The Week in Public Finance: Stockton, the Deficit Shuffle and Those Crazy State Revenues

A roundup of money (and other) news governments can use.
by | October 3, 2014 AT 3:00 PM

Stockton’s verdict is...not in

Stockton, Calif.’s bankruptcy judge yet again delayed making a decision on the city’s exit plan but he did issue a monumental judgement this week regarding the state’s behemoth pension system, better known as CalPERS (California Public Employees Retirement System). Christopher Klein, chief judge of the United States Bankruptcy Court for the Eastern District of California, said that cities in bankruptcy do have the right to exit the system and leave their debt behind. None of the three California cities to enter bankruptcy have tried to leave CalPERS, largely because the system has thrown a lot of money and resources (ahem, lawyers) at discouraging such thoughts.

The Oct. 1 decision, however, changes that. All three ratings agencies have quickly weighed in. The general consensus is that the decision could cause some distressed cities to consider bankruptcy as a way of shedding unsustainable pension obligations, but none of the agencies really see that happening. Fitch Ratings said that the more likely scenario is “that the ruling may encourage labor and management to negotiate pension cuts to avoid the uncertainties of bankruptcy court.” Moreover, added Standard & Poor’s, “municipal bankruptcy continues to carry a substantial stigma because it signals that management has abdicated its role as a steward of a community's financial resources and sets in motion what is often a long and costly process.” And nobody likes that.

Moody’s also touted the decision as a win for creditors, calling it a “positive sign for investors that pension obligations will not be given preferential treatment over debt in a municipal bankruptcy.” Stockton cut its health care payments to retirees and current employees but did not cut pensions in its exit plan. The next hearing is set for Oct. 30.

Is New York’s glass half full or half empty?

A new analysis from Janney Montgomery Scott this week highlighted New York State’s improving finances -- as evidenced by upgrades from the three major ratings agencies this summer -- but added a note of caution. “New York is still guilty of pushing off difficult decisions,” wrote analyst Tom Kozlik. “While the state has made some ground, additional reforms are needed in order to completely reverse ‘The Deficit Shuffle’ as the NY State Comptroller calls it.” Big budget stresses include: rising Medicaid costs, federal deficit reduction, rising retirement costs, local government fiscal stress, and infrastructure and education needs.

Still, in the last four years, the state’s budget gap has dropped from more than $13 billion in 2011 to a projected $3 billion this year. “This, in our opinion, is an excellent example of the type of positive results that can occur when ‘buy-in’ occurs for a more -- but not completely -- fiscally responsible spending plan,” Kozlik said, noting that the ratings upgrade was largely because of improved budgetary management practices and recent spending restraint.

Plus or minus $5 billion

A new report out by the Rockefeller Institute of Government confirms what many budget forecasters already suspected -- that growing unpredictability of state revenue totals has led to more forecasting errors. It’s precisely for that reason that researchers at the Pew Charitable Trusts have been encouraging states to institutionalize rainy day fund saving so that they have a buffer against these swings. (In Governing’s August issue, the Finance 101 feature also provided some good examples of states that have tried to manage their revenue volatility.)

Getting back to Rockefeller, the institute’s report found that states collectively overestimated revenues by more than 10 percent in fiscal 2009, the largest forecasting error since 1987, the earliest year data was available. “While forecasts are often more difficult during and after recessions, errors near the 2001 and 2007 recessions were much worse than those near the recession of the early 1990s, suggesting that revenue volatility is increasing,” the report said. The report also found that increasing reliance on capital gains revenue is a big cause of volatility and that corporate income tax forecasting errors are the largest, followed by personal income tax and sales tax.