The Week in Public Finance: Economic Euphemisms, Struggling Cities and Silver Trumps Gold
A roundup of money (and other) news governments can use.
It’s the NEW economy, stupid!
Everyone keeps talking about this “new economy,” which usually is just a nicer way of saying “slow economy.” But why, dear doctor, are we still unhappy so many years after the recession officially ended? Following a recession, local governments tend to post great bounce-back numbers. Three years after the 2001 recession, for example, sales taxes nationally rebounded to as high as an 8.6 percent annual increase. But returns in 2012, three years after the recession ended in 2009, marked a mere 3.6 percent increase. Standard & Poor’s took another look at the problem this week (the week beginning April 14) and had this to say in a new report: blame it on the housing recovery.
When people buy property, it creates a spending multiplier in the economy because they tend to dump money into that house as long as they’re living in it. (Just ask Tom Hanks’ character in the 1989 comedy, The Burbs, or his 1986 one in The Money Pit.) But S&P notes that research shows this latest housing recovery differs from that of the mid-2000s in that a higher portion of home purchases have been for cash. This suggests that much of the buying has been by investors as opposed to owner-occupiers. “Therefore, despite the recovering home prices, the greater-than-usual participation by investors has muted somewhat the economic multiplier that typically accompanies a housing recovery, resulting in softer sales tax trends,” S&P says.
The report notes that home purchases in the most depressed places are improving. Traditional home sales in Nevada accounted for 70 percent of home purchases in February, up from 51 percent in the prior year. “What we don't know,” S&P adds, “is whether this is because owner-occupiers are entering the market or if investor-buyers are exiting.”
Poor, poor Michigan
Just when one city in Michigan gets its head above water, another one is gets caught in the undertow. Earlier this month, the state treasurer’s office announced that Michigan's financial control over Pontiac is finally reaching an end. But now a state review team has declared a financial emergency in the city of Lincoln Park and sent a report to Gov. Rick Snyder for his review. According to the report, Lincoln Park officials committed a number of big public finance no-nos, including, borrowing $2.5 million from its Water and Sewer Fund to make an annual pension payment and defaulting on a loan from SunTrust Bank.
Detroit going for the record
Speaking of Michigan, Detroit Emergency Manager Kevyn Orr appears on track for what could be one of the fastest municipal bankruptcy trials ever. He reached two key settlements this month. And they’re big settlements – they affect thousands of retirees, a group that has been very vocal about potential cuts to benefits checks. On Wednesday, the General Retirement System board voted in favor of a monthly 4.5 percent reduction in pension checks and the elimination of annual cost of living adjustments for members. Orr has also reached a tentative agreement with the Detroit Police and Fire Retirement System. Together, the two pension funds represent some 23,000 active members and retirees.
Orr is making steady progress on his goal to have Detroit exit bankruptcy by the end of this year. That means the whole process would be finished in under 18 months -- an astonishingly fast pace for a city of its size (more than 700,000 residents). Central Falls, R.I., (population 19,400) holds the record for the fastest municipal debt adjustment in the country when it left bankruptcy protection in 2011 after 13 months.
Movin’ on down
Fitch Ratings agency reports that public finance downgrades outnumbered upgrades during the first three months of the year. This isn’t a big surprise as this has been the trend for Fitch (and Moody’s for that matter) for the past year. In total, Fitch last quarter downgraded 37 credits (5.2 percent of all rating actions), affecting $51.9 billion in value. Fitch upgraded 21 credits, which represented 3 percent of all rating actions and $2 billion in value. The vast majority of the actions ratings agencies take (in Fitch’s case, 88 percent last quarter), however, are affirmations of a credit rating.
Get rich in Nevada without setting foot in a casino!
In case your friends think public finance isn’t entertaining, pass on this handy-dandy infographic. A luxury development in Las Vegas is trying to lure California residents to Sin City by reminding them how much they’re giving up in income tax to their state each year when they could be banking that savings in Nevada. The graphic takes a theoretical $1 million earned in a year and shows how the roughly $120,800 paid in state income tax in Year One could turn into nearly $2 million after 10 year’s investment. Wow! Only it helps to read the fine print: the investment return assumes a 10 percent compound interest rate. If that were the norm, we probably wouldn’t have a public pension crisis.
The graphic also touts Nevada’s friendly business tax climate and lower cost of living to conclude that “silver does beat gold.” Nevada jokes aside (full disclosure, yours truly is a native Californian), the marketing attempt is a telling example of how much public finance has become an everyday issue as we all try and figure out this, er, "new" economy.