The Week in Public Finance: Petitioning for Bankruptcy, Lost Airbnb Revenue and Downgrading New Mexico

A roundup of money (and other) news governments can use.
by | October 28, 2016

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'Put Bankruptcy on the Ballot!'

Activists in financially beleaguered Scranton, Pa., are petitioning for a ballot initiative that would let residents decide if the city should file for bankruptcy. It’s a first-of-its-kind petition and reflects the ongoing frustrations of a city that's been "fiscally distressed" for two decades.

Scranton is one of Pennsylvania’s Act 47 cities, which designates it as fiscally distressed and opens it up to aid and other resources from the state. The designation also means that the city must comply with certain fiscal requirements, such as developing a recovery plan.

But Act 47 has had its problems, the biggest being that it doesn’t seem to provide enough oversight. For example in 2011, the Scranton City Council voted to lower property taxes to provide relief for residents. But the move intensified the city’s budget problems, which included legacy costs, a shrinking tax base and limited access to the credit market. “Why council and executive actions that do not comply with a recovery plan are not constrained by Act 47 is a mystery,” wrote Natalie Cohen, Wells Fargo’s managing director for municipal research, in a recent analysis.

Another big program is that cities languish in the program for decades. The act became law in 1987 and by 2012, 14 municipalities across the state had been in the program more than a decade. Some, like Scranton, have been in the program for more than 20 years.

The Takeaway: Scranton’s recovery plan says it will exit Act 47 by the close of 2017. The city has actually made strides in recent years to stay on schedule, including settling a back pay issue that threatened to drain the city’s coffers and approving some tax increases to help get its underfunded pensions back on track, among others. In short, it’s making all the kinds of decisions municipalities have to make to exit bankruptcy. It’s just doing so without the label.

But it’s understandable, given the length of the city’s fiscal distress, why residents might not have too much faith in that plan. Their frustration and skepticism is a lesson for other states -- such as Michigan and New Jersey -- that have oversight programs for distressed municipalities. Bankruptcy may be a label states would rather avoid, but residents might be clamoring for it if it means it'll get the job done more efficiently.

Losing $440 Million to Airbnb

A new 50-state analysis of Airbnb vacation rental bookings found governments are potentially leaving $440 million on the table this year in forgone tax revenue from Airbnb rentals. One-quarter of that total comes from New York alone, according to the report conducted by the accommodations search engine AllTheRooms.com.

About half of the country doesn’t collect any taxes from Airbnb rentals, while 26 states have statewide or city specific deals to collect some portion of the hospitality tax from the company.

The Takeaway: This total is more of an estimate than a hard figure. The website got to the $440 million total largely through projecting Airbnb’s business this year based on historic totals. Still, the figure highlights an ongoing issue for localities: They're constantly playing a game of catch-up when it comes to recapturing a tax base that is gravitating more and more to the sharing economy.

Good and Bad News for New Mexico

Moody's Investors Service stripped New Mexico this week of its top-rated AAA credit rating, dinging the state for fiscal decisions that have dropped reserves to their lowest level in years. The state, now rated Aa1, recently closed projected deficits for 2016 and 2017 with one-time fixes.

The state’s reserves are expected to equal only 1 percent of recurring revenues at the end of fiscal 2017, which puts pressure on the state’s liquidity and leaves little wriggle room for any more revenue surprises. In its critique, though, Moody’s gave the state credit for not putting off tough budget balancing decisions and for its moderate level of debt.

Meanwhile, New Mexico was highlighted as a model by the Pew Charitable Trusts this week in a report on reducing unemployment insurance fraud. By modernizing two outdated systems instrumental in the reporting process, New Mexico reduced unemployment insurance fraud by 60 percent, or $10 million, between 2012 and 2013.

The Takeaway: The diverging reviews are a reminder of how no state is totally winning or totally losing at the fiscal game. But it does highlight the lengths a state will go to to avoid raising taxes. The state has resorted to a mix of one-time fixes, such as transferring money from the tobacco settlement account, and budget cuts because Gov. Susana Martinez has vowed not to raise taxes.

Of course, the governor ultimately might not have a choice: If the current solutions aren't enough, the state has few other choices down the line.

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