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New Jersey: Between a Rock and a Hard Place

Moody’s Investors Service has panned New Jersey’s plan to beef up its transportation funding, mainly because it does so at the expense of other state programs. The legislature this month approved a 23-cent gas tax increase, which will raise approximately $1.2 billion.

But to offset the tax increase, the legislature also approved tax reductions. The two largest are a sales tax rate cut from 7 percent to 6.625 percent and a nixing of the estate tax. These reductions will leave less money for education, human services and pensions, Moody’s said in its analysis this week. “Although the renewed capital investment will benefit the state’s infrastructure and economy, the net effect of the revenue package is credit negative because it will strain the state’s operating budget amid rapidly rising pension contributions and below average revenue growth,” analyst Baye Larsen wrote.

The Takeaway: The money raised through the gas tax increase would be dedicated solely to transportation projects if voters approve a November referendum. Protecting transportation-related revenues for transportation projects is almost a no-brainer -- especially in New Jersey. The state has raided its transportation fund so many times over the years that the trust is nearly dry, leading to transportation projects being halted this summer.

But the warning from Moody’s shows just how precarious the state’s entire financial position is. Even though new gas tax revenues are projected to support $16 billion of transportation-related capital projects over the next eight years, Moody’s projects it will ultimately result in roughly $1 billion less in general fund revenue by 2021.

To make up the difference, New Jersey’s revenue growth would have to increase to 5 percent annually. A tall order for a state that has averaged 3 percent since the recession and suffered multiple budget shortfalls.

Is Easy Online Lending a Myth?

Many small-business owners seeking a line of credit or a loan often turn to nontraditional lenders because they believe that they have a greater chance of being funded. To be sure, banks turn away small-business owners more often than they do medium or large companies. But a new analysis shows that mom and pops might not actually be having better success with nontraditional lenders such as online firms.

According to a fresh look at 2015 survey data by the Federal Reserve, small businesses seeking credit from online lenders actually reported lower overall approval rates compared to traditional banks. An applicant’s credit score and lack of collateral were the two main reasons online lenders turned away borrowers.

Specifically, 77 percent of firms that applied to online lenders received at least some credit, compared with 83 percent of applicants at traditional lenders. Just 20 percent of the online lender applicants were approved for all the funding they sought, compared with more than half (56 percent) of traditional lender applicants.

The Takeaway: Unlike banks, the online lending industry is largely unregulated. One argument some have against regulation is that more rules will cause credit to dry up for small business online lending, just as it has in traditional bank lending. While it’s important to note that there is likely some self-selection going on -- businesses with risky credit profiles may be skipping banks altogether and only applying for online loans -- the data pokes at least a tiny hole in the anti-regulation argument.

Party Like It’s 2006

It's time to fire up Gnarls Barkley’s “Crazy” and revisit the breakup of Britney Spears and Kevin Federline because 2006 is coming back to America’s cities. According to new data released this week by the National League of Cities (NLC), city revenues have almost reached their pre-recession levels, when adjusted for inflation. The NLC’s Christiana McFarland expects that cities as a whole will hit the mark next year.

The report, which is outlined in greater detail here, also noted that cities have returned to their pre-recession ending balances, which is money they use as a budgetary buffer against downturns.

The Takeaway: This recovery has been long and lean. In previous recessions, rebounds were generally a four- or five-year affair. What's more, the revenue dips of the 1990 and 2001 recessions didn’t fall more than 3 percent off pre-recession levels. But city revenues following the 2007 recession kept plunging until they were 12 percent below pre-recession levels.

And consider this: A look at the NLC’s 2006 fiscal survey data reminds us that 2006 was also the first year that city revenues reached pre-2001 recession levels. So, you could say that cities today are operating on what they earned at the start of the millennium.

A lot has changed since then, though. For one, localities have much less financial flexibility than they did more than a decade ago. One prime example is pensions, which on average were fully funded in 2000. Now they are 74 percent funded, representing more than $1 trillion in unfunded liabilities.

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