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The Week in Public Finance

This week's roundup of money (and other) news that governments can use touches on fiscal health predictions, marijuana money, tax heroes and more.

Fiscal health predictions, pot problems, tax heroes and more are covered in this week's roundup of money (and other) news governments can use.

States: 1, Locals: TBD

State financial health in 2014 looks rosier than that of local governments, at least to Janney Montgomery Scott analyst Tom Kozlik. He issued two reports last week (see below) assessing the financial climate for states and localities and, at least for now, state governments are on the whole looking more stable (with some exceptions). The positive outlook for states comes generally because they have a better ability to raise revenue while local governments have less flexibility to do so. State tax revenues were up 9 percent year over year in the second quarter of 2013, compared with the corresponding quarter in 2012, Kozlik notes. And preliminary data for the third quarter shows revenues are expected to be about 6 percent higher. 

But Kozlik notes that the majority of localities are highly rated and many are “facing the post-2010 environment with open eyes. They have started to or already are budgeting conservatively, and not taking excessive risks.” It’s just that some continue to believe that the pre-recession fiscal climate will return. And, quite frankly, that’s not happening any time soon, if ever. Kozlik estimates as many as one in five local governments has not adjusted to this economic reality and is susceptible to a downgrade. He expects that downgrades will continue to outpace upgrades in 2014.

But the “cautious” outlook assigned to local governments “does not mean investors should shun local governments,” he says. “It simply means investors need to be increasingly conscious of the factors pressuring local governments and investors must carefully assess credits on an individual basis.”

Pot predictions

This week’s Municipal Issuer Brief by Municipal Market Advisors shines the heating lamp on marijuana. Now that Colorado and Washington have legalized pot for recreational use, MMA predicts a whole slew of dicey issues to arise this year. “MMA has been monitoring this issue as a potential new revenue stream for states and localities to securitize to meet growing infrastructure needs,” analyst Matt Posner writes. “Alaska, Maine and New York have recently advanced efforts to legalize the plant. This could be very important—but divisive—revenue issue to monitor in 2014.”

And the award goes to…

The Tax Foundation this week announced the winners of its new award, the Outstanding Achievement in State Tax Reform award. The foundation said winners were selected due to “their extraordinary efforts to advance the cause of simpler, smarter tax policy.” Among the six winners were Indiana Gov. Mike Pence, who lowered the state’s income tax and eliminated the inheritance tax; Michigan Gov. Rick Snyder, who dropped the state’s cumbersome Michigan Business Tax in favor of a corporate tax; and North Carolina Senator Phil Berger, who was instrumental in the effort to lower that state’s income taxes. The award extends to non-elected officials too – Ohio activist Ron Alban was honored for his effort in 2011 to coordinate a grassroots effort that led to the repeal of the state's estate tax beginning in 2013.

So, I can retire when?

A new paper by the Center for State and Local Government Excellence’s Elizabeth Kellar and Joshua Franzel takes a look at the trend of retirement benefits for newer workers being less generous than they have been for prior generations. In some places this can mean that city and county managers need to look at the management challenge of people working side by side with very different compensation packages, the authors note. Another concern is that new hires will be less motivated to stay with the organization as long in places where the vesting requirement has increased.

“The implications of these changes for a new employee are significant,” Kellar and Franzel say. “Traditional defined-benefit pensions simply will not provide as much retirement income in the future as they did in the past. Saving for retirement will require more individual effort, although employers can make it easier for people to save.”

Rules, rules, rules

The Municipal Securities Rulemaking Board issued its new rules for Municipal Advisors this week and they are open for public comment until Mar. 10. The proposed rule "requires municipal advisors to disclose all conflicts of interest to their clients and to document the nature of their relationship with their clients, including compensation arrangements and the scope of advisory activities to be performed," the MSRB says. Board officials said they extended the usual 30-day comment period to 90 days in order to accommodate what they expect will be a high amount of interest from governments and financial firms.

Read Janney's reports here:


Liz Farmer, a former Governing staff writer covering fiscal policy, helps lead the Pew Charitable Trusts’ state fiscal health project’s Fiscal 50 online resource.
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