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Blame the economy

State budget forecasters are now missing the mark more than ever, a new Pew Charitable Trusts and Nelson A. Rockefeller Institute of Government report said this week. The March 10 report found that forecasting errors are on the rise, an increase driven largely by the huge and growing differences in year-to-year tax collections. The size of the fluctuations in tax revenue rose in 42 states between 2000 and 2013, the report said.

Of course no forecaster will ever perfectly predict budget performance -- there will always be errors. But the big culprit lately has been volatility. Revenue from the corporate income tax is the least predictable while income from the capital gains tax also tends to swing dramatically from year to year. Pew’s past research on revenue volatility has shown that governments can manage against unpredictability by establishing a rainy day fund in which to deposit any unexpected windfalls. Pew also recommends that state officials prepare and update revenue estimates as close as possible to the start of the budget year and regularly analyze errors to sharpen forecasting techniques and assumptions in order to reflect changing economic conditions.

A new buzzword?

In his outlook report this week, Municipal Market Analytics’ Matt Fabian coined a new acronym: MPR. It stands for Mythical Pension Reform, a term that just might catch on as two states are attempting to overhaul their flailing pension systems. The reform is imaginary; politicians like to include the expected savings in proposed budgets before the reform actually passes. This is a mistake, Fabian says. In his analysis this week on Illinois Gov. Rauner’s proposed 2016 budget, Fabian says that any reliance on MPR in the budget should only be applied to future years as the state’s courts “have not shown much sympathy for state budget concerns or timeliness when considering the legality of past pension reforms.” (New Jersey is the other state this year attempting a major reform.)

Rauner is seeking to slash current employees’ retirement benefits in an effort to close his state’s continual budget gaps, including one in 2016. A previous pension reform, which cuts benefits already accrued by employees, is tied up in a legal battle. Rauner’s proposal would allow current employees to keep the pensions they've already earned but future employees would get less generous benefits. The governor estimated the move would save $2.2 billion in 2016 alone.

Warning in Connecticut

The Nutmeg State’s troubled finances may be catching up to it. Standard & Poor’s put the state on a negative credit outlook this week based on what the agency called weak revenue growth and a projected $1.1 billion budget gap in 2016. "We are concerned that structural budget balance is under pressure during a period of national economic growth," said S&P credit analyst David Hitchcock. “Should we perceive budget pressure to significantly worsen during our two-year outlook horizon, or if currently modest reserves become drawn down significantly during a period of economic growth, we could take a negative rating action.”

S&P affirmed its AA rating on $400 million General Obligation bonds the state plans to offer this month in a sale that will total $500 million in offerings. Fitch Ratings also affirmed its AA rating and Moody’s Investors Service kept its Aa3 rating, which is one step lower than the others. Following the ratings releases, State Treasurer Denise Nappier called the news “bittersweet.” However she did not expect S&P’s outlook revision to affect the state’s upcoming bond sale. S&P noted that the state’s employment growth has been slower than the rest of the country and jobs in the well-paying financial sector shrank nearly 2 percent last year. The agency also expressed concern that the state continued to face structural budget pressure during a time of national economic growth.