The Week in Public Finance: The Motherly Advice Edition

A roundup of money (and other) news governments can use.
by | October 17, 2014
Newark, N.J. The Garden State has money problems of its own, but that didn't stop the credit community from giving the green light to a state takeover of the city's finances. Wikimedia Commons/ Doug Kerr

Do as I say, not as I do.

New Jersey may have financial problems, but it’s got nothing on Newark. That’s largely why the state’s takeover of the beleaguered city got a thumbs up from the credit community this week. In an Oct. 13 analysis, Moody’s Investors Service said the state takeover of Newark is good for the city's credit "because it places the state in control of many of local government decisions and remove local government governance from the equation." It has to be noted, however, that New Jersey is no shining example of fiscal responsibility – in May, Moody’s downgraded its credit rating, citing recurring revenue shortfalls, depleted general fund balance, and ongoing reliance on one-time budget fixes that deferred structural imbalances into future years. But then again, the agency’s A1 rating for the state is a whole tier better than its Baa1 rating of Newark.

Back to Newark – Moody’s said the power of the state to lay off employees, renegotiate union contracts and cut health benefits are all positives for Newark’s financials. (Definitely not so positive for city employees.) Atlantic City is the only other New Jersey city under formal state supervision. Like New Jersey, Newark ended the last fiscal year with with a revenue shortfall and has raided its general fund balance to make up the difference. Newark faced a $30 million operational deficit related to the anticipated sale of municipal property that never happened and the city’s failure to process its annual tax lien sale. Those mistakes depleted the fund balance to zero on Dec. 31 for the first time in at least a decade. (As recently as 2008, the city's fund balance had reached a high of $50.7 million, or 7.8 percent of revenues.) Thus, Moody’s said, Newark's reliance on cash flow borrowing has also increased, reaching $75 million this year from $55 million in 2013.

Do your homework. Seriously.

The Municipal Market Advisors warned this week that investors looking at local governments with any hint of distress had better take a hard look at pension debt load. Developments in the bankruptcies of Stockton, Calif., and Detroit have “jeopardized the repayment of capital market creditors,” MMA said, and ultimately pensioners are making out better than bondholders when a city is forced to restructure its debts. The firm advised that local governments’ investment worthiness be viewed “holistically,” meaning that “the costs associated with repaying public debt plus pensions plus OPEBs (retiree healthcare) plus direct loans and other important contractual relationships should be considered when modeling payment capacity.”

Keep your eyes on the road (ahead).

Even as economic progress slowly inches along following the Great Recession, Janney Montgomery Scott already has its eyes on the next downturn. The firm this week released an analysis of federal aid trends for states and localities during recessions over the past 40 years aimed at identifying patterns. What it found is, well, there aren’t any.

Sometimes the aid is great, like the 2009 Recovery Act. But sometimes, like during the early 1980s and 1990-91 recessions, there isn’t any assistance at all that targets state and local governments, the analysis found. So, with recent political gridlock and cost-cutting threatening the possibility of any agreement on assistance during the next recession, Janney analyst Tom Kozlik concluded, “we do not think investors should count on federal assistance in the near term for state and local governments.”

This is a problem because many state and local governments are not prepared for the next downturn yet; reserve funds are still low and the economy hasn’t totally bounced back in most places. That means that some places could suffer even more the next time the economy contracts. Governments that are best poised to weather the next fiscal downturn are “high quality municipal issuers, or those with stable or improving credit profiles, and in traditional municipal sectors,” Kozlik said. “They are the issuers that have their fiscal houses in order, have not leveraged themselves excessively, have not taken on risks outside of their primary missions and will not need to count on a federal government bailout.”

Make new friends but keep the old.

The Tax Foundation on Oct. 16 honored New York Gov. Andrew Cuomo with the Outstanding Achievement in State Tax Reform award “for championing a comprehensive corporate tax reform bill that will transform New York’s treatment of corporate taxes from one of the worst in the country to one of the best.” It’s an especially notable honor, considering the fiscally conservative foundation was once derided as a “right-wing think tank” by a top Cuomo administration official.

New York’s reforms in 2014 caught the eye of the foundation for lowering the corporate income tax rate to the lowest level since 1968. As these reforms phase in, New York’s corporate tax system will improve from 25th place to 4th best in the nation in the foundation’s rankings. A less impressive feat is the state’s overall ranking on the foundation’s annual State Business Tax Climate Index, which will improve from 50th to 48th.

The foundation awarded D.C. Council Chairman Phil Mendelson the follow day (Friday) with the same award. The council passed tax reforms this year that decreased the tax burden on the middle-class and also lowered the corporate tax. The foundation hands out the award to six people each year; the remaining four will be announced next week.