recession

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Why Few Cities Will Take the Supreme Court Up on Their Right to Sue Banks

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Last week's ruling leaves open a key legal question that could make cities unlikely to file suit.
BY  | MAY 11, 2017

After losing billions in property tax revenue during the foreclosure crisis, local governments notched a win last week when the U.S. Supreme Court affirmed the city of Miami’s right to sue big banks under the Fair Housing Act.

But don’t expect a flood of lawsuits to follow any time soon. The ruling leaves open a key legal question about the burden of proof cities must present to show they were financially harmed.

In the 5-3 ruling, the court sided with Miami, agreeing that the 1968 act, which prohibits racial discrimination in the lease, sale and financing of property, applied to cities as well as people. But the ruling didn’t agree that Miami had provided enough direct evidence linking discriminatory lending practices by Wells Fargo and Bank of America to the financial harms incurred by the city. It also stopped short of saying what a city must do to prove economic harm and remanded the case back to the lower court to answer that question.

Budget Shortfalls Expected in the Most States Since Recession

Almost half the states cut their budgets this year, and that trend is likely to continue into 2017.
BY  | DECEMBER 13, 2016

Weak revenues are causing the most state budget shortfalls since the Great Recession.

According to the National Association of State Budget Officers’ (NASBO) annual state spending survey, half of all states saw revenues come in lower than budgeted in fiscal 2016 and nearly as many (24) are seeing those weak revenue conditions carry into fiscal 2017, which ends in summer 2017 for most states. It marks the highest number of states falling short since 36 budgets missed their mark in 2010.

As a result, 19 states made mid-year budget cuts in 2016, totaling $2.8 billion. That number of states “is historically high outside of a recessionary period,” according to the report.

The revenue slowdown is caused mainly by slow income tax growth, even slower sales tax growth and an outright decline in corporate tax revenue

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The Week in Public Finance: States in Recession, Higher Ed Winners and Losers, and Virtual Retirement

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A roundup of money (and other) news governments can use.
BY  | JULY 8, 2016

Oklahoma's in a Recession

New economic data shows what Oklahoma officials have been fearing: The state has officially entered a recession. Revised federal Bureau of Economic Analysis (BEA) data shows that the state’s gross domestic product was negative for most of 2015.

A recession starts when there are two quarters of economic contraction. Originally, the BEA reported that Oklahoma’s economy contracted in the second quarter, grew by 0.1 percent during the third quarter and contracted again in the last quarter of last year. But the third quarter figure was recently revised downward to -0.6 percent.

Data for the first quarter of 2016 is expected to be released later this month, but according to State Treasurer Ken Miller, the prospects don’t look good.

“General indicators fail to point to any marked economic recovery at this point,” he said in his latest state economic report.

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The Week in Public Finance: Rescuing Puerto Rico, Brexit Fallout and Minimum-Wage Trends

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A roundup of money (and other) news governments can use.
BY  | JULY 1, 2016

Puerto Rico’s New Path

Congress this week has reached an agreement on a rescue bill for Puerto Rico. The troubled territory is set to default for a third time over the past year on a debt payment due today. The legislation, which was signed by President Obama Thursday, follows a long-running debate about whether Congress should intervene at all.

The bill, called the Puerto Rico Oversight, Management and Economic Stability Act, or PROMESA, passed the House of Representatives earlier this month and the Senate on Wednesday. The legislation would allow the island a path to restructure its more than $70 billion in debt while installing a financial control board to govern its finances. It was modeled after similar legislation for Washington, D.C., whose finances were also subject to a control board two decades ago.

The Takeaway: The legislation won’t stop Puerto Rico from defaulting on its $2 billion debt payment Friday. But the fact that it now has a path to solvency -- however murky and long -- delivers a message of certainty to municipal market investors. To be sure, investors will take a hit and Puerto Rico’s officials will lose immediate control of the island’s financial future. But the process will be far more orderly than it has been in the past year or so. Litigation promised “to be endless and to consume scarce resources of the beleaguered commonwealth’s government," former New York Lt. Gov. Richard Ravitch pointed out in an op-ed this week

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The Week in Public Finance: What Brexit Means for Muni Bonds, Pension Projections and More

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A roundup of money (and other) news governments can use.
BY  | JUNE 24, 2016

What Brexit Means for the Municipal Bond Market

On Thursday, Britain voters shocked the world by deciding to exit the European Union in a vote that became known as "Brexit," a combination of Britain and exit. The result, which prompted Prime Minister David Cameron to say he will step down in the coming months, has implications for global financial markets, which in turn can affect the U.S. municipal market.

Even before the results of the vote were in, the uncertainty of the outcome was affecting markets everywhere. Global stocks and some corporate bonds had slumped while demand for traditionally safer assets like U.S. Treasuries and municipal bonds had “soared,” according to Ivan Gulich, senior vice president of the financial firm Loop Capital Markets.

This increased demand for municipal bonds has driven down interest rates, which is good for governments looking to borrow money. For example, the interest rate on a 30-year Treasury bond is currently lower than it was even in the wake of the Lehman Brothers' 2008 bankruptcy that roiled the corporate market and drove demand toward government securities.

“What was initially seen as an issue for Europe has rattled markets around the world,” wrote Gulich this week in an analysis.

After Milestone Year of Recovery, State Spending to Slow

States' overall budgets finally surpassed pre-recession peaks this year -- but not everywhere.
BY  | JUNE 22, 2016

This year was one of milestones for state budgets, but the upward swings of 2016 will likely be dampened in the years ahead.

It took almost a decade, but total state spending and revenues finally surpassed pre-recession peaks this year, according to a new survey from the National Association of State Budget Officers (NASBO). Yet more than two dozen states haven’t reached that milestone, a sign of the recovery’s uneven progress after the worst economic collapse in more than a generation.

While fiscal 2016 also marked the highest annual growth -- 5.5 percent -- for total state spending in nearly a decade, it was primarily driven by significant one-time spending increases and technical adjustments in several large states, including New York, Ohio and Texas. The median spending growth rate across the 50 states was 3.8 percent, which is lower than last year’s but slightly ahead of expectations a year ago.

Looking ahead, spending is projected to slow down even more, to 2.5 percent next fiscal year (which begins July 1 for most states). Revenues are also projected to slow.

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The Week in Public Finance: A New Pension Trend, a Last-Ditch Effort to Hold Lenders Accountable and More

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A roundup of money (and other) news governments can use.
BY  | MAY 6, 2016

A New Trend in Pension Funding?

Oklahoma Gov. Mary Fallin signed a bill into law this week that establishes a rainy day fund for the state’s pension system. Called the Pension Improvement Act, the law creates a fund that the state can use to help with its annual pension costs. There are no rules for when to put money in the fund, but the law does say money can only come out via legislative appropriation. It also says that money can only be used to help the state pay its full pension bill in tough economic years or to help fund cost-of-living increases for public employees.

Oklahoma isn’t the only state this year to create a separate fund to help with pension costs. Last month, Kentucky lawmakers started a $125 million permanent fund, which is similarly expected to help the state afford its annual pension payment. The state has asked for independent audits to help determine when the fund should be tapped.

The takeaway: Many states have rainy day funds to help supplement their budgets in years when revenues fall short. Theoretically, those funds could also help with paying a state’s pension bill. But the reality is that pension payments are often the target of cuts in tough economic times. What's more, pensions also lose money from investment losses during economic contractions.

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The Week in Public Finance: CalPERS' Rethinks Tobacco Divestment, Fact-Checking Illinois' Exodus and Income Recoveries

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A roundup of money (and other) news governments can use.
BY  | APRIL 22, 2016

Smoking or Non-Smoking?

The California Public Employees’ Retirement System (CalPERS) struck a controversial note this week when its board announced it would study whether to get back into the tobacco industry. The nation’s largest pension fund divested from tobacco companies in 2001 on the premise that making money off a product known to cause cancer was in conflict with the fund’s social responsibility.

But a study by a consulting firm showed that CalPERS forfeited an estimated $3 billion in investment profits since 2001 because of that decision. The board will take its time -- two years -- reconsidering its decision, citing its fiduciary duty to make the best investment choices possible for retirees.

The announcement has already drawn fire from those who say CalPERS would violate its role as a health insurer by getting back into tobacco. State Treasurer John Chiang, who sits on the board and voted against the majority, said in a statement that investing in tobacco companies is harmful to public health and to the fund’s fiscal bottom line.

Municipal Bond Market Faces New Pressure

A new federal rule could make it more expensive for governments to issue debt in a financial crisis.
BY  | APRIL 5, 2016

Selling government bonds could become more difficult during the next credit crunch, thanks to a new federal rule outlining the kind of liquid assets that banks must hold in case of an emergency.

The rule, issued Friday, greatly limits the kinds of municipal bonds that qualify in a big bank’s investment portfolio as "highly liquid" -- in other words, assets that can be sold quickly for cash. The new regulation was issued by the U.S. Federal Reserve, and is a modification of its previous proposal with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation.

There's no immediate negative effect for government issuers. But if and when the next credit crunch hits, it could become more expensive for states and localities to issue debt. That's because if fewer bonds qualify as highly liquid, there would be less market demand for them. And lower demand would mean higher interest rates for governments.

“As long as munis continue to have a good risk-adjusted return for banks, they’ll continue to invest," said Chris Mauro, who leads RBC Capital Markets’ municipal strategy team. “It’s really when you’re entering a liquidity crisis and banks are running up against their limit: Unfortunately they may liquidate some of their municipal [bonds] as a result. And they’ll use those proceeds to buy highly liquid assets.”

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The Week in Public Finance: Contradictory Pension Reports, Brewing Pension Battles and Recession Worries

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A roundup of money (and other) news governments can use.
BY  | FEBRUARY 12, 2016

Contradictory Pension Reports

Two groups published studies this week looking at whether traditional pensions or 401(k) plans are better for teachers and came up with … exactly opposite conclusions.The University of California at Berkeley looked at the state’s teacher pension system (CalSTRS) and found that for the “vast majority” of California teachers (six out of seven), a defined-benefit pension provides more secure retirement income than a 401(k)-style plan.

The study also concluded that pensions reduce teacher turnover, “which is better for students, reduces costly and time-consuming training, and increases teacher effectiveness.” It portrayed 401(k) and cash balance plans as bad for teachers because they place more risk on the retiree as their final benefit is not defined. Such plans also decrease the incentive for early and mid-career teachers to stay on the job, the report said.

Separately, TeacherPensions.org ran an analysis of teacher pensions in Illinois. It found that traditional pensions are not a good deal for teachers because they disproportionately favor those who stick around for 30 or 35 years, “at the expense of everyone else.

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The Week in Public Finance: A Muni Bond Victory in Congress and a Ukraine-Inspired Idea to Restructure Puerto Rico

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A roundup of money (and other) news governments can use.
BY  | FEBRUARY 5, 2016

Preparing -- or Not -- for a Slowdown

The financial outlook for states and localities over the next few years, simply put, isn’t as rosy as it’s been for the past couple of years. (If you even want to call the last couple of years rosy.)

Last week, we reported that states other than oil-dependent ones are dealing with mid-year spending cuts. Looking ahead, state budget forecasters are expecting tepid sales and income tax revenue growth for both 2016 and 2017. If spending continues to grow faster than revenues, the next few years could be challenging for government budgets.

“States still haven’t made up for a lot of the cutting that got done in the last six to eight years,” said Bill Pound, the executive director of the National Conference of State Legislatures. In particular, states are still trying to restore education funding while implementing higher standards, he said.

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Having a Rainy Day Fund, But Not Knowing How to Spend It

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Some states have millions in savings that they don't know when or how to use. A new report suggests ways to better manage their money.
BY  | JANUARY 28, 2016

As state lawmakers head into the budget-writing season, some will face the unpleasant task of figuring out how to fill projected shortfalls. In most cases, that conversation will include a debate on whether to withdraw cash from the state’s rainy day fund.

Some states count on their rainy day savings during recessions to limit budget cuts, while others strive to put away enough savings to avoid cuts altogether. But many states lack clear guidance about when to take money out of rainy day accounts, for what purposes and how much.

Rainy day funds have been around for decades. Among the 46 states that have them, only half have laws that clearly express what they're seeking to achieve with them, according to a recent Pew Charitable Trusts report. Two states -- Wyoming and Kentucky -- lack any statutory or constitutional direction about their purpose or proper use.

That means legislators have to argue each time finances become a problem.