The Week in Public Finance: Surprise in New Jersey, Puerto Rico's Balancing Act and a D.C. Shoutout
This week's roundup of money (and other) news governments can use.
He said, she said in New Jersey
Due to what the state is calling an “unanticipated revenue shortfall," New Jersey didn't take in enough money in income, sales and corporate tax collections. April revenues for the three tax streams are anticipated to be approximately $600 million below budgeted expectations. Total anticipated revenues were about $31.8 billion for Fiscal Year 2014, about 2.5 percent less than budgeted. The treasurer’s office attributed most of the shortfall to the slower income, sales and corporate tax revenue.
The announcement triggered a one-notch credit rating downgrade to A+ from Fitch Ratings last week (the week of April 28), which cites the state’s overall $800 million shortfall and Gov. Chris Christie’s use of one-time fixes to plug budget holes. A far cry from “unanticipated,” Fitch said the budget’s forecast was “overly optimistic.” Taking a look at the budget, 2014 income tax revenues are projected to be about $13 billion, a 6.5 percent gain and higher than the previous record of $12.6 billion set in fiscal year 2008. Like many states, New Jersey saw higher-than-anticipated income tax revenue in 2013 thanks to filers pushing income into the 2012 calendar year to avoid higher tax rates in January 2013. Unlike many states, New Jersey failed to treat that as anomaly and neglected to project slower growth in the 2014 fiscal year.
A bondholder scorned
Fitch’s managing director of U.S. public finance is warning that Detroit may have done better than it initially proposed in reimbursing some city bondholders, but don’t let that fool you. “Most Detroit bondholders are left vulnerable,” said Amy Laskey in her analysis, which noted the city is trying to invalidate altogether debt certificates related to its pension system. “Maintaining or restoring essential services should be expected to trump attention to [bondholders rights] when a municipality is distressed to the point of bankruptcy,” the analysis said. If the city gets its way, Laskey believes that the aggressive strategy could be followed by other bankrupt cities to rid themselves of their “nontraditional” debt obligations.
For the first time in more than a decade, Puerto Rico’s legislators get to argue over passing a balanced budget as Gov. Alejandro Garcia Padilla’s 2015 document proposes more than $1.4 billion in cuts and includes $775 million to pay off debt. The $9.64 billion budget comes in one year ahead of when Padilla’s administration said it expected to balance the budget.
Response from analysts has been positive but muted. Daniel Solender at Lord Abbett & Co. called the budget “a step in the right direction.” Janney Capital Markets managing director Alan Schankel said “significant fiscal and economic challenges remain,” but noted the commonwealth’s “immense progress made in the past 18 months.”
Who says nothing gets done in Washington?
Capitol Hill may be twiddling its thumbs on overhauling the tax system but the District of Columbia isn’t. Well, sort of. Earlier this year, the city commission on tax reform submitted its final report (it spent more than two years collecting data) and two of the recommendations have made their way into the mayor’s proposed 2015 fiscal year budget.
The commission, established in the fall of 2011, determined that the District’s current tax system has three major shortcomings: (1) middle-class residents pay a relatively large share of their income in District taxes; (2) business taxes are too high; and (3) the District’s tax base is too narrow.
Last month, Mayor Vincent Gray presented a budget proposal to the D.C. Council that proposed adding a 7.5 percent middle-income tax bracket. The city’s income tax has four brackets: a base bracket of 4 percent, income over $10,000 but less than $40,000 is taxed at 6 percent, income between $40,001 and $350,000 has an 8.5 percent tax and income over $350,000 has an 8.95 percent tax. Gray's proposal would add a tax bracket so that people earning between $40,001 and $60,000 would be taxed at 7.5 percent. The proposal would also bump up the 8.5 percent bracket to earners starting at $60,001. Gray’s proposal also calls for a business tax reduction from 9.975 percent to 9.4 percent. The tax commission recommends reducing the tax to 8.25 percent, equal to Maryland’s 8.25 percent rate and closer to Virginia’s 6 percent rate.
The fiscally conservative Tax Foundation is applauding the work of the commission, calling the proposed reforms “impressive.”