The Week in Public Finance: Pensions Protest Bathroom Bills, a Billion-Dollar Showdown in Kansas and More

A roundup of money (and other) news governments can use.
by | February 24, 2017

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Pension Funds Mess With Texas

The country’s largest public pension systems and investors are pressuring Texas officials not to approve a so-called bathroom bill introduced in January. The legislation targets transgender individuals by requiring them to use the public restroom that aligns with the gender on their birth certificate.

Pointing to North Carolina, which lost hundreds of millions in business from canceled sporting events, concerts and conventions after its bathroom bill became law last year, the group warned in a letter that Texas could meet the same fate. Already, the National Football League and the NCAA have said that the siting of future events in Texas would be jeopardized if lawmakers move forward.

The more than 30 signatories on the letter include comptrollers, controllers and treasurers of California, Connecticut, New York, Oregon, Rhode Island and Vermont, as well as major firms such as BlackRock and T. Rowe Price. Collectively, the group represents more than $11 trillion in assets.

The Takeaway: Threats like these aren't new. Called social divesting, stewards of major pensions have increasingly urged corporate boards in recent years to make policy changes, such as pressuring energy companies to move away from fossil fuels.

But wading into another state’s politics is unusual. And we’re talking significant amounts of money. California’s public employees fund (CalPERS) and its teachers fund (CalSTRS), the two largest pension funds in the country, have billions invested in Texas holdings. Of CalPERS’ nearly $303 billion in assets, just under $15 billion (about 5 percent) is invested in Texas holdings, according to data from the Controller Betty T. Yee’s office. CalSTRS has roughly $5.6 billion of its nearly $200 billion portfolio, or 3.5 percent, in Texas holdings.

If the other investors in the letter have similar shares related to Texas and ultimately decide to divest, the total cost to Texas could number in the hundreds of billions.

A Billion-Dollar Showdown in Kansas

Kansas Gov. Sam Brownback kept his tax reform package -- and its $1 billion budget shortfall -- in tact this week by preserving a tax loophole that lets scores of business owners pay no income tax.

At issue is a tax exemption for what are called pass-through businesses. These businesses are not incorporated, and therefore are not subject to the corporate income tax. Instead, income is reported on the business owners’ personal tax returns. Pass-through businesses are typically small but also include some major companies like Chrysler and Kaiser Permanente.

Brownback’s 2012 tax reform packages exempted the state’s more than 330,000 pass-through businesses from any income tax. Experts like the Tax Foundation warned at the time the package would lead to deficits and encourage tax dodging. Still, lawmakers five years ago not only signed off on the idea, they stuck back in some of the credits and deductions that Brownback would have eliminated to help pay for the cuts.

The Takeaway: The Kansas Legislature tried but failed this week after a Brownback veto to eliminate the pass-through exemption in an effort to raise revenues. The events indicate a far different legislature from the one in 2013 that, facing a $300 million revenue gap, could only stomach cutting spending by $150 million.

Years of dealing with shortfalls seem to have worn legislators down. “Everything’s going to be chaotic for a while,” House Minority Leader Jim Ward told the Kansas City Star. “At the end of the day, you’re going to see a plan substantially similar to what was rejected by an obstructionist governor and his followers in the Senate.”

Old vs. New States

The Dakotas, Nebraska and Utah rank as some of the most competitive and financially sound states, according to the financial advisory firm, PwC. On the other end of the spectrum, Connecticut, Illinois, Kentucky and New Jersey rank among the least stable states.

The rankings were based on state financial data compiled by the Institute for Truth in Accounting, net migration data from the U.S. Census Bureau and business climate assessments by CEO Magazine, CNBC and Forbes.

Despite budget woes and out-migration, oil states still ranked well in the PwC model thanks to their substantial budget reserves and low-debt profiles.

The Takeaway: The overall rankings picture is a good illustration of old states and their legacy problems. All of the states in the top 10 are in the West or Midwest. Meanwhile, eight of the 10 lowest-ranking states are in the East. Nearly all of these states face significant unfunded pension and retiree health-care obligations and are losing population. “As a result,” the study says, “the higher ranked states generally are better positioned for the future while the lower ranked states need to engage in a range of transformational reforms in order to help create a better future.”

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