MuniLand

Millions of uninsured Americans will now have access to healthcare as a result of the Supreme Court’s decision last Thursday to uphold the Affordable Care Act. This is a big step forward for the nation, but it raises questions about funding. The nation is already starved for revenue and is supposed to cut $1.2 trillion from the federal budget over the next eight years through the sequestration process.

Under sequestration, one or more of the three major areas of the budget – defense spending, Medicare or Medicaid – need to be cut. Congress is now trying to have President Obama show where these cuts will be made. But the Daily Caller is reporting that the president doesn’t intend to implement sequestration for the military:

President Barack Obama’s White House has told at least one defense contractor not to worry – sequestration isn’t really going to happen.

According to House Armed Services Committee Chairman Buck McKeon, Office of Management and Budget (OMB) Acting Director Jeffrey Zients told Lockheed Martin CEO Bob Stevens not to worry about the potential sequester.

Sequestration cuts are set to automatically take place following the failure of the deficit-reduction super committee.

The Supreme Court’s decision to uphold the Affordable Care Act just created an unenviable task for governors across the country.

To grant healthcare coverage to all Americans, the ACA involves an expansion of Medicaid, a program jointly funded by the federal and state governments and administered by the states for the poorest Americans. Under the expansion, an estimated 18 million people who previously lacked health insurance will be swept into the Medicaid program. Even though the federal government will bear the full cost of this expansion in the first year and 90 percent of it in subsequent years, states will shoulder some of the program’s administrative costs.

Adding 18 million people to the Medicaid rolls is a challenge in itself, but it also comes amid fears that Congress will decide to cut spending on social programs like Medicaid as a way to decrease the federal deficit. Wary of unfunded mandates like this one, some governors are hinting that they will refuse to expand healthcare coverage under the Medicaid program despite the federal government’s offer to pay for nearly all of it:

In a recent op-ed, Reuters’ Chrystia Freeland suggests that if nations have any hope of restoring trust in their core institutions, they should focus on adopting technology to the extent that Silicon Valley has:

After all, whatever your political allegiances, it is hard to disagree that in recent decades, when it comes to transforming the world, [Silicon] Valley has outdone the Beltway.

One reason for that gap may be that while our private and business lives have been transformed by the technology revolution, government largely has not…

“Have a drink out there, folks, and just know that your kids and grandkids will be out there picking grit with the chickens,” says former U.S. Senator Alan Simpson in the video above. Simpson’s quip is the best summary I’ve ever heard of the public’s lack of understanding of the severity of the nation’s fiscal crisis. The federal government is currently borrowing 42 cents of every dollar that it spends. Thanks to the Federal Reserve’s quantitative easing and the strong global demand for U.S. Treasury debt, the nation has been able to borrow heavily at low interest rates to cover its budget shortfalls.

But the debt is piling up so high that the country might face a borrowing shock if there were a black swan event or if bond vigilantes forced higher interest rates. It’s not a question of whether rates will rise – they certainly will. What we don’t know is when it will happen. The same politicians who created this fiscal quagmire have now tasked themselves with fixing it. Despite numerous proposals on how to get our debt under control, the political dynamics of the issue make it likely that nothing will be resolved in Congress until after November’s election. The Washington Post reports:

But once the election is over … the issue of the debt will quickly rise to the top of the agenda – and not just because of the debt limit. In January, policymakers also will be facing the first round of harsh, across-the-board spending cuts adopted last summer, as well as the expiration of a host of tax cuts that benefit every American household. Unless Congress agrees on an alternative deficit-reduction strategy, the policies threaten to deliver a fiscal shock that could throw the nation back into recession.

There is a general consensus that America needs both new infrastructure and more jobs. Where there’s disagreement is over what role the federal government should play in providing the necessary funding to jump-start new projects. In a recent webinar, Standard & Poor’s laid out the current types of financing available for surface transporation projects (page 3):

• General Obligation Bonds (Appropriation debt)
• Sales Tax Revenue Bonds
• Gas Tax Revenue Bonds
• Toll Revenue Bonds
• Federal Grant-Secured Obligations (GANs/GARVEEs)
• Transportation Infrastructure Finance and Innovation Act (TIFIA) loans
• Public Private Partnerships (P3)

The top five categories in the list above are types of municipal bonds, meaning that they require a local or state government to take on debt to fund infrastructure. At the level of federal financing, the U.S. Department of Transportation’s Federal Highway Administration gives out TIFIA loans to public-and-private infrastructure projects. For example, the Macquarie-owned public-private partnerships that are building the Midtown Tunnel in the Norfolk and Hampton Bays area of Virginia and the FasTracks rail project in Denver are using federal TIFIA loans in the funding pool.

ZeroHedge points out that the amount of U.S. debt outstanding has just surpassed the latest reading of our gross domestic product:

There is nothing quite like a $70 billion debt auction settlement at the last day of a month to bring total US debt to a record $15.692 trillion, which happens to be just $600 billion shy of the $16.394 trillion debt ceiling … And now that we know what Q1 GDP was at the end of Q1, or namely $15.462 trillion, it is simply math to divine that today alone total US/debt to GDP rose by 50 bps to a mindboggling 101.5%.

Now there is a whole school of thought, which counts New York Times columnist Paul Krugman among its leaders, that says that despite the amount of debt the federal government has incurred, more government spending and debt are needed given the stagnant state of the economy. Krugman elaborated on this idea in a recent interview with Julian Brookes of Rolling Stone:

Conservatives are working in legislatures across the country to eliminate or reduce state and local tax rates with the stated purpose of promoting job creation. These legislative efforts have received support from the American Legislative Exchange Council (ALEC), an ultra-conservative lobbying group. Oklahoma Governor Mary Fallin is the latest beau ideal for ALEC’s fiscal austerity drive as she leads the charge to eliminate her state’s income tax. She writes in the introduction to ALEC’s latest edition of “Rich States, Poor States”:

I have been committed to these fundamental principles for years, and we are seeing incredible results because our legislators have had the courage to stand with me in support of conservative governance. Oklahoma’s economy is outperforming the national economy, and our success stands in stark contrast to the record of dysfunction, failed policies, and outrageous spending that occurs in Washington, D.C. Oklahoma could teach Washington a lesson or two about fiscal policy and the proper size and role of government – and so could the tax and fiscal policy reforms espoused by ALEC.

I’m all for state and local governments shrinking their workforces and learning more efficient ways to deliver government services. There is nothing sacred about the current level of the government’s labor force, especially at a time when the non-public sectors of the society are continuously seeking to deliver goods and services with fewer economic inputs. It is only fair that we ask similar efforts of the public sector.

The $25 billion mortgage-fraud settlement that was announced yesterday came after 18 months of coordinated action by the Department of Justice, the Department of Housing and Urban Development and 49 state attorneys-general. The settlement is carved up so that homeowners and governments at the state and federal levels each receive some compensation. Given the scale of national losses, it’s a tiny penalty for banks that engaged in egregious servicing and foreclosure practices, and it will do little to repair the widespread economic damage.

More important for states, the amount they are set to receive far from covers the shortfalls they will suffer from lower property tax collections, which are pegged to property values.

A little background: Municipalities and school districts collect substantial revenues from property taxes, and they benefited from inflated housing values during the boom. With higher property tax collections, they ramped up municipal services. Starting in the first quarter of 2010, property taxes began to flatten, but property appraisals did not, as they lag behind property values by several years. We are just now starting to experience what could be a big decline in property tax collections.

It’s not clear that Congress is capable of doing its job of managing the nation’s purse strings. Capitol Hill failed at identifying a combination of tax increases and reductions in spending that would have lowered our growing debt burden. Now every constituency that draws funds from the U.S. Treasury is angling to push others away from the trough. A perfect example is the internecine warfare to come over defense cuts. Here is a slick ad against funding for the military’s nuclear arsernal obviously coming from the traditional munitions and equipment makers:

The military players are well versed at battling over the spoils. But it’s the soft side of federal spending, where social support and services are funded, that is less equipped to fight over its share of decreased funding.

The automatic cuts that kick in due to the failure of the supercommittee are aimed at defense, Medicare and Social Security, and other discretionary social programs. The legislation spares cuts for Medicaid payments to states. It’s interesting that this area was protected when other major areas of the budget will have reductions. Medicaid cuts were the reductions that governors and county officials feared most because they consume an increasing amount of state and local budgets. Maybe governors were the real winners of the lobbying game when the Budget Control Act of 2011 was being written.

This great graphic from Visually maps the public’s great discontent with the federal government using data from the Pew Research Center. It’s hard to imagine the numbers being any worse than this: 11 percent of the public is satisfied with the officials in Washington, DC.

Given Pew’s research, it’s somewhat counterintuitive that a recent poll from Gallup shows Americans pretty content with their state and local governments. From Politico:

Trust and confidence in local government has hovered around 70 percent for the past decade, and the recent gridlock at the federal level has done little to sully local impressions of government. In fact, 68 percent of respondents to a new Gallup poll on Monday said they had a “fair” or “great” deal of trust and confidence in their local governments.