The Week in Public Finance: Cities in the Red, Puerto Rico Lowers Expectations and Second-Guessing Tax Reform Windfalls

A roundup of money (and other) news governments can use.
by | January 26, 2017
Puerto Rico has announced plans to sell its power company, which was devastated during Hurricane Maria in September. (Shutterstock)

How Much Does Your City Owe?

A new analysis of the country’s largest cities found that nearly 9 in 10 don’t have enough money to pay all their bills.

The report was released Wednesday by Truth in Accounting (TIA), a nonprofit think tank that analyzes government financial reporting, using data from 2016 comprehensive annual financial reports. Of the 74 cities studied, New York was in the worst shape. It needs to come up with $179 billion in order to meet its promised obligations.

In total, 64 cities turned up in the red. According to the report, "The bottom five cities are in a financial tailspin due to unsustainable retiree health-care costs, pension programs and shortsighted accounting gimmicks, among other issues.”

The Takeaway: The group also graded cities on their taxpayer burden: None received an A, but 11 received Bs, 23 received Cs, 34 received Ds and seven cities got an F. In almost all these cities, pension debt is to blame. Of the $335 billion in total outstanding debt among the 75 cities, unfunded pension liabilities account for two-thirds and retiree health-care liabilities account for most of the rest.

Taking this into account, it’s easy to argue that since these bills aren’t due today, it’s not as if these governments don’t have enough money to keep providing services. Still, these bills represent a looming burden that is constraining how much cities can spend. It’s similar to those variable rate mortgages that forced many homeowners into foreclosure during the housing crisis: The homeowner isn’t expected to pay off the entire bill at once, but paying down that debt gets more expensive every year and requires tough -- and sometimes impossible -- choices.

 

What a Real Government Shutdown Looks Like

This week, financially destitute Puerto Rico made two big moves seemingly aimed at lowering expectations that the commonwealth will be able to function as a government any time this decade.

On Monday, Gov. Ricardo Rossello announced plans to sell the island’s troubled public power company to the private sector. It was devastated by Hurricane Maria, which in late September knocked out power across the entire island and left 3.4 million residents in the dark. Today, four months later, more than one-third of homes and businesses are still without electricity.

Two days after making the announcement, the governor lowered the bar even further. He warned that the physical damage and population exodus following Maria meant that Puerto Rico might not be able to pay back even a portion of the $74 billion in bond debt that forced the government into bankruptcy.

The Takeaway: It wasn’t too long ago that Rossello’s predecessor, Gov. Alejandro Garcia Padilla, told a group of reporters that Puerto Rico might be able to return to the municipal bond market after two years. At the time, Congress had just passed a rescue bill that gave the government -- a frequent seller in the bond market -- a path to bankruptcy and a way to restructure its debts.

Still, that statement seems laughably optimistic in retrospect. While no one could have predicted the blow that Hurricane Maria would deliver to the island’s fiscal recovery, bondholders were already complaining about the restructuring process. Investors were concerned the fiscal recovery plan was light on details, notes Municipal Market Analytics’ Matt Fabian in his weekly report. Even now, he adds, the “commonwealth still cannot show the regular cost of its basic operations and how that money is being spent.”

Given these conditions, the government’s moves to absolve itself of more debt obligations will certainly invite scorn from bondholders and likely shut itself off from any kind of municipal market borrowing for the foreseeable future.

 

Tax Reform Windfalls? Maybe Not.

Despite reports that many states can expect a revenue windfall thanks to the federal tax overhaul, one group is warning that might not be the case. Calling the word windfall “overstated," the Center on Budget and Policy Priorities (CBPP) estimates that 29 states will either see no revenue impact, lose revenue or see "modest" revenue gains totaling less than 1 percent of general fund spending.

“And in many of those states that could see larger revenue boosts,” the report goes on, “the added revenue would come disproportionately from lower-income families (due to the elimination of the states’ personal exemptions), which would partially reverse states’ substantial progress in recent decades in eliminating income taxes for families in poverty.”

Moreover, the report says, states should “view with caution” any big estimates regarding revenue gains. That’s because taxpayer behavior in response to the new tax code, as well as how accountants and advisors will exploit loopholes for their high-net-worth clients, is a big unknown.

The Takeaway: As such, the report advises policymakers to ignore calls for income tax rate cuts because such a move could hamper a state’s ability to address potential cuts in federal aid and other looming budgetary challenges down the road. It also advises states to consider upping their own corporate income tax rates because businesses are getting such a big break at the federal level.

Given the CBPP's record of criticizing the tax reform plan and its skeptical view of income tax cuts, the report's conclusions aren't suprising. Still, it's worth noting that it's too early to make assumptions about how tax reform will impact state revenues because there are so many variables. To that end, the report has a handy list of the main changes at the federal level that state policymakers will want to keep tabs on. The list includes: a doubling of the estate tax exemption to $11 million per person, doubling of the standard deduction and allowing pass-through businesses to deduct 20 percent of their income before taxes.

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