The Week in Public Finance: Mega-Subsidies Math, a Comeback for Bond Insurance and More

A roundup of money (and other) news governments can use.
by | September 2, 2016

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Megadeals Don’t Add Up

When it comes to economic development, spending more often results in a smaller return.

Looking at more than 170 economic development "megadeals" made in recent decades, a new report finds that states and localities spend more than $658,000 per job on average. By contrast, “most workforce development programs cost only a few thousand dollars per job, and studies find they pay off well,” said Thursday's report by Good Jobs First, which tracks government subsidies.

A megadeal is a subsidy award with a total state and local cost of at least $75 million. The most expensive single deal examined by the watchdog group is a 30-year agreement worth $5.6 billion given by the New York Power Authority to aluminum producer Alcoa.

According to the report, the most expensive jobs have been in the oil and gas industry, with an average price tag of more than $4.7 million in subsidies per job. The least expensive jobs were in finance, which cost slightly less than $50,000 per job.

By contrast, 31 of 33 workforce development programs with available data from state audits cost less than $7,000 per job. Montana had the highest-cost program, paying a little more than $12,000 per person.

The Takeaway: If you're only looking at job creation, this report contains some pretty damning evidence against offering huge tax breaks to lure employers. But to be fair, luring an employer or convincing one to stay also comes with other goodies for states, such as a bump in sales tax revenue from money spent on new construction costs. Another effect to consider is that having one major employer in an industry can often attract others serving that industry -- governments could reap the tax benefit of that increased economic activity.

Still, the precise impact of the indirect benefits is much harder to quantify. And sales tax bumps from new construction are temporary benefits. The real bread and butter in this economic growth recipe is job creation -- as each new job introduces new, stickier money into the local and state economy. So while it’s not an apples-to-apples comparison between tax breaks spending and workforce development programs, it’s not an unreasonable one if you want to look at the cost of growing a local economy.

The report recommends curbing such costs with capping the dollars spent per job. Nineteen states have at least one program with a cap of, in most cases, $6,000 or less.

Retirement Security for All

This week, California Gov. Jerry Brown is expected to sign into law the first state-mandated retirement program for private-sector workers.

The program will be phased in over three years and will require all companies with five or more workers that don’t offer a retirement program to auto-enroll employees in the Secure Choice Retirement Savings Program. The plan will ultimately impact about six million California workers who don’t currently have access to a retirement plan through their employers.

State Treasurer John Chiang called the legislation the "most significant step" toward providing all Californians with a dignified retirement since federal Social Security was created in 1935.

Money is expected to start flowing into Secure Choice accounts next year and will make California the first state to open up a state-run, 401(k)-style savings program for private-sector workers. Illinois has also adopted a program but is still in the process of implementing it.

The Takeaway: More states are now expected to follow California’s lead as most Americans are ill-prepared for retirement and have no retirement savings. Already, Connecticut, Maryland and Oregon have plans for their own state-run retirement programs.

But the real boost for retirement programs like California's came last year when the federal government appeared ready to clear up some ambiguity for states about the rules for private-sector retirement programs. Many states were concerned that the plans would have to conform with the federal Employee Retirement Income Security Act that governs private retirement plans. Last fall, the Government Accountability Office recommended that the secretaries of the Treasury and Labor revise the rules to give states more flexibility in private-sector retirement plans. The Department of Labor released its proposed revised rules one month later.

A Comeback for Bond Insurance

Bond insurers -- companies that provide a money back guarantee to investors on bonds sold by municipalities -- were one of the biggest casualties of the 2008 financial crisis. Governments liked to insure their bonds because it typically allowed them to sell the bond with the insurer’s higher credit rating. That let governments get a lower interest rate cost on the bonds, making it worth the insurance expense. But the insurers’ effectiveness was essentially obliterated when their own credit ratings were downgraded amid the 2008 crisis. A little over a decade ago, half of new bonds issued in the municipal market were insured. Today, just 6 percent are.

While they’re down, bond insurers are far from out.

In their monthly outlook, analysts Alan Schankel and Eric Kazatsky of Janney Montgomery Scott predict insurers are biding their time for a comeback. Some existing bond insurers have restructured since the crisis while a new one -- Build America Mutual -- has come on the scene.

Meanwhile, insurers have been decreasing their exposure to outstanding bonds as governments have not re-upped their insurance when refinancing old debt.

The Takeaway: Low-interest rates have driven down the need for bond insurance because even low-grade governments are getting historically low rates on their bonds. But Schankel and Kazatsky say that has also provided a window for insurers to regain their financial health after losing a lot of money in municipal bankruptcies. When rates rise, more governments will turn back to insurance.

“Bond insurance plays an important role for many municipal investors,” the authors wrote. “We expect that role to expand, along with market share, if not immediately, then in coming months and years.”

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