B&G Report: Misleading Debt Burdens and Budget Claims and a Chance at More Cash

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by | February 6, 2014
 

There’s been a lot of talk about “social impact bonds,” a tool that governments can use to borrow money from private investors to finance social service projects. Investors get paid off with government savings if and when the projects succeed. In fact, our colleague, Jonathan Walters recently wrote a Governing column about the topic.

We bring this up because at year’s end, New York Gov. Andrew M. Cuomo announced that the Empire State is the first to launch a state-led “pay for success project.” We want to give the state credit for this kind of innovation. But we’re curious to hear from our very clever and sometimes skeptical readers: Do you think this is a great idea, a deeply flawed one or someplace in between? And why? Let us know, please.

On Jan. 23, the Minneapolis Star Tribune ran an article about how one of the most vocal members of the city’s audit committee was losing her position. Apparently, the former mayor didn’t fill out the proper paperwork when he reappointed her. This, in itself, was an unfortunate turn of events.

But when we looked into the matter by perusing the city’s website we found something surprising. The city has several vacant positions in its audit shop: a director of internal audit, a senior internal auditor and a senior internal auditor II. As any small business owner would ask: “I wonder who’s watching the store?”

Interested in debt levels? Beware! We strongly recommend that you take a look at a December report from the Federal Reserve Bank of Boston. It looks closely at the complexity of determining state and municipal debt in a way that allows reasonable comparison from state to state. One issue is that some states take on many more services than others, making their debt ratios less than comparable. Hawaii, for instance, funds many services that are paid for locally elsewhere. Connecticut doesn’t have any county-level government, and so tends to take on more debt at the state level.

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Even if you’re just looking for the actual affordability of debt, things can get very tricky. Most analysts use “debt service-to-revenues” as a good metric of near-term affordability of state debt. But consider the following: According to the report, debt to revenues does not necessarily capture the long-term nature of most bonded debt commitments. A state’s annual debt service requirement gives no real indication of how many years into the future such a claim will be made on state resources. It can also paint a misleading picture of a state’s debt burden if principal payments are back-loaded, or if there is a high likelihood that at a later date a state will be able to rollover its debt to achieve a lower interest cost through the issuance of refunding bonds.

Long ago, we started talking about "rickety bridges to the future." We were referring to revenue streams on which cities, counties and states rely that are far from solid. Missouri is one of the most recent states to stumble on such a bridge. “Lottery revenue is falling $13 million short in the first part of this fiscal year,” according to OzarksFirst.com. The state overestimated income from riverboat gambling by $22 million. The state planned to use these revenues to fund education, and now Missouri has to find other sources. The governor has ideas for making sure that education won’t lose any money as a result of these shortfalls. But the lesson here is this: States dependent on many so-called sin taxes had better get used to surprises.

"Fiscal discipline is not the enemy of our democracy but its fundamental predicate." -- California Gov. Jerry Brown

There’s been some confusion in Vermont’s state capital over the percentage increase the governor’s budget represents over last year’s. Gov. Peter Shumlin indicated that his spending proposal for fiscal year 2015 represented an increase of 3.56 percent. At the same time, many legislators had used the same basic budgetary figures to come up with a 5.2 percent increase.

According to the Burlington Free Press, the legislators were befuddled for a bit, until it became clear how the governor reached his figures. According to the newspaper, first the administration compared the current budget total as passed last spring with the governor’s proposal for next year and identified the increase as $88.5 million. Then the administration subtracted $40 million from the increase, noting that these costs had been paid for in the 2014 budget from one-time sources of funds and would be covered with ongoing dollars in the proposed 2015 budget. That left $48.19 million in what the administration identified as new spending -- a 3.56 percent increase over the previous year.

Was the governor’s math improper or misleading? It depends on who you ask. But what we do know is this: When the governor and the legislature don’t have a parallel approach to coming up with such a fundamental figure, something is wrong.

Here’s a possibility for states to pick up a little cash. In the past, many states have tried to collect on U.S. Savings bonds left unclaimed in safety deposit boxes. They’ve failed. But now, in a historic court case, the state of Kansas has picked up nearly $1 million this way, thanks to a decision from the Shawnee County District Court.

“Previously, all attempts made by any state to claim U.S. savings bonds under various unclaimed property acts were denied due to a lack of legal title to the bonds,” said State Treasurer Ron Estes in a statement.

Note to other states: We’d suggest that you take a look at Estes’ success in Kansas and see if you can take a similar route.

Two billion dollars in tax cuts is a pretty significant amount, even in a state the size of New York. And that’s exactly what the state’s governor proposed in his recent State of the State address. Where would the mountain of cash come from? The governor indicated that there would be enough money in surplus funds that will become available in fiscal year 2016-2017.

Sounds great. We live in New York and would be more than happy to participate in those tax cuts. But after reading a well-wrought piece done by the Citizen’s Budget Commission (CBC), we’re dubious. The thrust of the CBC piece is that those surpluses are predicated on some assumptions that are far from sure things including:

  • holding spending growth to two percent,
  • controlling pension and fringe benefit costs,
  • further limiting budgets for state agencies -- like corrections, mental health and services for people with developmental disabilities -- that have already been subject to dramatic cuts, and
  • constraining local government assistance. As the CBC report points out, “mid-year projections show growth of 3.4 percent on average from fiscal year 2013-14 to 2016-17.”

In a recent article , the Center for Priority Based Budgeting draws a link between the policies for which it advocates and better bond ratings. The article offers some interesting evidence. For example, it cites Douglas County, Nev., whose rating has been upgraded two steps from A+ to AA. According to a press release, “the rating upgrade is a significant event for the County and reflects recent efforts to implement several fiscal health practices, including long-range financial forecasting, revenue and expense stabilization and priority based budgeting."

This is exciting stuff. And it makes sense to us that the kinds of efforts the Center espouses would result in better financial status. For example, it calls for clearly identifying the cost of programs and seeking the best means for delivering services. Still, we’d really like to see a large research project designed to more fully establish this correlation. Anybody know of anything like this?

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