The Week in Public Finance: Wells Fargo's Punishment, a Surprising Study and Kansas' Forecasting Blues

A roundup of money (and other) news governments can use.
by | October 7, 2016

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Governments Punish Wells Fargo

Some governments are temporarily cutting ties with Wells Fargo thanks to a scandal involving thousands of unauthorized accounts.

This week, Illinois and the city of Chicago announced they're joining California and suspending their relationship with the bank for at least one year. Meanwhile, Massachusetts, Oregon and the city of New York are reviewing their business ties with the firm.

The sanctions are in response to a $190 million settlement in a case where Wells Fargo staff were accused of opening checking, savings and credit card accounts without customer approval for years to satisfy managers' demands for new business.

Since then, the bank has fired 5,300 employees over the issue and announced plans to end its controversial employee sales goals program.

The Takeaway: Suspending business with a bank has real, immediate implications. Not only do governments have accounts with the bank, they also use the firm to help underwrite municipal bond sales. This all amounts to a lot of money.

Illinois, for instance, has $30 billion in state investment activity with the bank, while Chicago has paid Wells Fargo $19.5 million in various fees since 2005.

The settlement is reminiscent of the huge penalties that financial firms paid for their subprime lending abuses that led to the 2008 financial crisis.

Alluding to that, California State Treasurer John Chiang said this week that “Wells Fargo is just the most recent example of the craven abuses that can be perpetrated when a financial institution comes to serve itself rather than its customers.”

Study Finds Pension Costs 'Under Control' for Many

This may come as a surprise to some: Pensions, retiree health-care and debt payments seem “under control in many jurisdictions," according to a new analysis that looked at the total burden of fixed costs on state and local budgets. "But a handful face an enormous challenge."

The brief, produced by Boston College’s Center for Retirement Research, breaks down what share of the revenue generated by states, counties and cities are devoted to these costs.

About three-quarters of all states have required payments below 15 percent of their revenue, and 23 of those states have fixed costs below 10 percent. (Government best practices tend to argue that cost burdens for states become a concern when they exceed 15 percent and untenable when they exceed 25 percent.)

SOURCE: Boston College’s Center for Retirement Research

On the flip side, five states -- Connecticut, Hawaii, Illinois, Kentucky and New Jersey -- face cost burdens higher than 25 percent. Illinois and Kentucky’s burdens are largely driven by pension debt, while retiree health-care costs are more significant in the other states.

Counties and cities face higher burdens, although that’s partly because they rely less than states on their own revenue for total spending. That said, a number of California counties are in rough shape with more than half of their own revenue going toward these fixed costs. In Fresno County, that share is more than 60 percent -- with nearly all of it going to pension payments. Among cities, Chicago pays a similar share to Fresno but about one-fifth of its costs are for debt service.

The Takeaway: The report’s authors said it best: “Generally, people lump together these unfunded liabilities and make alarming claims that all state plans are about to go bankrupt. The evidence, though, suggests otherwise.”

It’s also important to note that pensions aren’t the only cause of tight budgets. Wichita, Kansas, for example sees 40 percent of its own revenue going toward fixed costs -- but three-quarters of that is for debt service. This means that the solutions to managing these fixed costs vary from place to place.

Is Kansas Trying to Hide in Plain Sight?

The day after Kansas’ Department of Revenue reported that tax collections are coming in $45 million short of projections, a state task force announced it wants to stop releasing those reports altogether.

The state’s revenue projections have fallen short more often than not since 2013. That's when Republican Gov. Sam Brownback and the legislature pushed through the state's largest income tax cuts that were supposed to help stimulate the economy. Instead, the state has suffered major blows ever since, including credit rating downgrades and budget shortfalls.

As a result, the governor begrudgingly pushed to increase sales and other taxes last year -- a proposal that barely passed the Republican-controlled legislature and led to its longest session ever.

The consistent discrepancies between the state's projections and actual outcomes have driven a debate in Topeka about whether the tax cuts or the forecasting method is to blame for the financial problems. Now instead of releasing the actual figures compared to forecasted figures each month, the state task force wants to compare each month with the corresponding one a year earlier. In other words, how's the state doing in October 2016 compared to October 2015?

The Takeaway: Even if something is off with Kansas’ revenue forecasting, eliminating these reports won’t change that. In fact, all it would seemingly do is cut down on some embarrassing news stories.

According to the Lawrence Journal-World, Revenue Secretary Nick Jordan blamed the off forecasts on “kind of a storm of tax policy changes and the economy lagging behind. That’s not just Kansas,” he added. “That’s nationally. That’s the states surrounding us.”

Not quite.

Few states have epicly struggled with such significant shortfalls in recent years. And none of those states have been Kansas’ neighbor.

In fact, a look at the economic output of states shows that Kansas’ GDP growth in 2015 (0.2 percent) underperformed its neighbors. Arkansas, Colorado, Iowa, Missouri, Nebraska and Oklahoma all posted between 0.8 percent and 3.6 percent growth. Of the so-called Great Plains states, only North Dakota had a lower economic output (-2.5 percent), and that's because of its dependence on oil revenues, which have dropped dramatically. Nationally, GDP growth in 2015 was 2.4 percent.

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*CORRECTION: A previous version of this story mistakenly stated that the capital of Kansas is Wichita.