The Week in Public Finance: Online Sales Tax, Pension Reform and Getting Real About Ratings
A roundup of money (and other) news governments can use.
For past editions of the Week in Public Finance column, click here.
New life for taxing online purchases?
U.S. Rep. Jason Chaffetz (Utah) is bringing the online sales tax debate back to the chamber where similar legislation abruptly died last session. Chaffetz, a Republican who The Hill newspaper calls a younger and more “television-friendly face” than previous GOP champions of the idea, introduced his own version of the Marketplace Fairness Act (MFA) that allows states to collect sales tax on online purchases. The MFA passed the Senate but failed to pass the House last year.
Like the MFA, Chaffetz’ bill would allow states to collect sales taxes from online purchase made by their residents. But it allows a few more provisions to alleviate some of the pressure on small businesses to comply. For one, it includes significant audit protections for small businesses. And, except in rare cases, it exempts businesses with under $5 million in gross receipts from remote state audits entirely. The MFA only exempted businesses under $1 million total receipts. The Chaffetz plan also calls for states to give remote sellers the software needed to collect and remit the taxes due. It would also require states to pay for set-up, installation, and maintenance costs on the software.
The bill, introduced on June 15, earned immediate support. The National Conference of State Legislatures said it supports it “without reservations” and the National Retail Federation also applauded the bill. Despite the new face and bipartisan support, the bill still faces a tough road. House Speaker John Boehner, who was the main reason the MFA stalled in the House last session, has made no indication that his stance on the issue has changed. And in the Senate, former majority leader Harry Reid’s leadership was the main force behind the MFA’s passage there last session. Current Majority Leader Mitch McConnell is an outspoken opponent of the measure.
What’s next for pensions? Depends on the state.
The slew of court rulings on pension plan protections in recent years has resulted in everything from a total rejection of any changes (in Illinois) to approval of some changes but not others (in Oregon) to allowing cuts to retiree pensions in the rare case of municipal bankruptcy (in Stockton and Detroit). Standard & Poor’s rating agency took a look at what all this means and concluded in June 18 report that – surprise, surprise – there is a wide variety among the states in what’s allowed and what’s not, and as a result, the funded status of the pensions themselves varies considerably.
"Reform efforts seem to be slowing as all states have already proposed reform with varying degrees of success," said Standard & Poor's credit analyst John Sugden in a statement. "However, the gap is growing between well-funded and poorly funded pension plans. Despite six years of economic expansion, many states face budget gaps in either fiscal 2015 or fiscal 2016, or both years, and lean budget margins could lead to a greater reluctance for struggling states to fund actuarially determined contributions," he added.
The S&P report also noted that “a significant amount of states” in 2015 aren't funding their pensions sufficiently, which it believes “will continue to weaken their liability profile and potentially adversely affect their creditworthiness.” Governing has also covered this issue; click here to look up how some of the largest pension plans are faring and how much of their actuarially determined contribution they received from their state last year.
The dirty business of paying for ratings
An analysis by Municipal Market Analytics this week noted that the number of government issuers seeking two or three ratings on their bond offerings is slipping. Several factors are at play, wrote analysis Matt Fabian, but a big one appears to the fact that issuers pay for ratings and they don’t enjoy paying for a lower rating. The result is that whichever ratings agency is trending higher, issuers tend to opt just for a rating from that agency. For example, Fabian said Moody’s saw a small bump in its market share in 2011 following its rating recalibration in 2010 which resulted in a number of upgrades. But since then, S&P has had the advantage. “Moody’s more cautious view of credit and S&P’s criteria change that raised a significant number of local government ratings has resulted in S&P gaining market share as Moody’s has waned,” Fabian’s report said.
Another factor is the still relatively young Kroll Ratings agency, which is offering its services at a cheaper price. According to Fabian, Miami International Airport recently chose to obtain a Kroll rating (which was higher) and drop its Moody’s rating, which was lower and cost about 30-to-40 percent more. “As increasingly cost-conscious issuers consider issuing debt the immediate and future costs of obtaining and maintaining ratings,” Fabian warned, “the benefit of multiple ratings or high cost opinions will reasonably come under scrutiny.”