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Oil State Woes

Oklahoma's credit rating was downgraded this week, making it the third oil state in just one month to suffer such a blow. S&P Global Ratings pushed Oklahoma's rating down to AA, citing the state's chronically weak revenue. The downgrade comes as news broke this week that the state is facing a nearly $900 million shortfall.

"Collectively the state's financial position has deteriorated to a point that further precludes the state from building up reserves in subsequent fiscal years,” says S&P credit analyst Oscar Padilla, who adds the state is now more vulnerable to regional or national economic weakness.

This is Oklahoma's third consecutive year with a deficit, and the second straight year of a so-called revenue failure, when collections fall more than 5 percent below estimates.

The action follows downgrades in two other oil states last month: Moody’s Investors Service downgraded West Virginia and Louisiana one notch each. States that rely on oil and energy for significant portions of their economy have had to grapple with revenue shortfalls since the price of oil dropped drastically a year and a half ago.

The Takeaway: Most oil states dipped into a recession last year and it's taken a toll on ratings. Alaska was downgraded by all three ratings agencies, New Mexico by Moody’s and S&P, North Dakota by S&P and West Virginia by Fitch Ratings and S&P. Only Texas and Wyoming have kept their credit ratings intact since prices dropped. That's because Texas has a fairly diversified economy while Wyoming is more reliant on coal mining than oil extraction.

Solving these revenue gaps will be difficult. Governors in these red states have proposed sales tax increases to help close the gap. But any tax increase in a conservative state faces long odds. Oklahoma Gov. Mary Fallin, for instance, is proposing an expansion of the state’s sales tax. Only last year, however, voters rejected a small sales tax increase to help end the state’s teacher shortage crisis.

Securing Secure Choice

With Congress poised to derail state programs that would ensure all workers have access to a pre-tax retirement savings plan, state lawmakers are talking backup plans.

The U.S. House resolution in question would overturn a Department of Labor rule that gave states the OK to create private-sector savings programs for small businesses. The House passed it last month and the Senate could take up the resolution as early as today.

In California, officials are considering modifying their Secure Choice program to fit a previous Labor Department rule from 1975. Among other changes, that would mean dropping a feature that automatically enrolls workers into the program. Research shows that automatically enrolling workers makes it 15 times more likely employees will save.

At a National Institute for Retirement Security conference this week in Washington, D.C., retirement attorney Michael P. Kreps said the Labor Department's rule allowing Secure Choice programs created certainty for the more than 20 states and cities creating a program or considering one. Overturning that would essentially "take the thumb off the scale." That could have a chilling effect on places still considering a program.

The Takeaway: Liberal-leaning states are farther along in the Secure Choice process, but the issue is bipartisan. A letter signed by 19 Republican and Democrat finance officials is asking the Senate to reject the House measure.

Still, the House measure has largely been along partisan lines. It’s also in keeping with prior Republican efforts to insert federal control into state public pension plans. Particularly telling is that House lawmakers have cited “severely underfunded” pension plans in warning that Secure Choice might somehow put taxpayers on the hook to foot the bill. In reality, the plans are independently managed and funded through fees.

Still No Fiscal Clarity From Trump

President Trump released details about his upcoming budget proposal and delivered his first joint address to Congress this week, but state and local governments are still largely in the dark about their fiscal futures.

While the speech announced a few new programs targeting illegal immigrants, it did little to flesh out the specifics of the president's domestic policy agenda.

And on Monday, the administration announced budget plan details that elicited more questions than answers. Trump plans to take $54 billion from discretionary spending -- where states get most of their federal aid -- and move it into defense spending. (Medicaid would be exempt from reductions. However, the president has expressed a desire to change it into a block grant program, which leaves the door open for cuts.)

Meanwhile, Fitch reports the largest single discretionary program potentially subject to cuts is federal highway aid ($40 billion). But given Trump’s pledge to boost infrastructure investment through public and private capital, it’s hard to imagine that happening with major cuts in highway funding. “Absent highway aid cuts,” Fitch said, “it remains unclear how the president's budget plan would affect state and local governments.”

The Takeaway: For states and locals, it’s unnerving to set budgets and move forward on significant policy when there’s no clear idea of how changes in Washington could potentially affect federal aid. Add to that the fact that many states are grappling with budget shortfalls and many experts are expecting an economic slowdown in the next two years, and it’s an incredibly uncertain time for government budgets.

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