For past editions of The Week in Public Finance column, click here.
Break out the champagne
Let’s kick off the weekend with some good news. This week, Fitch Ratings declared that most states have improved their financial flexibility and are well-positioned to confront revenue uncertainty and future economic downturns. Debt levels for states are relatively low with annual debt service representing a small part of budgets. Even pension liabilities are becoming more manageable, the Feb. 17 report said. “As U.S. states work through budget negotiations for fiscal years that begin this July 1, they do so under credit conditions that have improved significantly since the recession,” said Managing Director Laura Porter. “This solid position from which to manage uncertainty, strong shared credit fundamentals and manageable long-term liabilities account for the fact that 90 percent of Fitch's rated states carry a Stable Outlook.” (Fitch has a negative outlook for New Jersey, Mississippi, Connecticut and Illinois.)
Actual state-by-state recovery has varied considerably, however, and let's not forget that a couple weeks ago a Wells Fargo report highlighted revenue troubles in Kansas, Wisconsin, Louisiana, Michigan and Arizona. Fitch's assessment notes that in all cases the return to pre-recession peak employment levels has been slow. Through December 2014, only 31 states had fully recovered their pre-recession employment numbers. Also, a recent report by the National Association of Counties shows an even greater disparity at the local level: Nearly three quarters of county economies are still below their pre-recession employment levels and unemployment is not back to pre-recession rates in 95 percent of the 3,069 county economies.
Hospitals and banks buddying up
I’ve written before about the growing occurrence of direct bank loans to governments and how this development raises transparency issues for the municipal market. But this week’s municipal note by Municipal Market Analytics dissected the topic even further, noting that last year hospital issuance was down more than 60 percent over the past five years to $15.4 billion (from $40 billion in 2009). MMA cites two reasons: one is uncertainty about the impact of Affordable Care Act costs, including reimbursement cuts and patient volumes. The other reason, said Matt Fabian, is that in the aftermath of the financial crisis, many hospitals with troubled variable rate bonds replaced them with direct bank financing. “As that source of capital grew,” Fabian writes, “it provided an attractive financing alternative for the sector’s issuers, particularly for technology projects that have a more limited life than a new facility.”
As far as the rest of the market, so far bond issuance in 2015 looks stronger than in recent years and indications are that this will remain true for the year. Much of the drive, however, is due to issuers refinancing existing debt to improve cash flow.
Those sneaky 1 percenters
The tax fairness advocates have found another way to argue for higher taxes on rich people. A report this month analyzed the ultimate tax rates of different income groups after federal deductions are applied to incomes. It found that the top 1 percent pays a state and local tax rate on average of 5.4 percent, compared with a rate of 9.4 percent paid by the middle 20 percent income group. Governments could raise an additional $68 billion per year tf the top 1 percent ponied up and paid an equivalent share of its income to state and local governments. And if the top 20 percent of earners paid the 9.4 percent rate, it would generate up to $128 billion in additional annual revenue, the report found.
Those reading the report should consider the source. The report, Tax Fairness: An Answer to State Budget Problems, was written by economist Stephen Herzenberg, executive director of Keystone Research Center, and Greg LeRoy, executive director of Good Jobs First. Both groups are nonprofits that advocate for tax equity and often bring attention to examples of income inequality and tax breaks for big corporations. Still, it’s an interesting way to look at how income blocks are ultimately taxed by state and local governments.
The data is from 2012, so it does not include the tax hike California voters approved for their highest earners that went into effect in 2013. It would be interesting to see how that data changed the picture, if at all. And of course, when it comes to tax hikes on the wealthy, the downside is that it makes the state’s income revenue stream more volatile because it is relying for more money from a smaller group of people. That was the criticism in California, which already had a volatile income tax revenue stream. To help mitigate that in part, voters approved a measure last year that deposits excess income revenue into the state’s rainy day fund.