The Week in Public Finance: Credit Downgrades, the Growing Life Expectancy Gap and Pennsylvania’s Quasi-Budget

A roundup of money (and other) news governments can use.
by | January 8, 2016

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

Alaska Gets Downgraded

Alaska continues to flounder over how to compensate for lost oil revenue. This week, the uncertainty was enough for Standard & Poor’s (S&P) to downgrade the state’s credit rating from a top-rated AAA to AA+. On top of that, the governor instituted a hiring freeze and travel restrictions for state employees.

More than any other state, Alaska’s budget has been hammered by the drop in oil prices this past year. The state relies on oil revenue to fund nearly all of its operations. It withdrew $2.8 billion out of its savings to close a budget gap in 2015, and this year’s budget relies on a $3.4 billion withdrawal even after cutting about $1 billion in spending.

S&P warned that it would likely keep dropping Alaska’s credit rating unless lawmakers enact “significant fiscal reforms." Gov. Bill Walker has proposed just that. His fiscal 2017 budget includes the state’s first income tax in more than three decades. While small -- about 1.5 percent for most Alaskans -- the tax likely won't be popular with residents. The budget proposal would also restructure the state’s $47 billion Permanent Fund, a low-risk investment fund that is fed by about one-quarter of the state's oil revenue and pays an annual dividend to residents. The state would seize the fund, increase the amount of oil revenue going toward it by half and put the fund's investment earnings toward future operating budgets. The other half of oil revenue would be used for residents’ dividends. This year’s payments were about $2,000; under Walker’s proposal, payments would likely be cut to $1,000.

In a report issued this week, Moody’s Investors Service, which still rates Alaska as AAA, called Walker’s proposal a “bold effort” to move the state away from its reliance on oil. But it also noted that the increased tax burden and decreased dividends for residents make it politically difficult to pass. The debate will dominate this year's legislative session, which begins Jan. 19.

Rethinking Retirement

Don’t have a college degree? You may want to retire sooner than you think. While people of all incomes and education levels are living longer, a new study found a growing gap in life expectancy between the two socioeconomic ends of the spectrum.

The Boston College Center for Retirement Research (CRR) found that men and women with the highest attainment of education are expected to live about 3.5 years longer than those with the lowest. In 1979, the difference was only about one year. This means that the least educated Americans will have to retire about a year and a half sooner than the most educated in order to have an equal portion of their life spent in retirement. This information is particularly pertinent to governments looking at raising their employee retirement age -- as New York and Delaware have already done.

"Policymakers seeking to encourage working longer," the brief states, "should be cautious about the potential effects that such policies could have on inequality.”

Working Out Some Kinks

After a more than six-month standoff, Pennsylvania now has a partial payment plan in place that will save public schools from borrowing more money to stay open. Late last month, Gov. Tom Wolf freed up $23.4 billion for schools, contractors, vendors and nonprofits that rely on state subsidies to operate. Wolf allocated the money via line item vetoes in a $30.3 billion budget passed by the state House and Senate.

The state’s budget impasse has been driven by an increasing gap between slowing revenues and growing expenses, including mounting pension obligations. The Republican legislature has refused to consider Wolf’s tax increases to right the balance.

The partial funding was seen as positive by S&P, but the credit rating agency is "also waiting to see how further deliberations play out." S&P added that the legislature's vetoed budget did nothing to solve the state’s structural deficit -- it left a $500 million budget gap for fiscal 2016 and a $2 billion budget gap for fiscal 2017. S&P warned that the longer lawmakers debate, the more likely they'll fail to pass a structurally balanced budget for this year and instead continue to rely on one-time measures to fill the gap. That "could add to the growing revenue and expenditure misalignment and increased pension funding pressures," the rating agency said.

Illinois also remains without a budget. It too faces a similar structural imbalance, mounting pension obligations and a divided government. While K-12 funding is one of the few things lawmakers there actually have agreed on for the year, the state’s higher education institutions are now starting to worry about how they’ll afford to stay open if the impasse continues.