Public Money

Municipal Bondholders Beware

Four cities emerged from bankruptcy court this past year, and in each case, their road to fiscal stability was paved not with cuts to the pensions of firefighters, teachers and other local government employees, but to the wallets of bondholders who had invested in those cities. In California’s San Bernardino, Stockton and Vallejo, and in Detroit, bondholders faced losses of up to 99 percent of their holdings, according to Moody’s Investor Services. In the bankruptcy resolutions in all three California cities, the courts preserved full pensions for retirees, while in Detroit pensions were cut only by about 18 percent.

This has neither ensured nor clarified the future fiscal sustainability of those cities or for others with structural debt problems. It has merely perpetuated concerns that cities have found a get-out-of-jail-free card. In May, Moody’s sharply downgraded Chicago’s credit rating, attributing the decision almost entirely to the city’s pension liabilities for its teachers and its inability to pay for schools. Should the Illinois Legislature grant Chicago and other municipalities access to bankruptcy, many fear that municipalities’ political inabilities to rein in pension liabilities could trigger future bankruptcy court decisions that, as in California and Michigan, would have repercussions for municipal bondholders throughout the nation. READ MORE

Are Muni Bonds an Income Equalizer?

Income inequality has reemerged as the central issue in American politics. States and localities across the country are considering a variety of responses, including raising the minimum wage, enacting rent control and expanding affordable housing. But how will we pay for these responses?

Advocates for the “99 percent” have built a simple and compelling story: They blame their situation on taxes, the super-fortunate “1 percent” and a broken promise. For decades, the story goes, the lower and middle classes permitted the rich to pay less than their fair share of federal taxes. More money in the private economy was supposed to mean stronger economic growth, more jobs and better opportunities for everyone else. But instead of reinvesting in America, the 1 percenters took the money and ran. Now the 99 percent want to put an end to tax exemptions, credits and other “tax preferences” that have done little to help them. READ MORE

Municipal Bankruptcy's New Rulemakers

Neither Congress nor the Obama administration had a response -- or even words of support -- when two large U.S. cities lurched into bankruptcy two years ago. And there still isn’t a response now as Puerto Rico, a U.S. territory, heads in that direction.

Well, that’s not entirely true. As Congress completed its 2016 budget resolution in May, it included for the first time in U.S. history a provision of singular discrimination. It barred so-called “bailouts” to municipal corporations, cities and counties -- none of which have ever been “bailed out” -- while leaving unchanged support for federal bailouts of nongovernmental corporations, such as major Wall Street banks and automobile companies. READ MORE

3 Ways to Bring Taxes Into the 21st Century

‘Tax modernization” was a trending topic in this year’s state legislative sessions. It joins “tax efficiency” and “tax fairness” as the latest benign-sounding way to talk about the thorny issue of who will pay for state and local government.

Modernization is tricky because different sides of tax policy debates deploy it to mean different things. To some, it means state and local governments should collect taxes more efficiently. To others, it means we should apply the taxes we have in new ways. A third group equates a modern revenue system with one that enlists lots of different types of taxes. Each of these groups envisions a unique tax system, but you need them all on board to get meaningful policy change. Tax modernization is a nice way to tie all three perspectives together. READ MORE

The Costly Double Whammy of Aging

For years, we’ve been warned of the profound effect America’s rapidly aging population will have on our services. But there are two areas in particular where an aging population poses the largest threat to the fiscal future of states and localities: health-care costs and tax subsidies.

Let’s start with health-care costs, specifically the increasing costs of providing Medicaid coverage for an expanding population of elderly people in need of long-term care. Baby boomers born between 1946 and 1964 are more likely to live longer and exhaust their resources than previous generations. By 2050, when the youngest boomers will be in their 80s, long-term care for the elderly will devour roughly 3 percent of the U.S. economy, up from 1.3 percent in 2010, according to the Congressional Budget Office. READ MORE