MuniLand

Relying on the rich uncle

State and local governments earn their “wages” primarily by collecting taxes, although states get significant “flow-throughs” from the federal government for Medicaid and other social entitlements. Every state varies in where they draw tax revenues from. For example, states that are highly dependent on tourism will see substantial revenues from hotel and sales taxes.

New York and New Jersey are two well-to do states that have historically relied on sharing in the largesse of their rich uncle from Wall Street. The Federal Reserve Bank of New York published an interesting paper last year that talked about how these two states were heavily reliant on tax revenues from the financial sector and were especially affected by the financial crisis of 2007-2009. Wall Street revenues rebounded sharply in 2009 and 2010 but are now sputtering and projected to decline going forward due to financial reform and the slow pace of recovery.

One recommendation of the Federal Reserve’s research staff was to have a reduced reliance on personal-income taxes, which fluctuate with the economy, and a greater reliance on sales taxes, which tend to be more stable. Unfortunately, sales taxes tend to be regressive and place a heavier burden on the poor, who spend the bulk of their income on consumption.

Here is a comparison of quarterly tax revenues for New Jersey and New York from the U.S. Census Bureau. As you can see, New Jersey already relies more heavily on the sales tax: New Jersey New York New Jersey New York Total Taxes $ 6.0B $ 19.7B - – - - – - Individual income taxes $ 2.5B $ 11.7B 41.6% 59.7% General sales tax $ 1.8B $ 2.9B 29.0% 14.8% Corporation income taxes $ 0.25B $ 1.3B 4.2% 6.7% Insurance $ o.22B $ 0.48B 3.6% 2.4%

It’s likely that revenues for states will continue to decline and cuts will become harder and harder to make. Every state is unique and the discussions will be tough, but more data is needed to understand what can be done. I applaud the Federal Reserve Bank of New York for addressing this issue. I encourage all creative minds and research groups to come up with solutions. The old approach of tossing verbal bombs across the political aisle should be left behind. We have enough resources to care for everyone but they must be gathered and distributed judiciously.  The rich uncle that many states relied on may be gone for good.

Don’t borrow in the dark, Governor Christie

Every family encounters times when bills are due and they don’t have money. If this happens to a state or local government, they go to the municipal bond market where they can borrow short- or long-term. In the current market they are likely to find a lot of willing lenders.  These lenders will lend at very reasonable interest rates, and the terms of the borrowing will be made public so taxpayers can see what their obligations are.

Since there is so much demand in the muni bond market I was surprised to see that the State of New Jersey was going to set-up a “bridge loan” with J.P. Morgan Chase, one of Wall Street’s biggest banks. The specific details of the borrowing have not been announced, but tidbits released in the media suggest that the lending rate from the bank will be twice the rate from the muni bond markets.

The consumer analogy would be using a neighborhood payday lender rather than taking a cash advance on a credit card. The payday lender would charge you 10% and the credit-card company would charge 5% for the same loan. These are made up examples, but give a glimpse into the most important variable when comparing the state’s borrowing choices.

Has Chris Christie “fixed” the problem?

Has Chris Christie “fixed” the problem?

Joan Gralla of Reuters reports that Governor Chris Christie will be signing the pension and health-benefit reform law today. This is an important step for the health of New Jersey’s pension plans, and Governor Christie should be lauded for his accomplishment.

The state’s 2010 Debt Report (page 15) said that they have $87.5 billion in unfunded liabilities as of June 30, 2009 and that the rate of increase has gone up substantially in recent years:

    $30.7 billion for the seven major state pension funds $56.7 billion in unfunded post retirement health benefits

Unfortunately Governor Christie has skipped payments of $5.5 billion over the last two years and compounded these unfunded liabilities. One of these skipped payments was used to claim a “balanced budget.” Your household budget is not really “balanced” if you skip your car loan payment for a year.

Greening the city

Greening the city

Many cities took a big step forward for clean air when they adopted buses fueled by natural gas. But there are other important projects that will make getting around easier, quieter and less polluting. New York City is getting ready to take a big step. From American City:

New York City has the potential to take those [bike sharing] concepts and scale them up to a size unseen on this side of the Atlantic. Mayor Michael Bloomberg, a man the transportation community has a complicated relationship with, has been dangling a transformative bike sharing program in front of alternative transportation advocates since 2009 when New York’s city planners issued an “exhaustive proposal” that included a 10,000 strong fleet of safety-equipped, GPS-ready bikes.

Economically, the deal is a victory for innovative financing because it fully absorbs the burden of maintenance, damage, and —as this is a city— theft, vandalism, and “artistic destruction.” New Yorkers would buy their memberships on weekly, monthly, or yearly bases and get an unlimited number of free rides that take less than 30 minutes; ride a little longer, pay a little more. New York has decided that an initial burst of capital will serve their purposes the best not least because of their uniqueness among American cities in terms of density and population.

8 weakest U.S. states

According to the credit rating agencies and the bond markets, these are the 8 states with the weakest credit profiles. These states may be weak because their debts are too big, because their economy is flagging or because they haven’t adequately funded the retirement of their employees. If this were a school, these would be the students sitting in the back of the class. Maybe it’s time for these states to do a little more homework.

We start with the weakest Puerto Rico, a United States commonwealth. #1 – Puerto Rico

#2 – Illinois

#3 – California

#4 – Michigan

#5 – Nevada

#6 – New Jersey

#7 – District of Columbia

#8 – Rhode Island

The declining welfare rolls

The ever-shrinking welfare rolls

Stateline has done some very good reporting on the decline of the welfare rolls. Welfare funding was switched to block grants in 1996, and the funding level has remained the same since then. From Stateline:

Welfare is not a big budget item for most states, taking up less than 2 percent of all state spending, according to the National Association of State Budget Officers (NASBO)…

…When Congress overhauled that system in 1996, it changed welfare from an “entitlement program” guaranteeing coverage to everyone who was eligible and instead created the Temporary Assistance for Needy Families (TANF) block grant that hands out lump-sum payments for welfare. States are essentially given a set amount of money and allowed to use it as they wish. The amount has stayed level since 1996.

Is the taxpayer backstop the root of pension problems?

Public workers have been protesting against the reduction of their benefits in several states. It got a more than a little testy in Wisconsin this winter, which has led to several recall elections for legislators there.

It is the right of public workers to push back when they believe they have been treated unfairly. But it is also the responsibility of public workers, and especially their union leaders, to help create a realistic, sustainable benefit scheme for themselves. Too often union leaders insisted on more and more benefits and lower contributions while ignoring the damage done to the viability of their pension plans.

Maybe they didn’t worry because they knew that taxpayers would have to make up shortfalls in underfunded pension plans. Maybe the guaranteed taxpayer backup is the root of our fiscal problems. It has placed all the responsibility for fiscal prudence on elected officials who often are easily swayed by well-organized constituent demands.

Muni swaps moving higher

Lisa Pollack of Markit in London sent over some interesting charts of U.S. municipal swaps. I put up this one which shows the market perception that risk is increasing again for some states, particularly Illinois and California. It is important to remember that these markets are thinly traded and that there is a large block of muni CDS written on California that is coming to market from the bankruptcy of Lehman Brothers.

National Totals of State Tax Revenue, by Type of Tax

The U.S. Census brings us these figures for taxes collected at the state level for 2010. You can see the substantial reliance on individual income and sales taxes (I left off some categories to fit the table in. Click through to the Census document to see more data): Quarter Total tax Individual income Corporate income Property tax State sales tax 2010 4Q $ 177B $ 61B $ 9B $ 4B $ 57B 2010 3Q $ 168B $ 57B $ 7B $ 3B $ 56B 2010 2Q $ 204B $ 72B $ 14B $ 3B $ 54B 2010 1Q $ 163B $ 52B $ 8B $ 8B $ 54B

 

Muni sweeps: Important deals for CA and NJ

New Jersey municipal employees to pay more for benefits

The Wall Street Journal is reporting that New Jersey Governor Chris Christie and the state Democratic leadership have reached agreement on reducing employee benefits:

In the face of heavy opposition from unions, the Democratic leadership of the New Jersey legislature and Gov. Chris Christie reached an agreement on major cuts to public-worker pensions and benefits…

…Democrats worked into Wednesday evening to get union support, offering weaker proposals, to no avail, a person familiar with the negotiations said. Instead, top lawmakers went ahead with a comprehensive bill submitted earlier this week that requires workers to pay more toward their pensions and new hires to work longer to reach retirement age, while eliminating annual cost-of-living increases for current and future retirees, among a slew of other changes.

Chris Christie’s “too big to fails”


Chris Christie, the Republican governor of New Jersey who has consistently been championed as a “fiscal conservative,” has a real soft spot for several of his state’s “too big to fail” private projects. These projects include the massive retail/entertainment/sports/dining complex at the Meadowlands and the Revel casino project in Atlantic City. Governor Christie has made his state, which is in perilous financial condition, equity partners in the two projects.

Meanwhile a court order is forcing Governor Christie to increase the state’s contribution to public schools:

The New Jersey Supreme Court ordered the Christie administration on Tuesday to increase state education aid by $500 million in the coming school year, saying it had failed to meet its constitutional obligation to provide adequate educational resources for poor and minority children…

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