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What a Trump Presidency Could Mean for State and Local Finances

An early review of Donald Trump's health-care and trade policies reveals some potentially bad news for state and local governments. According to Fitch Ratings, Trump's proposals would "significantly lower federal transfers to state budgets and could negatively affect economic growth and revenues."

Specifically, Trump has proposed converting Medicaid funding into a block grant program, which Fitch says would lead to much lower federal funding for the states. A Congressional Budget Office (CBO) assessment of earlier Medicaid block grant proposals projected declines of between 4 and 23 percent in federal funding over 10 years.

The president-elect has also harshly criticized the North American Free Trade Agreement and said he would slap tariffs on goods imported from countries, such as China, that have cheaper labor than in the United States. Fitch Ratings said Trump’s trade policy would have adverse implications for U.S. investment and growth, and would push up prices.

On the positive side, Trump has also talked about major investments in infrastructure. But he's been low on details for his plan -- only suggesting that federal tax credits could encourage private investments in revenue-generating projects -- and could make it more expensive for state and local governments to borrow money for those infrastructure projects. That's because his planned tax cuts would lower the benefit of buying tax-exempt municipal bonds for many individual investors. Without the full benefit, governments may have to swallow a higher interest rate payment in order to attract investors.

The Takeaway: Let’s put things in perspective. Since when has a presidential candidate gotten everything he wanted once he took office? Chances are low that every single outcome listed above will actually happen. It’s also important to note that President Obama has also called for reducing the municipal bond tax benefit for much of his presidency. So, that particular threat to state and local finances is not a new one, although some suspect tax reform will make its way from the back to the front burner now that Republicans control the executive and legislative branches.

The proposed changes to Medicaid are perhaps the most worrisome for state and local budgets because aid from the feds makes up approximately 15 percent of total state expenditures, according to the National Association of State Budget Officers. If the CBO’s estimates are accurate, “reductions of this magnitude would have a significant effect on states' budgets,” according to Fitch. And you can bet that states will pass some of that hurt on down to local governments in the form of reduced state aid.

But right now, the word of the day is ambiguity: Trump has been fuzzy on details up to this point, so it remains to be seen if his policies will pass muster with Congress and how, specifically, they'll impact state and local government coffers. Even the proposed changes to Medicaid aid could have a happier ending if states get more spending autonomy under a block grant system. “Depending on the specifics of the program,” Fitch said, “states could lower their Medicaid costs with that flexibility.”

A State Takeover in Atlantic City

In other major voting-related news this week, New Jersey's Local Finance Board voted on Wednesday to take control of Atlantic City, which has struggled to recover from its shrunken casino industry.

The 5-0 decision came a week after the state nixed the city’s proposed recovery plan and one day after New Jerseyans rejected a ballot proposal that would have allowed for casinos to be built outside of Atlantic City.

The takeover means that Timothy Cunningham, director of the Local Finance Board, now has the authority to, among other things, sell city assets, hire or fire workers, and break union contracts for up to five years. City officials have opposed the idea of a takeover and previously said they would sue in the event of one.

Moody's Investors Services, however, called the takeover a positive move, even with the possibility that holders of the city’s bond debt could lose money in a restructuring. “The state certainly has the ability to make Atlantic City’s forthcoming debt payments on Dec. 1st and 15th,” said analyst Doug Goldmacher, “and it was questionable whether the city could make those payments without financial assistance.”

The Takeaway: Atlantic City is the first city to be taken over by the state since Camden in 2002. The results there were mixed. While Camden saw economic development improvements and revamped its police force to better combat crime, some question whether its fiscal sustainability was fully addressed.

Still, takeovers aren’t inherently bad. A lot depends on how the person in charge uses his or her increased decision-making flexibility.

In Detroit, the presence of an emergency manager led to that city’s expedited entrance and exit from municipal bankruptcy, as well as its return to local control. Not far away in Flint, though, some say the emergency manager system led to corners being cut and the city’s lead-poisoning water crisis.

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