The Week in Public Finance

This week's roundup of money (and other) news that governments can use touches on on the muni market rebound, California's grooviness and more.
by | January 21, 2014 AT 7:00 AM

Back in black!

The municipal market ended the week in the black, posting its first positive net inflow of cash ($103 million) since the week of May 15, 2013. Now that the pressure to sell in anticipant of higher taxes in 2014, RBC Capital Markets analyst Chris Mauro believes this past week is an indicator of what to expect going forward, calling it “a very positive development for the municipal market.”

Tax refund happiness state-by-state

A new interactive map from the Pew Charitable Trusts outlines the variation in state distribution of key federal income tax deductions. As federal tax reform discussions often include proposals to reduce or eliminate various tax expenditures, the interactive was created to help policymakers understand the current distribution as the first step in figuring out which states could be most affected by federal tax changes.

In 2011, tax filers claimed about $1.3 trillion in itemized deductions, resulting in roughly $182 billion in forgone federal revenue. The average claim rate, the percentage of all tax filers in the state who claim the deduction or credit, was 32.1 percent nationally. The top and bottom of the spectrum is not a shocker – tax-friendly state like West Virginia (18.8 percent), South Dakota (19.4 percent) and North Dakota (21.0 percent) had the lowest claim rates in the country. Tax-happy Maryland averaged the highest rate at 47.9 percent.

In 2013, federal tax expenditures are estimated to total about $1.1 trillion, rivaling total federal “discretionary” spending that Congress allocates annually to areas such as defense, education, and transportation.

Just a little inflation, please

Loop Capital breaks down why their analysts think that inflation will not rise far beyond 2 percent, even with the Fed’s tapering down of its municipal bond investments. Constraints that will continue to suppress interest rates include the disappointing December employment report and the fact that municipalities are expected to issue fewer bonds in 2014, according to the January Municipal Strategy Report. “We regard the fundamental question facing bond investors more as how steep can the yield curve become before it flattens rather than how high the rates can go from here,” writes Chris Mier, a Loop Capital strategist.

The January report also introduces Loop Capitol’s first-ever break down of the state of the state addresses. The report notes that job creation and education reform have been most prevalent themes mentioned in governors’ state of the state addresses over the last three years and analyst Ann Kibler expects these two themes “to remain at the top as unemployment remains relatively high in most states compared to pre-recession levels.” Governors are also expected to continue their push for funding early education initiatives and increasing graduation rates with a focus on workforce development.

For the full report, click here.

How California got its groove back

A new report from Standard & Poor’s pinpoints California’s fiscal recovery not at 2011, when the state’s beleaguered finances actually began turning around, but to a year earlier when voters approved a change in the way that state passes its budgets. Proposition 25 amended the state constitution to allow a simple majority of the legislature to pass the state budget, eliminating the previous need for a two-thirds approval. Since the proposition was passed, California has had a budget in place at onset of each fiscal year even as the first two years required the state to first close projected deficits of $26.6 billion and $15.7 billion, respectively.

“The earlier two-thirds requirement meant that a minority block of legislators could effectively shut down the budget process rather than concede to budget provisions they disagreed with,” says the report, which notes that a structural deficit was at the root of California’s problems and on-time fixes simply prolonged the issue. “In our view, budget negotiations are inherently political, but as the legislative caucuses grew increasingly polarized throughout the 2000s, common ground became harder to find.”