Economy

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Puerto Rico's Warning for States, Cities: You Might Be Next

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Gov. Alejandro Garcia Padilla said the island's rescue might simply be a harbinger of things to come on the mainland.
BY  | JULY 14, 2016

President Obama recently signed into law a highly anticipated -- and much debated -- rescue bill for debt-laden Puerto Rico. While the bill has its detractors, it marks a positive step toward the promise of recovery for the island. But the bill's impact could go far beyond the commonwealth's shores.

Puerto Rico, like states and many cities, can't legally declare bankruptcy. Saddled with $70 billion in debt, Gov. Alejandro Garcia Padilla's administration has spent the last few years unsuccessfully trying to reach an agreement with creditors. During that time, the commonwealth watched its tax base decline as residents fled stateside and Puerto Rican government entities defaulted on debt.

That's what life without bankruptcy protection is like for governments, Padilla said this week in a speech at the Brookings Institution in Washington, D.C. He went on to suggest that Puerto Rico, with its smaller economy and population size, might simply be farther along on a path other U.S. governments are also traveling. "We are only ahead of the curve -- the curve that looms for many states and municipalities," he said. "We are forced to try the route that others have not tried before, to knock on the doors that others may need to approach in the not-so-distant future."

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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 $4.3 Trillion That States and Localities Are Missing Out On

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Economic output would get a big boost if more women were in the workplace. A new report shows how far places have to go to close that gap.
BY  | JULY 8, 2016

Want to grow your economy? Close the gender gap.

That’s the advice from a new report that says states and cities could add up to $4.3 trillion to their annual economic output simply by focusing on policies that create a more equitable environment for women in the workforce.

The report, produced by the think tank McKinsey Global Institute, looked at levels of gender equality in measurable areas like political representation; workforce participation and leadership; educational attainment and teenage pregnancy rates. Overall, researchers found high gender inequality in many states and in some of the top 50 largest metropolitan areas.

"The real opportunity here is for a state to say, 'How could we do better? What are the levers that we can pull to get motivated and begin to address this?'" said Vivian Riefberg, one of the report's authors.

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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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Things You Didn't Know About Detroit's Historic Bankruptcy

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Nathan Bomey, author of a new book on the largest Chapter 9 filing in U.S. history, reveals the unsung heroes and true timeline of the event.
BY  | JUNE 16, 2016

Nearly three years ago, Detroit's $18 billion bankruptcy -- the largest municipal Chapter 9 filing in American history -- captured the nation's attention. Detroit, like so many other Rust Belt cities, had suffered from decades of economic decline, as well as shrinking economic support from the state; mismanagement from city leaders that hurt the public trust and shattered finances; and the exodus of more affluent and generally white residents to the suburbs.

These effects and more are captured in the new book Detroit Resurrected. It's the first book to extensively chronicle the city's story into and out of bankruptcy, and it's written by journalist Nathan Bomey, who was the Detroit Free Press' lead reporter on the city's bankruptcy and is currently a writer at USA Today. Bomey, who spoke with Governing about the book, based it not only on his extensive reporting at the time but also on revealing and frank post-bankruptcy interviews with key players.

The following interview is edited for length and clarity.

I didn't know until reading your book that bankruptcy was being talked about in Detroit several years before 2013.

It was. In Detroit, the promises to retirees were actually broken many years before the bankruptcy process. I think the problem was [that by the time bankruptcy was considered], political leaders didn't really have the political will to make the tough decisions to avoid this type of process. So they put it off. And one factor in Detroit's bankruptcy that has been widely misunderstood is that the emergency manager law was uniquely tailored to make a bankruptcy go fast. Kevyn Orr got the job about four months before the city ultimately filed for bankruptcy. I think looking back on it, most people would agree that by the time he was installed, bankruptcy was probably inevitable.

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How Zika Could Infect the Municipal Bond Market

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Even if an area has no cases of the virus, it could feel a financial impact.
BY  | MAY 27, 2016

When you walk through Atlanta's Hartsfield-Jackson International Airport, it’s hard to ignore the solemn warnings that the city could be an entry point for the Zika virus into the United States.

Everywhere, large signs picturing a menacing mosquito warn travelers: “Don’t let this bad bug bite you.” Other signs warn pregnant travelers about a Zika health advisory. Last month, airport concessionaires began selling insect repellent with the recommended level of DEET to keep mosquitoes at bay.

But there are also financial implications of Atlanta’s status as a gateway to Central and South American travel, and for other cities like it. According to a new report by the investment firm, Loop Capital Markets, the Zika virus could make it more expensive for some municipalities to borrow money.

That's because similar to natural disasters, a virus outbreak has the potential to overwhelm local and state health departments. In 2005, Hurricane Katrina "demonstrated the enormous capacity of governments to botch disaster relief efforts,” said Chris Mier, the report's author. Since then, research has shown that a region's susceptibility to disasters now plays a role in their municipal interest rates. For example, a study of California's more earthquake-prone cities found that they paid a higher interest rate on their bonds following Hurricane Katrina.

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The Fight for Jobs Intensifies Between Kansas and Missouri

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Nowhere are tax incentives more complicated -- and some say pointless -- than in Kansas City.
BY  | MAY 12, 2016

In major metropolitan areas, using tax incentives to lure businesses from one part of the region to another can sometimes seem like a big family fight. In the Washington, D.C., area, for instance, several jurisdictions are vying to become the new headquarters of the FBI, which is currently located in the district. If the FBI moves outside of D.C., Maryland or Virginia can claim "new" jobs. But the net gain to the metro area is negligible, save the temporary work created by new construction.

In nowhere does this chess match seem more futile than in Kansas City, which sits in both Kansas and Missouri. The two states have long competed with each other to woo businesses across the state line. AMC Theaters, Applebee's and JP Morgan Retirement are just a few businesses that have crossed the border in recent times. So much money is involved that the tax incentives battle has been dubbed the Kansas City Border War.

But recently there's been a concerted effort to call a cease fire. In 2014, the Missouri General Assembly passed a bill that effectively ended the state's tax incentive program in Kansas City after a group of 17 businesses in the two-state region lobbied both governors for it. For the law to go into effect, though, Kansas has to approve a similar bill. The state has until Aug. 28 to do so; otherwise, the "deal" is dead.

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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.

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Illinois May Target Predatory Lending to Small Businesses

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A first-in-the-nation bill would regulate loans made to small businesses by alternative lenders mostly found online.
BY  | APRIL 18, 2016

Illinois could be the first state to regulate predatory lending to small businesses, an emerging threat that some have called the next credit crisis.

The bill, SB 2865, targets many of the complaints that small business owners and researchers have made in recent years about loans made by online lenders and other non-traditional institutions. The legislation, which amends the Illinois Fairness in Lending Act, would require more transparency from lenders regarding the annual interest rate and terms applied to the loan.

“Many of the so-called four D’s of predation -- deception, debt traps, debt spirals and discrimination -- stem from a lack of transparency,” Chicago Treasurer Kurt Summers told the state Senate's financial institutions committee last week. “Today in Illinois, a company selling timeshares for $100 a month is required to have more clearly articulated loan terms in their contracts than an online lender would for a $200,000 business loan.”

The legislation, which the full Senate is now considering, would also set standards for making the loan, such as requiring lenders to consider a business owner’s ability to pay. Specifically, the measure would prohibit loans to a small business if the monthly loan payments would exceed 50 percent of the borrower’s net monthly revenue.

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The Week in Public Finance: Puerto Rico Drama and a Corn-y Kind of Tax Credit

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A roundup of money (and other) news governments can use.
BY  | APRIL 15, 2016

Beyond the Numbers in Puerto Rico

The drama over whether Congress should allow financially strapped Puerto Rico to restructure its debts has kicked up a notch after the recent announcement that the territory’s main financier was putting a moratorium on paying its debt, among other things. This week, a group called Main Street Bondholders launched an ad campaign calling the proposed federal legislation a “bailout” that “removes any incentive for Puerto Rico to remain at the table with bondholders.” The group says it represents the interest of retiree investors.

In response, House Speaker Paul Ryan issued a lengthy statement charging that “big-money interest groups on Wall Street” were dumping “a lot of money toward sabotaging this legislation in order to force a last-minute bailout upon Puerto Rico.” That would put U.S. taxpayers on the hook for creditors’ “bad loans,” Ryan said, which is what Congress is trying to avoid.

Anytime someone mentions “big-money interest groups on Wall Street,” it can be tempting to assume they're referring to Republican mega-donors Charles and David Koch. In this case, that's correct: The Main Street Bondholders were formed by the 60 Plus Association, a conservative small-government group that spent millions in the 2012 and 2014 election cycles to help elect conservative or Tea Party candidates. Much of its funding came from conservative groups with ties to the Koch Brothers. The group has been quiet until recently and no information is readily available yet on its funding and expenses this election cycle.

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The Week in Public Finance: School Shutdowns, Trading Munis and Small Business Lending

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A roundup of money (and other) news governments can use.
BY  | MARCH 4, 2016

Education Opens Closes Doors

One of states' top spending items is education. When lawmakers can’t agree on a budget -- or they decide to make severe cuts -- higher education often gets hurt. Sometimes, even K-12 spending takes a hit. In Illinois and Pennsylvania, ongoing stalemates over the current fiscal year’s budget may lead to school closures. In Louisiana, potential major cuts have students protesting.

Let’s start in Illinois, where three state universities have taken severe hits. Last Friday, Chicago State University sent layoff notices to all 900 of its employees. The school is making plans to end its semester early unless the state makes good on funding promises. That alarming news came after Western Illinois University announced it would cut $20 million from its budget over the next two years, while laying off 100 employees. Southern Illinois University is contemplating $40 million in cuts and has already started closing programs, such as men’s tennis and women’s golf. Most recently, Eastern Illinois University, which saw its credit rating downgraded to junk status last month, laid off nearly 200 employees, although the school president offered assurances that the university was not closing.

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Louisiana's Budget Has More Than Just an Oil Problem

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Unlike other oil-dependent states, Louisiana has deeper financial issues that began nearly a decade ago after Hurricane Katrina. The legislature is meeting in special session to deal with them.
BY  | MARCH 2, 2016

The global oil surplus is forcing some energy-dependent states to rethink their financial arrangements. Already, Alaska, North Dakota, West Virginia and Wyoming have hit the official recession marker of sustained job loss, according to Moody’s Analytics. These and other states are slashing spending to right-size their budgets.

But in Louisiana, the financial turmoil runs deeper than fallout from the last 20 months of declining oil prices.

Last week, Moody’s Investors Service slapped Louisiana with its first credit rating downgrade in more than a decade. It’s the only energy state other than Alaska to be downgraded since the oil price slump began, yet Louisiana is far less dependent on oil than the Last Frontier. Severance taxes -- the taxes imposed on the production of oil and minerals -- made up nearly three-quarters of Alaska’s tax collections in 2014, compared to about 9 percent in Louisiana, according to an analysis by the Rockefeller Institute for Government.

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The Week in Public Finance: Atlantic City’s Intervention, New Pay-for-Success Projects and Arizona's Pension Reform

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A roundup of money (and other) news governments can use.
BY  | FEBRUARY 19, 2016

Intervention in Atlantic City

Top New Jersey lawmakers have finally announced details of their plan to take over Atlantic City’s finances.The proposal was unveiled this week in a state Senate bill that gives more power to state financial overseers.

Atlantic City’s tax revenues have dropped dramatically in recent years as multiple casino closures have dried up the city’s main industry and revenue source.

"The intervention plan will enable the state and the city to work together to accomplish what Atlantic City can't do on its own," said Senate President Stephen Sweeney, a co-sponsor of the bill. "The city's fiscal crisis is severe and immediate. ... The state has to take a more direct role."

The bill would expand the role of the state's Local Finance Board chief so that they could not only renegotiate the struggling city's debt but also dissolve or consolidate city agencies and departments, share services with Atlantic County and sell city 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.

Obama's Last Budget: The Breakdown for States and Localities

The president's budget outlines ambitious spending proposals in health care and infrastructure -- though their likelihood of passing is slim.
BY  | FEBRUARY 9, 2016

Every budget is about winners and losers. In that regard, President Obama’s final budget is a $4 trillion mixed bag for states and localities.

Many of his proposed initiatives would benefit urban areas, which won him praise from some but criticism from others who say such help would come at the expense of rural America.

Looking at the big picture, the proposed budget maintains the agreement reached last year that helped states and localities by lifting automatic cuts on discretionary spending, which are known as sequestration cuts. The budget also outlines ambitious spending proposals in health care and infrastructure -- two key financial pressure points for state and local governments.

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Is Paying People Not to Commit Crimes Effective?

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Washington, D.C., may offer some people financial incentives to follow the law. It wouldn't be the first.
BY  | FEBRUARY 8, 2016

If the threat of jail or job loss isn’t enough incentive not to commit a crime, here’s one more: cash money.

That’s the tactic Washington, D.C., is considering after the city suffered an alarming 54 percent increase in its murder rate last year. A similar approach in Richmond, Calif., has helped to reduce crime.

The city council in D.C. gave unanimous but preliminary approval to a bill earlier this month that would identify up to 200 young people a year considered at risk of either committing or becoming victims of violent crime. If they complete behavioral therapy, life planning and mentorship programs run by the Office of Neighborhood Safety and Engagement -- and stay crime-free the entire year -- they would get paid.

The bill doesn't specify how much participants could earn, but the program would cost an average of $1.2 million a year for the first four years, including $460,000 for stipends.

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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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How Oil States Are Dealing With Sinking Prices and Revenue

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The states most dependent on oil tax revenues have different ways of dealing with the industry slowdown.
BY  | FEBRUARY 4, 2016

Oil prices are now at their lowest level in 12 years -- below $30 a barrel. That's great news for consumers, but not for the states that depend on oil tax revenues.

The falling price of oil, which has declined more than 60 percent since June 2014, has some states scrambling. With no end in sight, states that are more dependent on the industry simply can't replace the revenue by withdrawing from their substantial rainy day funds.

Oil, natural gas and mining account for about 10 percent or more of gross domestic product in eight states: Alaska, Louisiana, New Mexico, North Dakota, Oklahoma, Texas, West Virginia and Wyoming. Last year, total tax revenues in the eight states declined by 3.2 percent, according to a new analysis by the Nelson A. Rockefeller Institute of Government. In contrast, the remaining 42 states reported a 6.5 percent increase in total tax revenues.

Although most of these states tend to budget conservatively, the good years for oil had an impact on their finances.