The Week in Public Finance: Special Sessions, Chicago's Pension Deal and a Historically Giant Tax Break
A roundup of money (and other) news governments can use.
For previous editions of "The Week in Public Finance," click here.
Special Session Begins in Alaska
After failing to agree on a budget for the 2017 fiscal year, Alaskan legislators met this week to begin a special session. The state is one of a handful that has yet to pass a budget for the upcoming year, which starts in five weeks for most. But Alaska is arguably in the toughest position.
Lawmakers extended their regularly scheduled session but still failed to decide how or whether to enact fiscal reforms that would close its structural budget deficit. According to Standard & Poor’s, the continued “impasse risks a government shutdown starting on July 1 when the state's new fiscal year begins.”
The cause of Alaska’s woes is simple: The prolonged drop in oil prices has hammered its budget, which largely relies on oil revenue. To meet expenses, the state has drawn out of its substantial rainy day fund over the past two years. As a result, its top AAA credit rating was stripped away in January.
The solutions, however, are not so simple. Gov. Bill Walker wants to completely revamp Alaska’s revenue system, which includes implementing the state’s first income tax in more than three decades and significantly reducing the annual stipends that residents receive from oil revenue. Instead Walker wants to funnel more of that revenue into a new state investment fund to support the budget. Still, legislators disagree about how many -- if any -- of those proposals to adopt, and many still want to tap into the state's rainy day fund again to balance the budget.
The Takeaway: Alaska isn't the only state confronting big revenue questions this year. West Virginia has called a special session to pass a budget, too. Of the 13 states that have yet to enact a 2017 budget, four of them, -- much like Alaska -- are energy-dependent states. (One of them, Oklahoma, did announce a budget deal this week, but it is awaiting the governor’s signature.) Of course, oil and natural gas aren’t the only culprits for budget woes. California, which relies heavily on revenue from residents’ investment earnings, is dealing with a changing revenue picture as the volatile stock market has taken a bite out of its income tax revenue collections this year.
A New Deal in Chicago
Chicago, which has one of the worst funded pension plans in the country, announced a major deal to restore one of its pension funds back to health.
The deal would have the city pay about $70 million more per year into the so-called Laborers' fund. In exchange, unions agreed that new employees would contribute more of their salary into the fund, which serves about 5,000 mostly blue-collar workers.
Unless the deal is approved by the legislature, the fund is projected to be broke in a little more than 10 years. If it is approved, city officials estimate it will be 90 percent funded by 2057.
Chicago has passed pension reforms before -- only for them to be struck down by the state Supreme Court. But this deal differs from the previous reforms because it only applies to future employees.
Moody’s Investors Services had a tepid review of the plan, noting that the “city's funding commitment reduces the risk of insolvency” but still doesn't figure out a sustainable way to afford long-term higher pension costs.
“Accommodating higher pension contributions to all four of its pension plans … in annual operating budgets will be an important factor in Chicago’s credit trajectory,” said the ratings agency, which rates Chicago bonds at junk status.
The Takeaway: Changes that only affect future workers don’t do anything to help lower a pension plan’s current liability. Still, when a plan is close to insolvency, any long-term change helps, and that’s what Chicago has achieved here -- as long as the state legislature approves the plan.
The city’s largest municipal plan, which serves most white-collar workers, is in worse shape. No deal is in sight, and it has about one-third of the assets it needs to meet its total liabilities. It could run out of money in about 10 years. Chicago will likely use a similar model -- increased city payments/increased future worker contributions -- to tackle that plan’s funding. But how to pay for it is still a big question mark. Another tax hike seems all but assured in Chicago.
Boeing's Historic Tax Break Is Even Bigger Than You Thought
New data shows that what was already thought to be the most expensive incentive deal in history actually far surpasses initial estimates.
In 2015, Boeing got $305 million worth of tax breaks and credits from Washington state. That's 55 percent more than the state estimated the entire aerospace industry would cash in for that year. Similarly, in 2014, Boeing estimates it got $217 million -- 19 percent more than the state's estimated total tax break for the entire aerospace industry.
When lawmakers approved the Boeing package in 2013, it was estimated that Boeing’s tax breaks would total $8.7 billion through 2040. The first two years of tax breaks put Boeing on pace to far exceed that amount.
The Takeaway: Tax breaks have been a controversial issue as state and local government revenues tighten. Accountability has generally been poor, and governments are inconsistent at tracking them. Boeing’s figures are thanks to a new regulation in Washington state that requires businesses to report the value of their tax breaks. Nationally, new accounting rules recently went into effect that seek to do the same. Boeing’s figures have been an eye-opener for lawmakers in Olympia -- and are probably a precursor of things to come for lawmakers across the country.