Massachusetts sets the bar for transparency
For openness in finances, debt management and budget process, Massachusetts is the gold standard among states. The legislature and executive branch have collaboratively embraced a five-year budgeting process and committed to sharing the results with taxpayers and the public. Because of the state’s efforts to reach out to the investing community, I predict that its transparency will lead to lower borrowing costs and more stable funding sources in the future. The state is rated AA+ by credit rating agencies for creditworthiness, but I’ll assign it the highest rating, AAA, for transparency.
Several weeks ago, the state treasurer, Steven Grossman, launched a new Twitter account (@BuyMassBonds) that keeps the public informed about new financial filings and bond offerings. It’s a model of excellence for muniland in terms of keeping municipal bond investors informed through social media. Here is a recent tweet about an upcoming bond issue, the Massachusetts Water Pollution Abatement Trust State Revolving Fund Bonds:
Love clean H2O? Mass Water Trust is selling $230mill in bonds that fund it on Tues/Wed! Learn more at buymassbonds.com #muniland
— Buy Mass Bonds (@BuyMassBonds) May 25, 2012
On the state’s Debt Management Department website, municipal bond investors have rapid and easy access to:
- Current Bond/Note Offerings
- Forward Bond Sale Calendar
- Ratings Reports & History
- View How Your Bonds Are Trading
- Official Statement Archive
The Municipal Securities Rulemaking Board’s EMMA site is the official document repository for the municipal bond market, but the Massachusetts site is streamlined and oriented solely toward its bond investors. The site makes finding the state’s bond information very simple. California does a good job of providing information about outstanding bonds, but the amount of information it provides doesn’t come close to what Massachusetts offers. I’m sure that California could broaden its pool of bond investors with an information flow as strong as that of Massachusetts.
Christie wants to cut taxes while the cashbox is empty
New Jersey Governor Chris Christie got a lot of media attention this week when he announced that Warren Buffett “should just write [the government] a check and shut up,” on CNN’s Piers Morgan Tonight. His great one-liner obscured the more profound question he was being asked, which was: Shouldn’t the wealthy pay a higher proportion of taxes? Beliefs about progressive taxation vary widely, but income taxes at every level of government are structured so that the wealthy pay a higher proportion of taxes.
If I had been asking the governor questions, I would have focused on his fetish for cutting income taxes when his state’s cashbox is nearly empty. Or as the rating agency Standard & Poor’s defined the problem:
New Jersey Gov. Chris Christie released his proposed $32.15 billion budget for fiscal 2013 on Feb. 21. The budget remains structurally unbalanced, is built on what Standard & Poor’s Ratings Services regards as optimistic economic projections to close the budget gap, and increases New Jersey’s (AA-/Stable) reliance on nonrecurring revenues.
[...]
Assuming no further reductions to fund balance are needed to cover revenue shortfalls in fiscal 2012, reserves would fall to $300 million or less than 1% of expenditures at fiscal year-end 2013 if the legislature adopts the proposed budget. At this level, New Jersey’s fund balance would provide a limited financial cushion with which to offset revenue shortfalls should current revenue growth assumptions turn out to be optimistic.
I’ll translate the rating agency jargon: The state revenue projections are fantasy. If New Jersey gets lucky and revenues don’t fall short again as they did this year, then the state will end up with a cushion of $300 million to buffer a $32 billion budget. But if economic conditions slow at all (remember, many New Jerseyans work on Wall Street), then take out the midyear budget ax and start chopping. Basically the state is and will be running on fumes.
But Christie’s attack on Buffett obscures all that and shows him as forceful and in charge. In contrast Standard & Poor’s paints Christie as a fiscal illusionist. I just see him as another politician who promises the moon and prays he can juggle the books to cover his promises — or that he can get out of office before payment comes due.
If you’re looking for true fiscal conservatism, you’d do well to study Utah. Although Utah is rated AAA, the state is trying to figure out how to lower its municipal bond indebtedness in case of any emergency that might require it to issue bonds. The state also continues to top off its rainy-day fund, which is about 4.6 percent of general operating revenue. From Utah Policy:
Republican fiscal conservatism is a myth
Government has expanded tremendously at every level in the United States over the last several decades. Expenditures have risen; constituencies have gained new subsidies; and loads of debt has been taken on. It’s unstable and it’s time to go on a diet.
The Republican party declares that they are the party of fiscal conservatism which has been beating back the profligate Democrat party. Here is the war cry from their 2008 party platform:
The other party wants more government control over people’s lives and earnings; Republicans do not. The other party wants to continue pork barrel politics; we are disgusted by it, no matter who practices it. The other party wants to ignore fiscal problems while squandering billions on ineffective programs; we are determined to end that waste. The entrenched culture of official Washington -– an intrusive tax-and-spend liberalism -– remains a formidable foe, but we will confront and ultimately defeat it.
I wondered if the Republicans’ charge was accurate or if both parties had a tendency to spend tax dollars to buy support. Was there any quantitative evidence that Republicans were running tight fiscal ships? Looking at the finances of the states might create a better understanding. All states except Vermont must end the year with a balanced budget. Many of them require reserves in the form of rainy day funds. I pulled data from the National Association of State Budget Officers Fiscal Survey of the States, Fall 2011 covering “Total Balances and Balances as a Percentage of Expenditures, Fiscal 2010 to Fiscal 2012″. This is basically what states have left over at the end of the fiscal year. What I found is that both parties can practice sound fiscal policies or run very close to the edge of fiscal catastrophe. Republicans have no lock on tight fiscal ships.
The top chart shows that three of the ten states with the highest year-end budget surpluses and rainy day funds were controlled by Democrats and seven were controlled by Republicans. The four states with the biggest year-end balances are energy-producing states, led by Alaska. The guaranteed energy revenues that these four states enjoy would likely lead to big surpluses regardless of which party ran the state.
The chart below shows the ten states with the weakest year-end fiscal position. Six of the ten were controlled by Republicans. This data shows that a state can be Republican-controlled and still skirt the edge of the economic precipice.
The soft side of federal spending
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.
Politicians seem to be stuck in the blame game and hyperbole about who would or wouldn’t raise taxes on millionaires. We do need tax increases and we must cut everywhere as precisely and wisely as we can. Enough with the soundbites. It’s time to start talking hard numbers.
State taxes on fire
State tax collections are hot, hot, hot. The taxman rustled up 16 percent more in state income taxes for the second quarter of 2011 compared to the same period in 2010. Where is this phenomenal growth coming from?
Based on the most recent data collected by the Rockefeller Institute, states are raking in about $900 billion a year from their three major tax categories: the sales tax, personal income tax and corporate income taxes. Revenues from these three taxes total about 6.25% of U.S. GDP.
But it’s the personal income tax (PIT) that’s really driving the show. In the state of New York the PIT makes up about 60 percent of total tax revenues. In Oregon the PIT is an astonishing 72 percent of the state’s tax haul. Although the national employment level improved slowly the PIT was up on average 11.4 percent across the country year over year, according to Rockefeller. This contrasts sharply with the 4.6 percent national increase in state sales tax collections, especially given that 21 states cut their PIT tax rate while only 12 states cut their sales tax rates.
Robert Ward of the Rockefeller Institute tried to explain this counterintuitive phenomenon in a presentation earlier this month. He pointed out that some states have significant PIT revenues from capital gains. Unlike the federal tax code, twenty-one states treat capital gains as regular income. All the states in the chart above treat income earned from labor in the same way as income earned from capital. And in some states the amounts can be significant: In 2007, 13 percent of New York taxpayers’ annual gross income and 8 percent of New Jersey’s came from capital gains. That is a lot of bond and derivative trading on Wall Street.
Ward also pointed out that states are increasingly relying on personal income taxes. In 1978 PIT was about 25 percent of state tax revenues nationally versus 35 percent in 2008.
As financial markets gyrate, though, state revenues that depend on the PIT will gyrate too. Financial markets have been highly volatile over the last decade. It would be interesting to find any work that ties state PIT revenues and market performance together, and it would be especially interesting to see any work which explains this recent big jump in personal income tax collections.
11% PIT in Oregon (state tax)! Please turn out your lights when you leave!
What do muniland insiders think?
When the mainstream press pays attention to muniland, often it’s the most colorful and misinformed voices — think Meredith Whitney – that dominate coverage. So it was great to get some interesting data today on how municipal insiders view the market from the muni team at RBC Capital Markets. They did a survey of 116 municipal market professionals at the recent Bond Buyer’s California Public Finance Conference. Respondents included officials from federal, local and state governments; bankers; and other municipal finance professionals in attendance.
The key findings, shown in the chart above, are that industry participants worry most about the low level of bond issuance, headline risk and federal budget issues. Headline risk and federal budget problems are out of the control of everyone in the municipal space. But low issuance is a puzzler. Certainly these professionals have had their trade reduced as fewer bond issues come to market and as municipalities face harsher credit constraints than they are used to.
Another terrifying data point reported by RBC is the length of time respondents thought that it would take for state and local government revenues to return to pre-crisis levels.
The majority of survey responders think it will take four or more years before municipal revenues return to 2007 levels. We are looking at very hard times for muniland given that demands on state and local governments are likely to increase as more people seek Medicaid coverage and other support programs. Given this outlook it’s easy to predict that municipal bond issuance will remain very flat. State and local governments don’t have the fiscal space to easily take on more debt.
It’s hard times ahead but industry participants don’t seem overwhelmed by conditions. Chris Mauro, who heads the RBC municipal research team, said:
The interesting take-away from the recent California Public Finance Conference was that the percentage of respondents who feel that municipal defaults will be less in 2011 than 2010 has been going up while at the same time, the percent of respondents who believe that it will take four years or more for state revenues to return to pre-recession levels has also been increasing.
This reflects the growing confidence on the part of industry participants in the ability of state and local governments to manage through the current difficult fiscal environment but while at the same time, acknowledging that US economic weakness will limit the organic growth in state tax revenues.
Who are the “job creators?”
As the congressional supercommittee begins its budget-cutting efforts, state and local governments are worried about looming cuts to their federal grants. From Bloomberg:
In statehouses across the U.S., a budget-cutting congressional supercommittee and the sputtering economy threaten a fledgling recovery from the worst fiscal crisis in more than 70 years.
To create a more balanced approach that includes revenue increases as well as spending cuts, President Obama has proposed to raise taxes on the highest earners by reducing their tax exclusions and deductions (of which the municipal bond tax exclusion is a relatively small part).
Much of the criticism about his proposal to raise taxes on the wealthiest Americans describes the proposal as a drag on those who own small businesses and create most of the nation’s employment. Republicans often describe these small businesses as “jobs creators” when they argue against tax increases. As House Budget Committee Chairman Paul Ryan (R-WI) said on Fox News Channel:
And don’t forget the fact that most small businesses file taxes as individuals. So, when you are raising these top tax rates, you’re raising taxes on these job creators where more than half of Americans get their jobs from in this country.
To see whether this rhetoric is accurate, I thought it would be helpful to look at the IRS data for small business owners who file S-corporation and small proprietorship tax returns. I got the idea after seeing this income table from Scott Shane:
Finally, a well reasoned, fair and balanced post. Facts are to right-wingers and tea-pot heads like Kryptonite is to Superman!
Obama proposes direct aid to local governments
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:
The great milk cow in the sky dropped dead
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:
Data source: Government Printing Office (GPO)
The biggest block of federal funds flows to the Medicaid program for the poor and the elderly in nursing homes. In the first 20 seconds of this Bloomberg video, Paul Keckley, the executive director of Deloitte’s Center for Health Solutions, talks about how Medicaid has been exempted from cuts in the first round of the deficit-reduction deal.
This guy is ill informed. He speaks of the last 2 months of life or some nonsense like that, implying that the government can turn down the funding for those expensive months and achieve meaningful savings. I want to shout: WE CANNOT TELL WHEN THOSE LAST TWO MONTHS BEGIN ! You can either set some criteria for withdrawing treatment or not, but do not begin to know that you can predict when the patient is facing his/her last two months of life.
The federal government’s largess
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.
The other interesting observation I had looking at these numbers was the comparison of spending on special education to career and vocational training. Spending on special ed was over five times higher than spending on job training. I’m not advocating reducing special education but we must commit more resources to training unemployed Americans for higher skilled jobs.
Dig into the data a little. Where we spend our treasure is a big factor in America’s future. There will be less federal largess. Let’s spend it wisely.
(Federal budget via GPO. Data in $ millions)
United We Stand…… Divided We Fall……. Anyone remember that?
Extreme Partisan Politics are running and ruining this country, and has been for a long time, and far too long at that.
Maybe the American People should Unite and stand up for what is Right and Just, and get these Career Politicians and Lobbyist/ PAC Thugs out of Washington, and see how they like it on “Welfare”
Current Politics = Legalized Mafia.
The government is not For the People, and by the People anymore.
It is not a Democracy as it was meant to be.
It is for the Super Wealthy, The Poorest or Laziest of the Poor, Big Business, and Big Banks.
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Resident Muniland expert
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