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  #471  
Old 11-07-2017, 04:31 PM
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TAX BILL IMPACT

http://www.governing.com/topics/fina...ni-market.html

Quote:
GOP Tax Plan Puts Billions in Muni Market Savings at Risk
State and local stakeholders were blindsided by an aspect of the tax bill that would eliminate tax-free financing for many large government projects.

Spoiler:
In a surprise move, the Republican tax plan released on Thursday contains a proposal that finance experts say would be devastating for governments trying to find money for economic development projects.

The bill would eliminate all private activity bonds, which allow tax-exempt municipal bonds to be issued on behalf of a government for a project built and paid for by a private developer. Tax-exempt bonds fetch lower interest rates in the municipal market and therefore lower the overall cost of financing. The projects financed with this type of debt are typically things in the public interest, such as low-income housing, hospitals or airports.

The proposal caught the infrastructure finance community completely off-guard.

“It’s been a big surprise to the entire public finance community,” says Will Milford, a tax attorney at the firm Bryant Miller Olive. “For months, we’ve been hearing that munis were safe.”

Milford added that targeting private activity bonds is especially confusing because those types of bonds are the “logical way” to stimulate private investment in infrastructure -- a hallmark of President Trump’s campaign. In fact, during his confirmation hearing, Treasury Secretary Steve Mnuchin suggested that private activity bonds could be expanded.

“It goes against everything we were hearing would be a focus,” Milford says.

The federal government, though, would benefit from eliminating private activity bonds because it currently loses out on collecting tax revenue from the interest they earn for investors.

Many state and local government stakeholders are warning of dire consequences.

Oregon Treasurer Tobias Read said in a statement that the proposal would functionally eliminate the Oregon Facilities Authority. Over the past 27 years, $9 out of every $10 the authority has helped finance has gone toward either a health care or educational facility, according to the treasurer's office.

“All of these projects would need to be done with taxable, higher-interest-rate financing, which makes it far less likely for them to pencil out,” says Laura Lockwood-McCall, the debt division director at the Oregon State Treasury.

The Council of Development Finance Agencies (CDFA) president, Toby Rittner, called the move “devastating” and said in a letter that eliminating private activity bonds “is bad policy [that] will cripple economic, infrastructure and community development.”

The bonds have received criticism in the past, and a 2013 New York Times article called them a “stealth subsidy for private businesses” because they were used for things like a golf course and office buildings.

But government stakeholders argue they overwhelmingly help finance needed projects. New York City’s housing department, for example, tweeted on Friday that the state’s tax-exempt housing bonds helped finance affordable housing for nearly 170,000 people over four years.

In a surprise move, the Republican tax plan released on Thursday contains a proposal that finance experts say would be devastating for governments trying to find money for economic development projects.

The bill would eliminate all private activity bonds, which allow tax-exempt municipal bonds to be issued on behalf of a government for a project built and paid for by a private developer. Tax-exempt bonds fetch lower interest rates in the municipal market and therefore lower the overall cost of financing. The projects financed with this type of debt are typically things in the public interest, such as low-income housing, hospitals or airports.

The proposal caught the infrastructure finance community completely off-guard.

RELATED

Nixed State, Local Tax Deduction Makes New GOP Tax Plan a Tough Sell for Some Republicans
“It’s been a big surprise to the entire public finance community,” says Will Milford, a tax attorney at the firm Bryant Miller Olive. “For months, we’ve been hearing that munis were safe.”

Milford added that targeting private activity bonds is especially confusing because those types of bonds are the “logical way” to stimulate private investment in infrastructure -- a hallmark of President Trump’s campaign. In fact, during his confirmation hearing, Treasury Secretary Steve Mnuchin suggested that private activity bonds could be expanded.

“It goes against everything we were hearing would be a focus,” Milford says.

The federal government, though, would benefit from eliminating private activity bonds because it currently loses out on collecting tax revenue from the interest they earn for investors.

Many state and local government stakeholders are warning of dire consequences.

Oregon Treasurer Tobias Read said in a statement that the proposal would functionally eliminate the Oregon Facilities Authority. Over the past 27 years, $9 out of every $10 the authority has helped finance has gone toward either a health care or educational facility, according to the treasurer's office.

“All of these projects would need to be done with taxable, higher-interest-rate financing, which makes it far less likely for them to pencil out,” says Laura Lockwood-McCall, the debt division director at the Oregon State Treasury.

The Council of Development Finance Agencies (CDFA) president, Toby Rittner, called the move “devastating” and said in a letter that eliminating private activity bonds “is bad policy [that] will cripple economic, infrastructure and community development.”

The bonds have received criticism in the past, and a 2013 New York Times article called them a “stealth subsidy for private businesses” because they were used for things like a golf course and office buildings.

But government stakeholders argue they overwhelmingly help finance needed projects. New York City’s housing department, for example, tweeted on Friday that the state’s tax-exempt housing bonds helped finance affordable housing for nearly 170,000 people over four years.



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The tax bill doesn’t stop at eliminating private activity bonds. It would also nix other types of bonds valued by state and local governments.

Among the most concerning to local leaders, it would ban governments from issuing what are called advanced refunding bonds. These bonds allow governments to refinance debt earlier than they would have otherwise, ultimately letting governments take advantage of lower interest rates years sooner. The bill also bans issuing tax-exempt bonds for sports stadiums, a proposal that had already been floated this year on Capitol Hill.

It’s unclear exactly how much of the municipal market would be affected by the change, but experts say it would be a significant portion. According to Municipal Market Analytics’ Matt Fabian, up to 20 percent of the $3.7 trillion municipal market is made up of private activity bonds. Making those bonds taxable would dampen future issuance.

When it comes to the advanced refunding bonds, Fabian says between 10 and 20 percent of all annual bond refinancings fall under that category. That means up to one-tenth of the total $386 billion in average annual bond issuance could be attributed to that type of bond.

The notion of eliminating the tax-free status of all municipal bonds has been a perennial topic in Congress for years. But when the Republican framework for tax reform preserved that status, municipal bond market users thought they had emerged unscathed.

Now, stakeholders are left scratching their heads.

The lobbyist for the Government Finance Officers Association told the Bond Buyer that the proposal never surfaced in more than 90 meetings on the Hill. Meanwhile, the CDFA worked for weeks with Democrats in Congress to introduce a new type of disaster recovery bond to aid residents and municipalities in rebuilding. That bill, also introduced this week, would be rendered obsolete under the latest tax plan.
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  #472  
Old 11-09-2017, 04:39 PM
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http://www.governing.com/topics/fina...et-graded.html

Quote:
States' Financial Practices Get Graded
And the report card isn't good: Most states failed to balance their budgets without resorting to one-time fixes or underfunding pensions, among other violations.

BY LIZ FARMER | NOVEMBER 8, 2017
Spoiler:
Most states are required to pass balanced budgets. But since the Great Recession, that's gotten harder and harder to do as states have been forced to reduce and reallocate spending. According to a new report from the Volcker Alliance, a nonprofit dedicated to effective government, "The potential to defer or obfuscate in making these adjustments is very real."


So to keep them honest, the alliance is grading all 50 states on their financial practices. In the first of what is expected to be an annual report, the findings aren't pretty: Most states skimped on at least one major area of the budget, and some earned nearly failing grades in almost every category.

The report grades states in five critical areas: forecasting accuracy; oversight and use of rainy day funds and other fiscal reserves; use of one-time fixes; adequately funding employee pensions and other benefits; and disclosing budget and related financial information.

The area in which states collectively performed at their worst was long-term liabilities, such as pensions and retiree health care. States face nearly $2 trillion in these unfunded liabilities. The report dinged 19 of them with a D or D-, the lowest grades possible. "Those legacy costs are the millstone hanging around a lot of states' and cities' necks right now," says William Glasgall, who helped co-author the report.

States performed best when it came to avoiding one-time gimmicks to balance the budget. Nearly half (22) earned an A. Still, the report noted that over the course of the last three years, 80 percent of states relied at least once on a one-time maneuver to keep their budgets balanced.

The average grade earned for nearly all five categories was a B; states averaged a C grade for managing their long-term liabilities.

With the report, the Volcker Alliance joins credit ratings agencies in handing out grades to states. But while the credit rating agencies consider many of the same budget factors the alliance report does, the ratings are ultimately a measure of a government's likelihood of default, which is not the same as having one's fiscal house in order.

Take Illinois. The state went two years without a budget and saw multiple downgrades from ratings agencies. But it was still able to float bonds and easily find buyers because no state in the modern era has defaulted on its debt. "There's no reasonable risk of a state actually defaulting," Matt Fabian, a principal at Municipal Market Analytics, which consulted on the report, said at the report's release. "But you had the governor and legislature acting in completely unpredictable ways that belied the understanding of almost anyone. So, the bonds of Illinois ended up trading almost like a day stock which is terrifying to anyone in the market."

Not surprisingly, Illinois is one of two governments that earned a D or lower in all but one category. It and Kansas both earned Bs in the financial transparency category.

The report offers several policy recommendations, including having clear policies for withdrawing money from rainy day funds and other fiscal reserves; implementing rules for replenishing those funds; tying the size of fund balances to revenue volatility; and adopting a consensus approach to budget forecasting to reduce political influence. On that last item, the report highlights as a best practice Washington state's Economic and Revenue Forecast Council, which includes representatives of the legislative and executive branches, as well as the state treasurer.

When it comes to budget transparency, the report found that while all but four states have a budget website, few actually contain the necessary data to help policymakers and advocacy groups make informed decisions. The report praised Colorado's website because it includes things like budget documents and instructions, budget amendments, fact sheets, archives, and information from past years. Alaska and California stood out as well for being the only two states to earn an A in the category because they are the only ones that disclose the estimated cost of replacing depreciated infrastructure.

Hawaii, Idaho and Utah received the most As. They all earned an A in avoiding one-time fixes. Idaho and Utah received an A for legacy costs, while Hawaii got an A in budget forecasting. But the rest of their grades are a mix of Cs and Ds. It shows, says Glasgall, that no state is perfect. "Many are good," he says, "and some are very challenged."
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  #473  
Old 11-09-2017, 05:26 PM
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Mary Pat Campbell
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CONNECTICUT

http://www.nationalreview.com/articl...R5PM%20Actives

Quote:
Connecticut’s Budget Fails to Solve Its Long-Term Problems

Spoiler:
Big-spending blue states should take heed.

At long last, deep-blue Connecticut has adopted a new, bipartisan $41 billion two-year budget, which closes an alarming $5.1 billion deficit. After four months’ operating without a budget, there’s relief across the state and amazement at the bipartisanship.

The relief may be short-lived, since the new budget itself forecasts big future deficits. These deficits should be expected, given sharply escalating public-sector labor costs.

The bipartisanship is a surprise, since Democrats control both houses of the legislature, as they have for all but two of the last 30 years. However, Republicans have about closed the gap, and they shocked the political establishment by pushing a GOP budget proposal through the legislature in September — only to have it vetoed by hard-left Democratic governor Dannel Malloy.

Afterwards, GOP and Democratic legislators joined forces to craft the new budget, which passed by an overwhelming veto-proof four-to-one margin. If ever there was bipartisanship, this is it. However, bipartisanship is not a silver bullet.

While the budget closes the current deficit, the budget document itself projects a plunge back into a deep $4.5 billion deficit in the next biennium and a deeper abyss thereafter. Obviously, the budget fails to solve the state’s long-term problems.

The bipartisan budget closes the deficit mostly with artful gambits, one-time gimmicks, and wishful estimates, instead of meaningful measures to address escalating expenditures on overgenerous public-sector pay and benefits.

While the budget includes $1.6 billion in “labor concessions,” overall state expenditures on public employees will increase by $775 million in the new budget.

The concessions are only “savings” according to the word’s meaning in government budgeting, i.e., reductions in the magnitude of a future increase, rather than savings relative to prior spending levels.

Of the $1.6 billion in concessions, $715 million derives from a two-year wage freeze, in exchange for which union-friendly Governor Malloy granted a four-year no-layoffs guarantee. Wages will be the same — not less.

The rest of the concessions come from slowed but still robust increase in benefits expenditures. The benefits concessions derive from the wage and benefits deal that Malloy struck last summer with the state-employee unions revising the long-term benefits agreement, the so-called SEBAC agreement. In the deal, Malloy agreed to an extension of the notorious SEBAC agreement to 2027, shielding overgenerous benefits with strong legal protection for a full decade. The legislature approved the deal in a strict Democratic party-line vote.

In the next biennium, wages and benefits expenses will explode. Wages will increase about $625 million to roughly $9.9 billion, given two annual 3.5 percent raises agreed in the SEBAC deal. With escalating scheduled pension-fund contributions and assuming only a 4 percent increase in health-care costs, total health and pension expenditures will jump $1.3 billion to $10 billion, more than 33 percent above the level in the two fiscal years that ended last June.

The SEBAC benefits agreement is fiscally unsustainable. Major corporations have recognized as much and departed — GE, Aetna, and, most recently, Alexion. In 2018, Bristol-Myers Squibb will join the exodus.

These departures exacerbate the fiscal woes that trigger them. Conventional income-, sales-, and corporate-tax revenue has flatlined recently, despite (or due to) two huge tax increases under Malloy. Loath to increase tax rates yet again, budget negotiators instead imposed about $350 million in less obvious tax increases in the form of reduced or canceled tax deductions, credits, and exemptions.

There’s also a $330 million increase in net revenue from the maximization of a complex tax maneuver under which the federal government over-reimburses states for taxing, and then redistributing tax revenue to, health-care providers to enhance Medicaid coverage. Federal funding is increasing about $750 billion under the scheme. That kind of money might lead Congress to consider policy modifications.

Beyond taxes, the budget closes the current deficit with a variety of one-time measures. For example, the budget sweeps about $300 million from various special-purpose accounts, including green-energy-subsidy accounts funded directly through charges on utility customers’ bills.

Of course, these one-time measures cannot help in the next biennium. On the tax side, Connecticut provides an illustration that constantly increasing taxes may not overcome an eroding tax base. Sure enough, the new bipartisan budget itself projects that overall revenue will decline in the next biennium, dropping by $1.5 billion to $39.8 billion. The new bipartisan budget itself projects that overall revenue will decline in the next biennium, dropping by $1.5 billion to $39.8 billion.

A few brave Republicans voted against the new budget because Democrats and the unions nixed several pension reforms proposed to take effect after the SEBAC agreement expires in 2027. These reforms had been part of the budget passed in September. Despite their delayed effectiveness, the state’s outside actuaries had valued the reforms at $270 million in the current biennium and $10 billion over 30 years.


Most Republicans voted for the budget because it contains new formulaic caps on spending and borrowing. These restraints would have had great effect if enacted a decade ago. Now it’s less so, since the new spending caps exempt expenditures on unfunded public-employee pension obligations. Moreover, one spending cap is tied to inflation and the state’s personal-income level, which are increasing, however slightly, while the real problem is declining aggregate tax revenue, which will serve as the real brake on spending.

The other spending cap is tied to expected revenue (which, as just noted, is declining). The legislature can adjust the cap and, thereby, spending simply by raising taxes, which it will have to do just to maintain, or moderate cuts in, non-compensation spending, i.e., services for citizens.

When it mattered, on the SEBAC deal, there was no bipartisanship. Malloy, the Democrats, and the unions were zealous in protecting state employees to the detriment of Connecticut’s citizens.

Connecticut’s outlook is dire. The state looks like the canary in the mine. Other high-tax big-government blue states have similarly bloated ranks of public employees earning unaffordable benefits that have generated severely underfunded pension and health obligations. Illinois, New Jersey, and California come to mind. They should take heed.

— Red Jahncke is the president of Townsend Group International, a business consultancy in Connecticut, and a freelance columnist who writes on public-policy issues.

Read more at: http://www.nationalreview.com/articl...R5PM%20Actives
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  #474  
Old 11-12-2017, 04:59 PM
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CONNECTICUT

https://www.zip06.com/news/20171108/...udget-into-law

Quote:
Gov. Malloy Signs (Most) of State Budget into Law
Spoiler:
Nearly 11 months after the first budget proposal was released, Governor Dannel Malloy put pen to paper and signed the majority of the bipartisan budget into law on Oct. 31. While the bipartisan budget came as a victory and a relief to many, local legislators and leaders are keeping an eye on the cuts and possible future cuts within the new budget.

The State House and Senate passed the budget with sweeping, veto-proof majorities on Oct. 26. Once the budget hit the governor’s desk, Malloy signed most of the budget into law, but used his line-item veto to reject a new tax arrangement on hospitals.

Shoreline legislators praised the bipartisan nature of the budget that brought an end to the 123-day budget impasse. While members of both parties said certain issues required compromise, this budget includes cuts of five percent or less to the Education Cost Sharing (ECS) grant, an increased tax on cigarettes and hospitals, and revisions to prevailing wage and binding arbitration laws, and preserves the senior property tax credit while cutting funding to higher education and social services. While municipalities will not pay into teacher pensions as originally proposed, contributions from teachers will increase from six percent to seven percent of their salaries.

The final numbers look good for Guilford. In the governor’s February proposal, Guilford’s ECS grant, which serves as the state’s primary financial resource to help municipalities run their schools, was completely zeroed out, taking the town’s total ECS grant from $2.7 million this fiscal year to nothing in the next. In the budget referendum, the town assumed a significant cut to ECS funding and accounted for a loss of $1,892,955 in its adopted budget. The signed state budget gives $2,603,374 in ECS money to Guilford, creating a surplus of $710,419.

Looking at all of the state revenue sources including ECS, PILOT, Town Aid to Roads, and the Municipal Stabilization grant, Guilford receives $3,211,747 in state aid this fiscal year, creating a surplus of $251,111 over what was assumed in this year’s adopted budget.

First Selectman Joe Mazza said he was pleased with the final numbers.

“Obviously I am pleased that we finally have a state budget now and, now that we know where Guilford stands, I unfroze the capital expenditures, which I had put a freeze on at the beginning of the fiscal year,” he said. “Now all of the uncertainty is gone and we are pleased because in putting the budget together, we reduced our reliance on state funding by $1 million and in effect, the reduction under the new state budget to municipal funding to Guilford was less than what we reduced ourselves by, so bottom line is we are getting $251,000 more than we had anticipated.”

While the numbers look good now, State Comptroller Kevin Lembo recently came out and said the state is looking at a $93 million deficit this fiscal year. Municipalities like Guilford are familiar with the concept of mid-year cuts to municipalities to help close the deficit, so Mazza said he would recommend to the Board of Selectmen elected Nov. 7 (after press time) that they keep the projected surplus in the budget in the event of further cuts.

“The state could cut back on the funding, so I would recommend leave it in the budget because we don’t know what is going to happen until the close of the fiscal year,” he said. “I wouldn’t be surprised if they cut that number back somewhere in the spring. Right now we are ok but who knows what is going to happen.”

State Representative Vincent Candelora (R-86) confirmed the deficit and said that future cuts this year are a possibility.

“As I had said on the House floor, nobody should be surprised if these numbers change because Connecticut is in a real fiscal crisis and what this budget really represents is a whole new way of building the foundation for spending,” he said. “It is not going to get fixed overnight and we very well could be in by Christmas time looking at making additional budget cuts.”

However, Candelora said having solid numbers now is very important to local communities.


“By the governor signing the budget, for our communities it brings a real sense of relief for education and we can begin to start planning for next year,” he said. “I think everyone was really holding their breath and while many communities had budgeted some sort of reduction, there was no way communities could sustain the cuts that were in the executive order.”

State Representative Sean Scanlon (D-98) said while it is unfortunate the budget process took so long, the bipartisan nature of the budget was the right step forward. Scanlon said he thinks due to the timing of this budget, mid-year cuts may be less likely.

“The budget that required there to be a cut last year was passed in June of 2015, so I think so much time had gone out that it had been out of balance, but if we passed this thing in late October, I just don’t anticipate there being a need to make any adjustments that quickly,” he said. “Obviously we hope that the numbers from this budget pan out for the next two years.”

Scanlon said he hopes certain features of this budget, like the spending cap, will also help to get the Connecticut economy up and running again. A constitutional spending cap was ratified back in 1992, but was not implemented by the legislature until this budget. In prior years the legislature had used a statutory cap that was more flexible.

“I think there are a lot of things in this budget that should give people, and businesses specifically, a lot of confidence that we are doing what is being asked of us from that community, specifically when it comes to reining is spending,” he said. “We put a spending cap in this budget, spending only grew by less than one percent in this budget over last year. From a spending cap to a bonding cap I think we are basically saying to the business community here in the state and outside Connecticut that we are taking care of this problem on a bipartisan basis so that we can get Connecticut moving again and making progress again. I hope that they see we have come together to do this and take that as a sign that it is time to invest in Connecticut because this is a state that is worth investing in.”

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  #475  
Old 11-15-2017, 01:38 PM
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PENNSYLVANIA

http://wesa.fm/post/state-fill-budge...-fund#stream/0

Quote:
State To Fill Budget Holes By Borrowing Against Tobacco Fund
Spoiler:
Pennsylvania is going to borrow against its Tobacco Settlement Fund to fill in last year’s deficit and finish this year’s budget

The Wolf administration confirmed Tuesday that it will tap into the stream of money states have received from tobacco companies since the 1990s.

The borrowing will give the commonwealth money to balance its books up front, and will then be paid back over several decades.

The Commonwealth Financing Authority approved the plan Tuesday. However, Budget Secretary Randy Albright noted that it’s not finalized yet.

“The resolution today simply allows staff at the CFA to put together a professional team, and go out and ascertain in the market what the most cost-effective financing plan should be,” Albright said.

Currently, the Tobacco Fund allocates nearly $16 million annually for smoking cessation programs, according to the American Lung Association.

A spokesman for Wolf said the borrowing won’t affect that money.

But the association’s Deb Brown said she’s still worried.

“Unless they’re going to take money from somewhere else and invest it in these programs at the same level, it has to impact the programs,” she said. “There’s no other way to look at it.”

The administration didn’t elaborate on how it would keep the money flowing.

The tobacco plan was one of two borrowing proposals being considered to fill in budget holes. The other would have securitized profits from the state-run liquor industry.
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Old 11-15-2017, 02:35 PM
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CONNECTICUT

https://ctmirror.org/2017/11/13/newl...owing-red-ink/

Quote:
Newly adopted CT budget already showing red ink
Spoiler:
Less than three weeks after legislators approved a new state budget, eroding revenues have opened deficits topping $175 million this fiscal year and nearing $150 million in 2018-19.

Eroding income and sales tax receipts in particular also probably have worsened the multi-billion-dollar projected shortfall Connecticut must solve after the next election.

The consensus report from Gov. Dannel P. Malloy’s administration and the legislature’s nonpartisan Office of Fiscal Analysis also raises the risk the state might exhaust its emergency reserves.

“The governor’s caution regarding our ability to get through FY 18 in balance under the bipartisan budget passed by the General Assembly was well-warranted,” Office of Policy and Management Secretary Ben Barnes, Malloy’s budget director, said Monday. “This consensus revenue projection will likely place us more than $178 million in deficit before we have even had an opportunity to effectuate the large lapses and spending cuts built into the budget. OPM will finalize our projection in our letter to the comptroller next week, and the administration will continue to do its part to monitor revenues and expenditures closely.”

The estimated budget deficits tied to this revenue erosion — $178.4 million this fiscal year and $147.1 million in the next — total $325.5 million, easily exceeding the modest $213 million Connecticut holds in its rainy day fund.

Comptroller Kevin P. Lembo recommends a reserve more than 12 times that level.

And Connecticut won’t finish paying off the operating debt from the last time it exhausted its reserves — roughly $1 billion borrowed in 2009 — until January.

The new deficit estimate for the current fiscal year also falls dangerously close to the threshold that would force Malloy to craft a deficit-mitigation plan.

Such a plan is required whenever the state certifies a deficit in excess of 1 percent of the General Fund. In the context of the current fiscal year, that represents a shortfall topping $187.4 million.

The new budget faces major challenges on the spending side as well as the revenue component. It requires Malloy to achieve unprecedented savings after the budget is in force — a level that the governor already has warned would be difficult to achieve.
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Old 11-15-2017, 02:36 PM
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TAX REFORM

https://www.bloomberg.com/news/artic...of-tax-changes

Quote:
Muni-Bond Market Braces for Borrowing Rush Ahead of Tax Changes
By Elizabeth Campbell
November 14, 2017, 11:53 AM EST
November, December could be ‘huge’ for issuance, analyst says
Republican overhaul would pull tax break from many bond types
Spoiler:
The municipal market is preparing for a potential onslaught of bond deals before the end of the year as U.S. lawmakers consider pulling the tax break from tens of billions of dollars of debt issued each year.

The House of Representatives bill would require investors to pay income taxes on so-called private activity bonds, or PABs, which finance projects like airports, water facilities and toll roads, and do away with a frequently used refinancing technique known as advanced refunding. While the Senate version leaves PABs intact, the risk may push borrowers to act before the law is changed, Municipal Market Analytics said in a research report.

“It could be a huge end of the year,” Matt Fabian, a partner with MMA, said in an interview. “Issuers will probably begin to access the market shortly just on the risk. If they’re going to borrow next year they might as well accelerate to borrow now.”


A late-year rush -- if significant enough -- would offset the slowdown in the municipal market, where new debt sales have declined from last year’s record pace. That contributed to this week’s drop in state and local government bonds prices, paring the gains that came after the tax overhaul promised to slash sales in the years ahead by pulling the tax-exemption from a significant chunk of the market.

Citigroup Inc. analysts raised their municipal-bond sales forecast for 2017 by $15 billion to about $380 billion as governments move to refinance before the tax law is potentially changed. There was $428 billion of municipal debt sold last year, according to data compiled by Bloomberg.


The pace of issuance through the end of 2017 may be limited because there are few weeks left to do so. Given that it’s already mid-November, there isn’t enough time for a lot of issuers to come to market before the end of the year, according to Philip Fischer, head of municipal research at Bank of America Merrill Lynch.

The Illinois Finance Authority used PABs to finance more than $24 billion in “essential infrastructure projects,” including more than $3.6 billion in fiscal year 2017, according to a draft of a memo to Congress from the agency. Ending the exemption means projects may not get built, be delayed or reduced in scale, said Chris Meister, the authority’s executive director.

“The virtue of private activity bonds is that it provides a fairly small benefit, but in each individual transaction it’s a material benefit to non-profits to do the sort of work that either the private, for-profit sector cannot or does not want to do, or that government cannot or cannot afford to do,” Meister said in an interview.

The Illinois authority is ready to move quickly to help borrowers get private-activity deals done before the end of 2017, according to Meister, who said he’s heard that some borrowers are interested in moving up planned sales.

If enacted, the rollbacks to municipal-bond subsidies will “disproportionately” hurt states with fiscal challenges, said Richard Ciccarone, Chicago-based president of Merritt Research Services, which analyzes municipal finance.

“In Illinois, we can’t replace those kind of government incentives with tax-supported programs because our balance sheet is already loaded with debt and pensions liabilities,” Ciccarone said. “So we can’t easily replace the loss of the lower cost to do your financing.”
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Old 11-22-2017, 07:17 PM
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https://www.wsj.com/article_email/ha...DEzWj/#new_tab

Quote:
Have They Got a Bond for You
Connecticut and Chicago borrow a debt trick from Puerto Rico.
Spoiler:
State and local governments pledge their full faith and credit to repay general obligation bonds, but politicians in Chicago and Connecticut realize their word is depreciating in value. Thus they’re pitching a debt arbitrage to reduce their borrowing costs.

As part of Illinois’s slow-rolling bailout of Chicago, Democrats in Springfield this summer allowed the city to issue bonds securitized with $700 million or so in annual sales tax revenue. Creditors would have a legal lien on the revenues. Chicago plans to start floating the sales-tax bonds next month to refinance existing debt.

The bonds will be cheaper to finance than Chicago’s junk-rated GO bonds, which carry a 3.5% premium over top-rated municipal securities. Fitch has rated Chicago’s sales tax bonds AAA, which is an insult to every triple-A issuer including the U.S. Treasury. (Fitch still rates Treasurys triple-A, unlike Standard & Poor’s.) While the city noted in a recent presentation that “ratings agencies rate bonds issued by special-purpose corporations highly because they are more legally secure than a normal bond,” that hasn’t historically been the case.

Securitized bonds issued by special public corporations were once considered less safe than GO bonds because their revenue bases are narrower and can shrink over time. Consider the 2011 bankruptcy of Jefferson County, Alabama, which resulted from political corruption at its over-leveraged sewer system.

Detroit’s Chapter 9 bankruptcy in 2013 set a precedent by subverting GO bondholders to pay public workers and retirees. Prior to Detroit, creditors considered GO bonds sacrosanct and figured courts would compel local governments to raise taxes or cut pensions to repay them. That assumption proved incorrect. So creditors are now demanding higher yields for GO bonds issued by fiscally irresponsible governments.

Hence, Connecticut lawmakers recently authorized bonds backed by state income taxes as a substitute for GOs. The budget noted that “the new type of borrowing authorized in the bill may be viewed more favorably in bond markets because it is linked directly to a large and relatively stable revenue source.” Hmmm.

Income-tax revenues in Connecticut have repeatedly fallen short of estimates due to tepid economic growth. Last year they were off by $530 million. Perhaps Democrats consider this a rounding error on a $3.5 billion deficit. Chicago has reassured investors that the new “corporation would be considered bankruptcy-remote” (our emphasis). However, “in the unlikely event of a municipal bankruptcy, bondholders would still be paid.” Not so fast.

Puerto Rico likewise established a special public corporation in 2006 to issue sales-tax “Cofina” bonds, which were billed as more secure than debt paid from the commonwealth’s operating fund. And for a time that appeared true as politicians raised the sales tax (which was later converted into a VAT) to repay creditors.

But last year Puerto Rico’s governor issued a debt moratorium, which led Congress to impose a fiscal control board and create a quasi-Chapter 9 bankruptcy process. Cofina and GO bondholders are now vying for the same, small pool of money, and both will be lucky to get half of what Detroit bondholders recovered.

Illinois could authorize Chicago to declare bankruptcy in the future, and while states can’t declare bankruptcy, Connecticut could try to renegotiate the terms of its debt. In the event of a default, GO bonds in both places would be less secure because of competing creditor claims.

Investors thirsty for yield may take Chicago and Connecticut up on their proposition, but they shouldn’t complain later if these bets turn out to be bad political risks. Caveat creditor.
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Old 11-24-2017, 11:04 AM
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Originally Posted by limabeanactuary View Post
Cleaning out my office, and came across my hard copy of this.

Quote:
1. Summary
Highly publicized predictions of 50-100 municipal defaults have caused anxiety among municipal bond
investors.1

These recent predictions must be placed into appropriate context, looking both forward and to history:

 In 2009 municipal issuers defaulted on 178 individual bond issues. The aggregate face value of the defaulted issues was $3.5 Billion. In 2010 issuers defaulted on seventy-five municipal bond issues, with an aggregate face value of $1.7 Billion.

 The municipal credit market is a $2.5 Trillion market.

 Thus the prediction of hundreds of municipal defaults has already been realized. Losses have amounted to a tiny fraction of market value.2

 As of December 31, 2010 the MCDX 5-year index spread was 218 basis points. With seventy percent recovery for investors in default, this spread is consistent with 3.63 defaults per year out of the index’s fifty names, or a seven percent annual default rate.3


 Market spreads as of December 31 were already consistent with approximately thirty percent of municipal issuers going into default over the next five years. In that sense, the worst of the doomsday scenarios had already been incorporated into market yields.

 This doomsday scenario is very unlikely. States, counties, and cities face long-term budget stress, related in large part to employee retirement benefits. These problems, though large, are long-term problems and are unlikely to create across-the-board short-term liquidity crises that could lead to widespread municipal default.

So I looked up a few numbers re: Detroit & Puerto Rico:

Detroit:
https://www.forbes.com/sites/stevesc.../#1c31a4786286

Quote:
Plus, Dales notes, less than half of Detroit's $18 billion in total debt is made up of municipal bonds, the bulk of which, about $6 billion, have a good recovery track record in previous municipal bankruptcies. Even if the entirety of the debt was in muni bonds, $18 billion is barely a ripple in a market with $2.9 trillion in bonds outstanding, Dales writes.
Puerto Rico:
https://www.bloomberg.com/news/artic...ed-puerto-rico

Quote:
Debt Island: How $74 Billion in Bonds Bankrupted Puerto Rico
By Martin Z Braun and Jonathan Levin
May 15, 2017, 5:00 AM EDT Updated on May 15, 2017, 10:22 AM EDT
Billions sunk into grand projects, expenses and bureaucracy
In San Juan, $2.25 billion bought a money-losing train line

Looking up these authors, the most recent pubs I can find are from 2015:

Randolph B. Cohen:
http://rbcohen.scripts.mit.edu/Research.html
http://www.hbs.edu/faculty/Pages/pro...spx?facId=6597

Daniel Bergstresser:
http://people.brandeis.edu/~dberg/

Kind of curious to see if they'd update this research given recent history.
But given this page has a 2014 paper as "upcoming":
https://www.brandeis.edu/global/facu...c450688826c83a

I'm going to guess they don't keep their webpages updated
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Old 11-26-2017, 09:37 AM
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EFFECT OF UNFUNDED PENSIONS ON BORROWING ABILITY

http://www.montrosepress.com/nationa...25b19f39c.html

Quote:
Viscous cycle: Large pension debts making it more expensive to borrow funds
Spoiler:
Post-recession America’s states and cities are paying for their negligence in funding their public employee pensions, according to a new study.

The study by the Center for Retirement Research at Boston College estimated a cost to states and local governments when they borrow money but have a high amount of unfunded pension debt.

Prior to the 2008 recession, pensions were really not much of an issue when a state or city was assessed for borrowing. But the study found that cities with heavy unfunded pension liabilities after the crash are now paying an average of eight points more in interest on their loans. State’s pay seven points for bad pension management.

That can result in tens of millions of dollars more in fees that otherwise could have funded core services, J.P. Aubry, assistant director of state and local research, said.

“It reflects a meaningful portion of the average swing you see in municipal spreads,” he said.

Bond agencies, Aubry added, have begun using the poor pension management as an indicator of poor governance and list the liabilities as factors in credit rating downgrades.

“It’s another account, another bill that you can monitor to get a sense of how the government is running things,” Aubry said.

In Illinois, officials say the state's unfunded pension liabilities are about $130 billion, but credit ratings service Moody's estimated in May that the state's pension funds have $251 billion in liabilities.


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