprehensive reform to lower overall marginal tax rates, to encourage saving and investment, to foster global competitiveness, increase capital accumulation, attract foreign investment, and drive job creation.

New chair for muniland’s regulator

New leadership has been announced at the Municipal Securities Rulemaking Board, muniland’s primary regulator. Alan Polsky of Dougherty & Co., the incoming MSRB chairman, has spent much of his career working towards increased transparency in the muni secondary market where bonds trade after issuance. This is great news. From the Bond Buyer:

Alan D. Polsky, senior vice president of Minneapolis-based Dougherty & Co. LLC and former chair of the National Federation of Municipal Analysts, will be the next chairman of the Municipal Securities Rulemaking Board beginning Oct. 1, according to market sources.

Polsky spent a great deal of time trying to improve secondary market disclosure when he chaired the NFMA in 2001. During that year, the NFMA issued several “best practice” disclosure documents recommending how issuers, borrowers, and other market participants could improve disclosure in various sectors of the market. Polsky also was a member of the Muni Council, a group of about 20 muni market group representatives dedicated to improving secondary market disclosure. The group was responsible for the creation of the Central Post Office facility which temporarily served as a one-stop place for issuers to file their disclosure documents.

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“The great difficulty with politics is that there are no established principles.”
- Napoleon Bonaparte (1769-1821)

Oh, America! It’s time to reinvent you. You are mired in a deep and prolonged slump. Economic activity keeps slowing. Our political class has been viciously testing the boundaries of their adversaries. We are faced with a lot of bills coming due and we are broke. What can be done?

I’ve been advocating a new type of effort involving the government and the private sector to rebuild and recharge America by creating a federal infrastructure bank funded by U.S. corporate offshore profits. These corporate profits would be repatriated at a 0% tax rate (current law requires their taxation at 35% if brought back to America).

The states rely on the federal government for 1 out of every 3 dollars they spend. States are rightly worried that the new “super committee” established by the debt ceiling deal in Congress will be looking at these monies to reduce spending. I thought it would be useful to look at the federal budget and get a sense of the size and composition of these expenditures.

I got a large table of data from the Government Printing Office (GPO) that shows the Congressionally authorized grants to the states. About half these monies are administered by states and flow through their budgets (see especially Medicaid and education funding) and the balance are distributed as federal programs. Here are the main programs administered by the states in this pie chart. Federal unemployment assistance is not included in this area of the budget.

Medicaid has always been the biggest cash transfer program to the states. It requires matching funds from state and county governments. Although it escaped mandatory reductions in the first phase of deficit reduction it’s the area that has governors and legislators most concerned. Medicaid is the poor cousin to other health insurance programs and it generally pays the lowest reimbursement rates. Some creative thinking is needed for this widely used health insurance program.

Debt deal for states

As we reach the end game in Washington, states still have no idea how a reduction in federal spending will trickle down to their budgets. Stateline.org drills down to the number one concern of governors and state legislators — Medicaid (emphasis mine):

Among the biggest concerns for states was — and remains — the fate of Medicaid, the joint state-federal health insurance program serving more than 60 million poor Americans. That’s because Medicaid is generally the biggest item in state budgets. In the short term, the debt deal appears to spare Medicaid from immediate cuts in federal support. What’s more, Medicaid was specifically exempted from a “trigger” mechanism that would reduce spending automatically if the special congressional committee does not achieve its deficit-reduction goals.

Further:

NYT: States and Cities Brace for Far Less Money From Washington

Reuters: Three reasons conservatives should oppose a balanced budget amendment

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Medicaid moguls

As a nice bookend to state officials’ concerns about Medicaid, the New York Times has an outstanding piece today on the excessive pay for executives who provide care to the developmentally disabled. Medicaid funds these programs with federal and state dollars. All is not well in the public, non-profit sector. From the NYT:

There are many financial linkages between various levels of government in muniland but everyone eventually has to stand on their own. It’s like the cousin you grew up with but don’t see much now other than holidays. When your cousin loses their job and their mortgage is being foreclosed you want to help but in a limited way. You want the cousin to get a job and cut a deal on their mortgage or do a short sale. You don’t want them moving into your home or having access to your bank account. It’s the same between the federal, state and local governments. They are cousins. But not that close.

My fellow Reuters blogger, Felix Salmon, said yesterday that states are considered too-big-to-fail by the financial markets:

There’s certainly a general understanding, in the markets, that California is too big to fail: if push came to shove, the federal government would bail it out rather than let it default.