For previous editions of The Week in Public Finance column, click here.
What About the Children?
Last week I mentioned that Pennsylvania’s budget standoff could force schools to borrow money to stay open. This week, two new reports show just how dire the situation is for public schools in the Quaker State.
According to an Oct. 28 Moody’s Investors Service analysis, state aid to schools constitutes anywhere from 10 to 83 percent of their operating revenues. Districts that receive less in property taxes (which are paid out in September) tend to rely more on state funding. Those districts are now relying on cash reserves and short-term borrowing to keep open. At of the end of September, Moody’s reports, 17 school districts have borrowed more than $346 million and face a combined $11.2 million in interest fees on these loans. Philadelphia schools alone account for three-quarters of the borrowing.
Loop Capital expects that many of the remaining school districts in the state will also have to borrow to stay open. The good news is that the debt is secured by the funding the state is expected to eventually allocate for the school districts. Districts have so far have been able to access the credit market with ease.
Still, Loop Capital’s Rachel Barkley in her report predicts stress on local districts to escalate the longer the budget impasse continues. Another dozen or so of the 300 districts surveyed by the state expect to run out of cash by the end of this month. More than half will need money by the end of the calendar year. Only about a dozen school districts in the survey said they could make it to the end of the school year without borrowing.
Let’s Make a Deal
Moving on to places where legislators can pass budgets, two big deals made the news this week. In Chicago, lawmakers approved a property tax hike totaling $543 million over the next four years intended to help the city pay down its pension debt. The 2016 budget, adopted well ahead of the Dec. 31 due date, closes the roughly $233 million budget gap and allocates $978 million in total pension contributions across all of its pension funds. That represents a 78 percent increase from this year's contributions.
Still, the credit rating agencies note that the deal requires the state approve a revised payment plan the city negotiated for its police and fire pension obligations. If that doesn’t happen, it could put additional pressure -- about $200 million worth -- on the 2016 budget. For that reason, Standard & Poor’s and Moody’s (the only agency that rates the city at junk status) said the new budget doesn’t change their credit outlook on Chicago.
Nearly 700 miles away in Washington, D.C., federal lawmakers are also on the verge of approving a two-year budget and raising the nation’s debt limit. The budget is good news for states (and some cities) because it lifts onerous limits on discretionary spending, much of which goes to state-run programs related to Medicaid, education, social services and policing. The length of the budget -- two years -- also provides funding certainty that state and local governments have not enjoyed in the recent years of budget extenders.
Oklahoma Is Not OK
Oklahoma hit an ominous milestone earlier this month when Treasurer Ken Miller reported that for the first time in almost five years, the treasury collected less money over the past 12-months than it did during the previous 12-month period. The state's revenues have been hurt by falling oil and natural gas prices. I reported earlier this year that April’s total intake was just 0.5 percent higher than April 2014. Fast forward to September, and collections have now dropped by 4.6 percent compared with September 2014.
Gov. Mary Fallin responded by issuing two executive orders this week in the hopes of avoiding a budget deficit as the fiscal year goes on. One calls for all state agencies to reduce nonessential expenses by 10 percent for both the remainder of this fiscal year and for the entire 2017 fiscal year, which begins July 1. The second order directs agencies to sell off underused property and undeveloped land. Much of the money will go into a revolving fund that helps pay for state building maintenance while some will help offset projected state revenue shortfalls. Using one-time proceeds to plug a budget hole is what many call a budget gimmick. But the building sell-off is part of Fallin’s ongoing plan to reduce the state’s real estate holdings, as transferring that land to private ownership will place it back on local tax rolls.
“Disposing of underutilized property will reduce costs and ensure our taxpayer dollars are going towards the core government services that Oklahomans rely on,” said Fallin. “That is especially important as we approach what we know will be a tough budget year.”