The Week in Public Finance: Downgrades, the Next Recession and Bad Holidays

A roundup of money (and other) news governments can use.
by | August 21, 2015
Moody's recently downgraded the credit rating of St. Louis. (Wikimedia/ Brian Holsclaw)

For previous editions of The Week in Public Finance column, click here.

Not Making the Grade

Two governments received some bad news from ratings agencies this week. In Alaska, Standard & Poor's revised its outlook on the government’s general obligation and appropriation-backed debt from stable to negative. A lowered outlook means the agency could downgrade Alaska if conditions don’t improve. Moody’s Investors Service also lowered its outlook for Alaska back in December. In S&P’s Aug. 18 release, it cited the state’s large structural budget deficit. Alaska dipped into its rainy day fund earlier this year to close a more than $3 billion budget hole. It's facing a similar gap this year as revenues from oil taxes plunged. "We expect that if lawmakers do not enact significant fiscal reforms to reduce the imbalance within the next year, the state's rating could begin transitioning downward,” said S&P analyst Gabriel Petek. He added that the rating could even get worse “if lawmakers continued to fail to act as the state's budget reserves (not including the permanent fund) approached depletion.”

In St. Louis, Moody’s downgraded the city’s credit rating one step to A1, citing “the city's weak socioeconomic profile; reliance on earnings taxes which are due for voter reauthorization in 2016; a relatively narrow financial position; and a high debt burden.” A lower bond rating means it could get more expensive for the city to borrow money in the future. Not great news for a place with dwindling hopes of keeping its pro football team happy with a new stadium. Still, Moody’s did say St. Louis’ credit challenges are balanced against several attributes, including a diverse economy, relatively stable financial performance and recent declines in pension costs due to reforms.

Time to Panic?

As more pension funds announce low investment returns for fiscal 2015 and a fair number of states continue to grapple with budgets and fiscal burdens, it’s making it a little harder to sleep at night these days. Add in the fact that the U.S. economy has averaged a recession every six years since World War II and it has been about seven years since the last contraction, and one can’t help but wonder if we are overdue.

This is all to say that this month, when Francis Gannon, co-chief investment officer at Royce Funds, told the New York Times he thinks we are at an inflection point, it’s not without reason. Speaking to the doubt that many are having about the fact that companies with no earnings should trade at what the Times calls sky-high valuations, Gannon said, “the laws of finance have been suspended for quite some time. Now this is starting to crack. I think we are on a road to normalization.”

If that’s true, then states like Illinois, Kansas, New Jersey, Louisiana, Alaska and Pennsylvania (to name a few), that are dealing with significant imbalances between their expenses and incomes could be staring at a serious fiscal cliff. Most states were doing pretty well before the 2008 recession hit and just about all of them had to make extremely difficult cuts. The thought of facing a recession when the books are already out of balance is a scary one indeed.

A Not-So-Jolly Holiday

The Tax Foundation released a report this week saying state sales tax holidays are politically expedient but financially bad tax policy. Many of the 18 states that offer consumers a break from paying sales tax on select purchases occur in early August to encourage more back-to-school spending. (In addition to clothing and school supplies other sales tax holidays at different times in the year focus on computers, hurricane preparedness supplies, products bearing the U.S. government’s Energy Star label, and even guns.) But the fiscally conservative foundation’s analysis said that sales tax holidays don’t encourage more spending; they simply shift the timing of purchases. Some retailers even raise prices during the holiday, reducing consumer savings and increasing their own profits, the foundation found.

The foundation even questioned the tax break’s benefit to low income families, noting it gives a small amount of tax savings to those with lower incomes and a large amount of savings to higher income groups. The report argued that vouchers or rebates available to low-income consumers at any time of year would be more effective policy. “If the purpose of sales tax holidays is to make school supplies and clothes cheaper for low-income individuals, then a 4 to 7 percent price reduction for all consumers, but only for a brief period, is an odd and ineffective way of achieving that,” the report said. “It’s an example of politicians using a fire hose when a garden hose will do a better job.”