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  #491  
Old 12-22-2017, 02:45 PM
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TAX REFORM

http://www.governing.com/topics/fina...m_medium=email

Quote:
How the Tax Bill Will Change Governments’ Borrowing Costs
Key provisions will likely increase states and localities' current debt load and make it more expensive for them to borrow in the future. The bill's impact on supply and demand in the municipal bond market, however, is unclear.

Spoiler:
For the first time in more than 30 years, Congress has passed a major overhaul of the tax code. The Senate and House have approved the GOP compromise bill, and President Trump is expected to sign it before the end of the year.

The final bill is better than initially expected for state and local governments, but key provisions are still likely to force big changes to their cost of borrowing.

The cause of these changes is indirect: The bill's big break for corporations on their income tax rate will force some state and local governments into higher debt payments on money they have already borrowed directly from banks, thanks to triggers placed in those loan contracts. George Smith, a municipal bond attorney, says it's not unusual for these contracts to have language that allows banks to increase the loans' interest rates in the event of a corporate tax cut.

RELATED
Tax Bill Squeezes Urban America Western States Poised to Lose More Than $1 Billion Under Tax Bill GOP Tax Plan Puts Billions in Muni Market Savings at Risk The Week in Public Finance: Tax Reform Games, a Mad Rush to Issue Muni Bonds and Pension Fees The GOP Tax Bills Are Infrastructure Bills Too. Here’s Why.

But Smith, who specializes in municipal borrowing at the Bryant Miller Olive law firm, says there's no way to tell how many existing loan agreements have such a clause since that information is often redacted in public notices. Additionally, while some banks have an automatic trigger in their agreements, other contracts may leave it to the bank to decide whether to hike the initial interest rate. In the latter cases, says Smith, governments can try to negotiate a rate with banks or refinance out of the initial loan.

"But if they don't have that ability," he says, "they're stuck paying the rate."

One recent deal Smith closed for a Florida city had a trigger. Under the contract, the city refinanced $23.6 million with a tax-exempt rate of 2.99 percent over 10 years. If the bank's corporate tax rate is cut, the loan interest rate will shoot up, meaning the city would pay an additional $711,000 in interest costs over the life of the loan.

Going forward, the lower corporate tax rate could also potentially make it more expensive for governments to issue bonds in the municipal market.

Here's why: Banks and insurance companies buy a lot of municipal bonds, making up 28 percent of the market. Banks also lend money directly to state and local governments. The interest rate governments pay in these deals is typically lower than other types of loans because banks don't have to pay taxes on the income they earn from the loan. The same is true for bonds issued in the muni market -- the rates tend to be lower because they are tax-free.

But with the GOP tax bill, the corporate income tax rate is slashed from 35 percent to 21 percent. That means that banks and other corporations will start earning more money off other types of investments because their tax rate is a lot lower. It could even mean that, after taxes, those other investments are more lucrative than the low interest rate muni bonds and loans. The result is that muni rates may have to go up in order to be competitive.

Less clear is how all the changes in the bill will impact supply and demand in the muni bond market.

Thanks to the elimination of certain types of tax-free municipal bonds, there has been a mad rush to issue bonds before the end of the year. This has likely shifted some of next year's supply into the current year and has analysts predicting a significant decrease in the municipal bond supply in 2018. Most experts peg the drop around 25 percent, a more than $100 billion drop compared with this year.

With less supply, that could put governments in the driver's seat and help keep interest rates favorable to them. "It's a balancing act," says Todd Ely, director of the Center for Local Government Research and Training at the University of Colorado Denver. "Does the reduced supply counteract the likely reduced buying from corporate entities because munis aren't as great a deal as they used to be?"

There are other indirect circumstances that could also play a role in the cost of borrowing next year.

For one, the caps on state and local tax deductions in tax reform may also encourage taxpayers in high-tax states to shelter more income in municipal bonds.

The market also may get a boost from foreign investors, who of course aren't getting a corporate tax rate cut. While they don't benefit from the tax-exempt status of municipal bonds, slightly higher rates may mean that munis will be a better deal for them than other taxable bonds.
http://www.governing.com/topics/fina...m_medium=email

Quote:
Western States Poised to Lose More Than $1 Billion Under Tax Bill
Spoiler:
As Congress speeds toward a vote on its massive tax overhaul, the lack of funding to cover the costs of the package means Western states are poised to lose nearly $1.3 billion in oil, gas and coal royalties.

Neither the House nor Senate versions of the bill are completely funded — Republicans argued economic growth spurred by the cuts would offset their cost. That lack of funding could ignite a 2010 federal law that requires across-the-board budget cuts, including withholding from states their portion of the money that oil, gas and coal companies pay to operate on federal land, when Congress approves a deficit-increasing measure. One prominent Western GOP senator insists that it’s unlikely Congress would allow that to happen, but fears in state capitals remain.

RELATED
How the Tax Bill Will Change Governments’ Borrowing Costs Tax Bill Squeezes Urban America The GOP Tax Bills Are Infrastructure Bills Too. Here’s Why. GOP Tax Plan Puts Billions in Muni Market Savings at Risk
Western states rich in coal, oil and natural gas — among them Wyoming, New Mexico and Montana — already rely heavily on those industries and have had their budgets hit hard in recent years by falling energy prices. Several have been struggling to find millions needed to plug budget holes, and losing the 48 percent cut of the federal government’s royalty payments would be devastating, said officials across several states. The states’ congressional delegations cast their votes along party lines, with Republicans voting for the bill and Democrats against.

Furthermore, the cuts would hit schools and other social services particularly hard, as many resource-rich states use royalty payments to fund those systems. This comes as states fear the impacts of the tax overhaul’s other provisions, such as a cut in local and state income tax deductions.

“Triggering these cuts will put state budgets in the red and critical public services on the chopping block,” U.S. Sen. Jon Tester, a Montana Democrat, said in a statement. “On the heels of a catastrophic wildfire season that burned a hole in Montana’s budget, the last thing we need to be doing is handing out sweetheart deals to corporations that cost our state tens of millions of dollars.”

Governors’ offices did not respond to questions about how they would deal with the drop in revenue.

Montana is poised to lose $24 million in royalty payments if the tax bill goes through. That comes on the heels of a November special session that was called just five months into the state’s two-year budget cycle to address a $227 million hole. The state’s revenue department projected that in all, the state would lose $122 million under the Senate version of the tax bill.

Mike Kadas, the state’s revenue director, said the royalty payments go into the state’s general fund, about half of which goes toward education. Other large portions are directed to the university system, public health and human services, and the state’s correction system.


‘A Big Hit’
“Montana has been struggling to balance this budget for the last year or more, so $24 million is a big hit,” he said. “We’re all in the process of reducing services right now, so it just means more of that.”

Kadas said there is already talk about raising state taxes, and resource-producing counties, which get 25 percent of the state’s payout, would have to choose whether to reduce services or raise property taxes.

Chad Fenner, a county commissioner in coal-rich Big Horn County, Montana, which received $2 million in mineral royalties last year, said the predominantly Native American county already has had to raise taxes because of a lagging coal market. He said losing the payments would mean cuts to the ambulance service, senior center and fire protection, all of which were paid for with royalty money.

“I hate even thinking about it if that would happen,” Fenner said. “It wouldn’t be good for our county.”

The law that would trigger the cuts, the Statutory Pay-As-You-Go Act, also known as PAYGO, requires across-the-board cuts to certain programs if legislation passed by Congress increases projected deficits. An analysis from the nonpartisan Office of Management and Budget determines the amount of the cuts. Congress can, however, vote to waive the effects of PAYGO, which is exactly what some Republicans are suggesting.

Max D’Onofrio, a spokesman for U.S. Sen. Michael Enzi, a Wyoming Republican, said there has yet to be a sequester under PAYGO because lawmakers have voted 16 times to waive the required cuts.

“Senate Republicans will work to prevent cuts,” he said. “Congress made the PAYGO law and Congress can also waive its requirements, and they have done so before on a bipartisan basis.”

But not all are convinced it would be so simple.

“We’ve been told, ‘Don’t worry, Congress will fix this part of the deal,’ but I’ll believe it when I see it,” Kadas said.

Enzi’s home state of Wyoming would be perhaps the hardest-hit by withheld payments. The state got north of $664 million last year in royalty payments — the most of any state. It also faces a $770 million two-year deficit.

Mark Gordon, the state’s treasurer and a Republican, said the education system would be hit hard by the loss of mineral royalties. The money funds education first before flowing to other priorities.

Royalty payments aren’t just returned to the states to compensate for natural resources — the government has an obligation to offset the costs of development by funding schools, roads and other needs in impacted areas, Gordon said. “There was a recognition that where development occurs, the proper goal for the government was to use those royalties to take care of some of those impacts.”


New Mexico’s Woes
New Mexico expects to receive about $455 million for this fiscal year, according to Democratic U.S. Sen. Tom Udall’s office, and like other Western states, it has had budget problems due to falling energy prices. The state went through nearly all of its reserves over the past two years and is working to rebuild them.

Udall said the bill sets New Mexico “on a collision course for a huge budget cut.” Both U.S. senators from New Mexico sponsored an amendment to the Senate bill to exclude mineral payments from the cuts, but it did not pass.

“New Mexico can’t afford a $450 million budget cut, especially one that would slash the budget for public schools,” Udall said in a statement. “And New Mexico’s schoolchildren shouldn’t have to pay for tax cuts for the top 1 percent.”

New Mexico state Sen. John Arthur Smith, the Democratic chairman of the Senate Finance Committee, recently penned a letter with his counterpart in the House to New Mexico’s congressional delegation warning of the impact of losing the mineral royalty payments.

The cuts would “go right to the heart of education,” he said. Republican Gov. Susana Martinez’s pledge to not raise taxes leaves the state with few other options, but Smith said increasing taxes is what the state needs to do to untie itself from the volatility of the oil market.

“You get labeled politically that you just want tax increases, but I just want reliable revenues,” Smith said. “This roller coaster thing is not a lot of fun.”

The Western Governors’ Association, which represents the governors of 19 states, said in a policy resolution that the federal government has no discretion over this money and that payment to the states is the only authorized use for the revenue.

“There’s no question whenever you have to deal with giving something away and taking something back, whoever is on the short end of that stick is going to feel it,” said Gordon in Wyoming. “And PAYGO rules, if they apply to royalty payments to states, are going to be pretty devastating to us.”


MINERAL ROYALTY PAYMENTS TO STATES, 2016
The lack of sufficient funding for the tax bill being considered by Congress would trigger a law known as PAYGO, which stops mineral royalty payments to states, among other things.

Alaska $12,195,000

Arizona $55,000

California $35,317,000

Colorado $83,887,000

Idaho $5,485,000

Montana $23,008,000

Nevada $5,522,000

New Mexico $368,604,000

North Dakota $32,521,000

Oregon $107,000

South Dakota $307,000

Utah $67,901,000

Washington $4,000

Wyoming $664,312,000

Source: U.S. Department of the Interior
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  #492  
Old 12-28-2017, 09:32 PM
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HAMDEN, CONNECTICUT

https://www.nhregister.com/news/arti...s-12458099.php
Quote:
Credit agencies concerned about Hamden’s pension obligations, uncertain municipal aid
Spoiler:
HAMDEN — Amid significant losses of municipal aid, the town saw a credit rating downgrade but maintained favorable affirmations from two other major agencies.

All three of the town’s rating agencies — S+P Global Ratings, Fitch Ratings and Moody’s Investors Service — cited budgetary challenges exacerbated by the state’s fiscal troubles and the town’s costly pension obligations in their reports.

“You never like to see a downgrade but holding our own with two out of three is not bad, particularly in the climate we’re in,” Mayor Curt B. Leng said, “The state saw a downgrade from all three and we’re a product of the state. Every municipality is getting looked at much closer.”

Moody’s Investor Services downgraded Hamden from a Baa1 rating to Baa2 with a negative outlook, concluding a review prompted by the state’s then ongoing budget impasse.

“The downgrade to Baa2 is largely based on the town’s high pension burden coinciding with a limited financial position that will be pressured over the near term,” Moody’s lead analyst Nicholas Lehman wrote in the report. The pressure comes from increasing pension contributions and anticipated reduced state funding.

Fitch Ratings affirmed the BBB+ rating with a stable outlook, but lead analyst Kevin Dolan wrote, “The town’s weak financial profile is pressured as a result of growing debt service, a ramp-up in required pension contributions and very weak general fund liquidity.”

S+P Global Ratings removed the town from a credit watch list and affirmed the town’s A+ long term rating on debt with a negative outlook on stable financial performance. Although the reductions are manageable, “Hamden remains increasingly vulnerable to even slight changes in revenue or expenditures,” the agency’s analyst Christina Marin said in a report.

Marin wrote, “in light of Hamden’s weak reserves, extremely high pension, other postemployment benefits and a growing internal services fund deficit Hamden has limited flexibility to respond to the state’s financial challenges.”

Hamden may be facing close to a $4 million loss of municipal aid, Leng said.. However, a little more than half of that shortfall comes from the state mandated car tax, which may be reimbursed. Passed in the initial budget, only $330,000 would have been reimbursed, he said, but legislators added a fix for municipalities that had revaluations for grand list years 2014 and 2015 resulting in a tax increase of more than four mills.

Amid the revaluation changes, property values went down and to collect the same amount of money, the state would reimburse those municipalities up to 45 mills, Leng said. Bridgeport, Torrington and Hamden fell into category and wouldn’t have been reimbursed at a reasonable rate, he said.

With the fix, close to $2.6 million would be reimbursed for Hamden, Leng said, and while there’s no reason to believe the funds won’t come through, the money is not certain because of the item’s phrasing in the budget, saying “may” as opposed to “shall” be reimbursed.

“I think it’ll get fixed when they go back into session in February, but until then, especially for rating agency purposes, it’s not here and not on our list of firmly committed money,” Leng said. “It made for the murkiest discussions we’ve had. A lot of the discussion was around ‘what ifs’ and it was tougher to be on solid ground for discussion.”

Leng said the town is working seriously on the agencies’ pension liability concern, fixing the pension with cost-of-living adjustment reductions, new pension contribution levels and the pension obligation bond.

One of the largest drivers of pension reform has been a reduction to cost-of-living adjustments. For years, the town was paying out the 3 percent maximum annual increase, but it has been negotiated with three unions and set at a new “up to 1.75 percent” maximum per year. Since the town started paying out around 2 percent several years ago, the town’s pension liability has been reduced by more than $10 million. One percent of COLA has been valued by the town’s actuaries as equaling $2.1 million of the town’s annual annual required contributions, Leng said.

As a result of implementing these fixes, there is an increase in the money the town is putting into the pension plan so that it’s solvent for years to come, Leng said, but it also reduces pension liability.

The town has less revenue coming in than expected even though officials budgeted conservatively, not anticipating much more revenue, Leng said, adding the town did better than many communities but will still be short in the millions “and that has direct impact on any municipality.”

“We’re going to look at every dollar spent,” Leng said.

The town will continue the hiring freeze for nonessential employees and spending freeze for nonessential expenses, which he enacted in August. Both will continue indefinitely and the savings in town salaries that resulted from hiring freeze and delaying the start of new hires has created $1 million in savings from the budgeted salary accounts, Leng said.

“There are going to be many items that are going to be discussed and nothing is off the table because we have to work to balance our budget.”

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  #493  
Old 01-04-2018, 11:23 AM
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CONNECTICUT

http://www.courant.com/opinion/edito...102-story.html

Quote:
Editorial: Connecticut's Money Is Moving Out
Spoiler:
Connecticut's money is moving out — and a lot of it is moving to Florida.

It's common knowledge now that Connecticut is seeing an exodus of residents. But are the rich leaving? According to the latest IRS data, they are.


Legislators who hope to solve the state's budget crisis with ever-higher taxes should pay attention. The data are clear:

Those who moved out of Connecticut from 2015 to 2016 took with them more than $6 billion in adjusted gross income, or AGI. People who moved to Connecticut brought with them only about $3.36 billion in AGI. The total net loss to Connecticut: $2.7 billion. In one year. That was in the top five of all states, regardless of population.

Connecticut realized $6.85 billion in income tax from the 2015 tax year, or 4.3 percent of the $161 billion in AGI reported from all filers. If that same ratio held true in 2016, then the loss of $2.7 billion in AGI would have meant an actual loss of more than $100 million in income tax revenue.

In one year. That doesn't account for all of the problems in a $20 billion budget, but it's a serious dent, and it's indicative of a deep problem: Many of Connecticut's wealthy residents are moving out, and they're taking their money with them.

Legislators, this is strong evidence that taxing residents at high rates is becoming counterproductive.

Here's more evidence:

The average adjusted gross income for all filers who moved out of Connecticut last year was $123,377 — the highest in the nation and far above the state's median income. The average AGI per return for those who moved in was $92,677, or $30,699 less than those who moved out — the biggest difference in the nation. Put another way, those who moved in were not enough in number, or in income, to replace the expats.

The states that poached the most taxpayers from Connecticut were New York (8,202 tax returns) and Florida (7,944). The average adjusted gross income for those who left for New York was $111,653. That's pretty bad, but it's nowhere near as shocking as Florida, where the average return from former Connecticut residents was $253,187 in adjusted gross income.

That means more than $2 billion in income moved from Connecticut to Florida from 2015 to 2016, more than twice as much money as moved to New York.

The overall trend of richer people leaving Connecticut has been increasing over the last five years, according to the IRS data. The total number of tax filers and their average AGI for people who moved out of Connecticut was higher last year than at any time since before 2011-12. For example: From 2012 to 2013, more than 48,000 tax filers had moved out of Connecticut, nearly as many as moved out from 2015 to 2016, but the average return was about $112,000 in AGI, compared to over $123,000 last year.

Goodbye, rich people.

It's not that Florida doesn't have its problems — it does. But it has a unique situation: It can prop up most of its state government on sales tax revenues and attract residents by avoiding an income tax.

Connecticut's financial problems are serious. We have crushing pension obligations, too long ignored. The state must find a way to deal with them without taxing the stuffing out of the rich. That is not a guaranteed way to increase income, as the IRS data show.

The legislature's priority in 2018 must be to tackle this problem that they've hit the snooze button on for decades.



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Old 01-06-2018, 05:08 PM
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http://www.governing.com/week-in-fin...-pensions.html

Quote:
Corporate Tax Break Already Affecting Muni Market

Spoiler:
Even though the federal tax overhaul has yet to go into effect, the cuts to the corporate tax rates are already impacting the municipal market. Preliminary data shows that banks have begun to reduce their muni bond buying. According to Municipal Market Analytics (MMA), banks' third quarter net buying fell to about $5.7 billion. That’s the lowest quarterly number since 2009, when banks collectively sold off a net $10.3 billion.


In addition to reducing how much they buy, MMA’s Matt Fabian says it’s “not unreasonable that at least some institutions will become net sellers” of tax-exempt municipal bonds in the early months of 2018. This, he says, could counteract what was expected to be an advantageous interest rate climate for governments.

The Takeaway: So why are banks reducing their municipal bond holdings? With the GOP tax bill, the corporate income tax rate was slashed from 35 percent to 21 percent. That means that banks and other corporations will start earning more money off other types of investments because their tax rate is a lot lower. It could even mean that, after taxes, those other investments are more lucrative than the low interest rate muni bonds.

On the other hand, the muni market might see a counter development to this drop in demand. That's because the GOP tax bill also eliminated other types of tax-free municipal bonds, causing a mad rush to issue them before the end of the year. According to Bloomberg News, states and localities sold a record $55.6 billion of debt through Dec. 22, which could help to keep interest rates steady for governments.


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Old 01-08-2018, 07:51 PM
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http://www.washingtonexaminer.com/a-...rticle/2644978

Quote:
A financial 'bomb cyclone' is coming for the states in 2018

Spoiler:
January is traditionally the time to put the past behind us, turn over a new leaf, and make plans for what’s to come. Many indicators show the country’s economy has been pumping on all cylinders this past year. Stocks are at record highs and the unemployment rate is at its lowest point in 17 years. Many would agree that the economy is moving in the right direction, which is excellent news.

Unfortunately, this optimistic news is somewhat undercut by worsening financial trajectories at the state government level from coast to coast. The nation is not in as good a shape as it seems.


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Recently updated government financial disclosures show alarming levels of red ink on statehouse ledger books across the country. A 2017 analysis shows $1.5 trillion in state debt, a 15 percent increase over the previous year and part of a long-term worsening trend. In the last year, only seven states reported improved financials, while three were unchanged, and 40 are on a troubling downward trajectory.

There is a significant variation in the fortunes of the 40 downward trending states, which include examples at both ends of the extreme, such as Alaska’s declining surplus and New Jersey’s skyrocketing $208 billion debt. However, when the data is taken as whole it is hard to understate the scale of the precarious fiscal situation at the state government level. Truth in Accounting, an organization I founded in 2002, analyzes the most recent Comprehensive Annual Financial Reports, and our data shows that the average state now carries a staggering $10,020 in debt for every one of its taxpayers.

TIA’s sister site, State Data Lab, is a statistical resource created to help citizens understand the complex relationship between inputs and outputs that has led to this fiscal tailspin. None of these data points can be interpreted in a vacuum, but a clear image emerges when they are considered as a whole. Across the most financially challenged states, you can find above average public-sector compensation, higher unionization, and more egregious gerrymandering.

These data points hint at some of the intangibles that challenge budgeters at the state government level. But the most illuminating examples are simple increases in public-sector spending that are paid for with the taxpayer’s credit card.

Across all 50 states, we have seen expenditures creep up over the last 10 years in every category. Average state spending on education has increased 31 percent over the decade, spending on health and human services has risen 68 percent, and interest payments on debt have jumped by 36 percent. This spike in public-sector spending far outpaces inflation, and has pushed the average individual taxpayer's burden up from $8,900 in 2009 to $10,020 in 2016.

Increased government spending doesn’t necessarily foretell financial doom if it’s linked with corresponding revenue increases. But most states have opted to cover their spending sprees by unfairly shifting the burden onto future taxpayers, including our children and grandchildren. Vast amounts of money—mostly in public-sector pensions and other post-employment benefits such as retiree health care—have been promised on paper without sufficient funds to back them up.

This short-sighted accounting trick allows governments to claim they have balanced their budgets while artificially deflating their published debt numbers. However, the day will come when they have to decide whether to default on promises made to state workers, or hand the bill to surprised future taxpayers.

These accounting gimmicks amount to financial negligence, and undermine democratic checks and balances. Governors and state legislatures are saying one thing—in the form of bogus bookkeeping—and doing something else without scrutiny from constituents. If voters don’t have access to honest information, they can’t make informed choices at the ballot box. As we close out 2017, let’s set some goals about the nation’s financial trajectory. We deserve governments that live within their means, and above all else, we have a right to honest accounting disclosures from our elected officials.

Sheila Weinberg, CPA, is the founder and CEO of Truth in Accounting, a nonprofit organization that researches government financial data and promotes transparency for a better-informed citizenry.


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Old 01-08-2018, 08:16 PM
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CONNECTICUT

https://ctmirror.org/2018/01/04/soci...-cts-finances/

Quote:
Medicare program fix adds red ink to CT’s finances
Spoiler:
To find some of the money to reverse cuts to a popular social services program, the legislature is expected Monday to raid $17.8 million owed to next fiscal year’s state budget — which already is at risk of a significant deficit.

According to the bill lawmakers are scheduled to vote on in special session, the General Assembly also would make changes to the state’s contribution to the teachers’ pension — changes that could worsen this fiscal year’s budget deficit and spark a legal debate as well.

The measure, filed online, also would cut funds for executive appointments, miscellaneous expenses and for the Department for Administrative Services.

“At first blush, this doesn’t look promising for those at home rooting for achievable savings and containing the deficit,” Kelly Donnelly, spokeswoman for Gov. Dannel P. Malloy, said Thursday. “With that said, we’ll review the proposal in further detail over the coming days.”

The Democratic and Republican caucuses in the House and Senate did not comment when initially approached Thursday evening.

To reverse new eligibility restrictions for the Medicare Savings Program, which uses Medicaid funds to pay medical expenses that Medicare doesn’t cover for poor seniors and the disabled, legislators needed to find about $54 million this fiscal year. Estimates are those restrictions, if not reversed, could eliminate or reduce benefits for as many as 113,000 residents.

Creating a deficit next year to fund services now
One place they looked: next fiscal year’s finances.

When the General Assembly adopted the new, biennial budget in late October, it relied on a commonly used technique to achieve balance in both years.

As the plan was being designed, there were extra funds in the first year and too few in the second. To resolve this problem, the budget stipulates that $17.8 million in funds from the current fiscal year be carried forward into 2018-19.

But now, to find about $54 million for the Medicare Savings Program, lawmakers would cancel that transfer, leaving 2018-19 finances $17.8 million shy.

Further complicating matters, the legislature’s nonpartisan Office of Fiscal Analysis and the Malloy administration warned in November that tax receipts and other state revenues in the 2018-19 fiscal year already are projected to fall $150 million short of the level anticipated in the budget.

The legislature originally was scheduled to act in special session on Thursday, but postponed meeting until Friday — and then again until Monday — because of inclement weather.

Double-counting the teachers’ pension savings?
The plan to restore funds for the social services program also could exacerbate a $224 million deficit projected for the current fiscal year, by again altering how the state budgets for teachers’ pensions.

Connecticut has been restricted somewhat in this area since 2008, when it borrowed $2 billion by issuing bonds with a 25-year life, to bolster the cash-starved pension program.

The state promised in the bond covenant, its contract with investors, that it would appropriate the full contribution recommended by pension fund analysts each year in the state budget — something Connecticut often failed to do for decades beforehand.

But this year, legislators tried to work around that. They ordered teachers to contribute an extra $19.4 million this fiscal year.

The new budget technically does report the full state contribution that fund analysts recommended: $1.29 billion.

But it also directs the governor to achieve hundreds of millions of dollars in savings in a variety of agencies and programs across state government. Baked into that omnibus savings target is an assumption that $19.4 million of the $1.29 billion state contribution listed in budget won’t actually be placed in the pension fund.

In other words, the budget technically appropriates a $1.29 billion state contribution for teachers’ pensions, but actually delivers that amount minus the $19.4 million extra teachers must kick in.

State Treasurer Denise L. Nappier decried this accounting maneuver, saying what legislators believe to be a loophole may or may not violate the letter of the bond covenant, but clearly violates the spirit.

But to find more resources for the Medicare Savings Program, the legislature is expected to vote Friday to officially reduce the teacher pension contribution line item by $19.4 million — even though it already assumed that savings elsewhere in the budget.

The final $17.3 million earmarked in the bill to reverse cutbacks to the social services program would come from reductions to accounts for executive appointments, miscellaneous agency expenses and from the Department of Administrative Services.


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Old 01-12-2018, 04:21 PM
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http://www.governing.com/week-in-fin...alifornia.html

Quote:
25 States Start the Year Off With a Shortfall
Spoiler:
As state legislatures convene this month, half of them will likely have to add fixing a budget shortfall to their to-do lists. An analysis by the government relations firm MultiState reports that 25 states are facing budget shortfalls this month. That’s better than the 31 shortfalls the firm found last January.


The size of the deficits vary widely. In some places -- such as Rhode Island and Vermont -- it's small enough that very little legislative action will be needed to resolve it, writes MultiState Analyst Ryan Maness. Other states may have to consider significant changes to solve their fiscal problems. Notably, New York is facing its biggest budget gap -- $1.7 billion -- in more than half a decade.

The states with shortfalls are mostly concentrated in oil and natural resource states, the Midwest and the Northeast.

The Takeaway: Tax reform and the changes it will have on state revenue could play a big role in whatever solution states come up with. Because federal tax reform eliminates many itemized deductions, a fair number of states will see an increase in revenue unless they decide to break from the federal government and keep those income deductions for taxpayers. For example, Oregon, which is facing a $1.7 billion deficit over two years, is expecting up to a $200 million windfall this year.

History has shown that tax reform windfalls can be tempting in places that are short on revenue. Three decades ago when federal changes scaled back tax benefits, such as eliminating the deduction for credit card debt interest, states had to decide whether they would do the same. While many sought full or partial revenue offsets, nine -- all with weak revenue conditions in 1986 and 1987 -- decided to keep the windfall from the federal reforms.
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Old 01-17-2018, 06:56 PM
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NEW YORK

http://www.crainsnewyork.com/article...th-more-than-1

Quote:
Cuomo proposes plugging budget gap with more than $1 billion in taxes and fees
Governor pitches excises on health insurance, painkillers and online shopping

Spoiler:
Gov. Andrew Cuomo called for an array of new revenues to close the state’s $4 billion budget hole on Tuesday while sketching his spending plan for the coming fiscal year.

The governor asserted that Albany could reap $750 million from sales of health care nonprofits to private entities, $140 million from a new tax on health insurers, $170 million from an opioid surcharge, $300 million through a one-year suspension of certain corporate tax credits and $318 million through an internet sales tax.

The state would allocate the proceeds to a “health care shortfall fund”—which Cuomo said would “make up for these federal cuts that are coming down the pike”—and education spending.

Cuomo's total budget would be $168.2 billion, up 2.3% from last year. Expenditures of state funds would rise by 1.9%.

In keeping with all of his recent speeches, the Democrat deflected attention from the state’s longstanding fiscal issues by railing against the tax law Congress passed and President Donald Trump signed in December. He pointed to the massive federal corporate tax cut to defend the proposed levy on health care providers, and the one-year deferment of credits for companies holding more than $200 million in such incentives.

“They weren’t expecting the tax cut, they got the tax cut," he said. “I think it’s totally justifiable to have a tax to recoup part of their windfall benefit.”

Cuomo plans to impose a 14% tax on health insurers’ underwriting profits, raising an estimated $140 million, following a 40% cut they received in the federal tax overhaul. He also proposed that manufacturers pay 2 cents per milligram of active opioid ingredients, generating $170 million, “to offset the costs that we’re spending to fight opioid abuse.” The governor’s chief of staff insisted on Twitter that the state’s Medicaid program—which will grow by $593 million, or 3.2%, this year—will not pay the surcharge.

The governor vowed to dedicate the funds from the painkiller impost to anti-addiction programs, which will hit $226 million under the plan he announced Tuesday.

Several major federal health care programs have yet to be funded by Congress. Support for the Children’s Health Insurance Program, which covers about 350,000 Empire State children, expired on Sept. 30, with Congress providing temporary funding to states in December. Cuomo’s budget assumes Congress will reauthorize funding for the program, but if not, the state would need to contribute an additional $1 billion.

Another $1 billion is at risk if the federal government doesn’t approve cost-sharing reduction payments, which fund New York’s Essential Plan for low-income consumers.

The health care shortfall fund would offset that risk.

The reserve fund would be supported, in part, through funds paid to the state when health care nonprofits sell or merge with for-profit companies. One such deal that is pending is Queens-based nonprofit health plan Fidelis Care’s $3.75 billion sale to Centene. Cuomo didn’t mention the deal by name, but few such transactions are large enough to generate the $750 million the state anticipates.

“This is about not-for-profit health care companies that we financed through Medicaid primarily,” he said.

Cuomo also promised to rationalize what he described as a “hodgepodge” of sales taxes on online retailers like Amazon by imposing a single rate on the entire industry.

The new imposts face opposition from private-sector interest groups and their allies in the dominant state Senate GOP conference. State Senate Majority Leader John Flanagan, a Long Island Republican, appeared to outright reject them after the address in remarks reported on social media.

The governor will have to negotiate a final financial plan with the Senate and the Democrat-controlled Assembly by the start of the new fiscal year, April 1.

The 2017 federal tax legislation eliminated the state and local tax deductions, which let New Yorkers report less on their returns to the Internal Revenue Service. Cuomo reiterated his earlier calls to restructure New York’s tax system by replacing the income tax with a payroll tax—eliminating the excise on employees for money earned, and putting the burden instead on employers for wages paid.

This idea won a swift and bitter rebuke from a top small-business trade group.

“The executive budget proposed today by Gov. Cuomo offers little to help New York’s struggling small businesses and looks to impose a complicated and potentially unworkable new payroll tax,” complained Mike Durant, state director of the National Federation of Independent Business. “New York’s lack of economic competitiveness and high tax status is solely the result of Albany’s tax-and-spend culture, not the recently enacted federal tax reform.”

The governor also floated the notion of legalizing recreational marijuana, saying his office would study the matter and watch the actions of neighboring states and the federal government.

One of his Republican challengers, former Erie County Executive Joel Giambra, proposed decriminalizing cannabis as a new state revenue source over the weekend.

The governor again teased a congestion pricing plan that would fund the moribund subway system through a new charge on cars entering the Manhattan business district. He offered few new details other than insisting that he would not impose tolls on the four city-owned East River bridges, but promised a full proposal later in the week.

He did, however, call for providing the Metropolitan Transportation Authority with a permanent revenue stream by having the agency directly collect the payroll mobility tax on employers in the greater New York area. The tax was enacted after the Great Recession and later pared back because of opposition from suburban Republicans.


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Old 01-19-2018, 05:38 PM
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https://www.bloomberg.com/news/artic...al-bond-market

Quote:
European Insurers Find Yield in U.S. Municipal Bond Market
Spoiler:
Higher credit quality than corporates fuels foreign interest
Longer maturities are focus for European insurance companies
The global hunt for yield is so vigorous that payments to protect against car losses, deaths and storms in Europe are helping to bankroll roads and utilities in the U.S.

The $3.8 trillion municipal-bond market, long the investment mainstay of U.S. residents, is seeing demand from European insurance companies drawn to higher yields and ratings than they can find closer to home. It’s boosting the liquidity of a market where U.S. states and local governments raise money. And it’s also providing a new source of business to asset managers.

"It’s been very robust demand," said Ben Barber, head of municipals at Goldman Sachs Asset Management, which manages about $52 billion of the securities. "We’re seeing brand new entrants into the market that are coming to institutional investors like us."

The interest from corporations such as Germany’s Munich Re underscores the changing landscape in the municipal market, which is so U.S. focused that radio commercials for New York commuters tout local bonds. By the end of September, foreign buyers had increased their holdings of the securities to about $104 billion, more than double what they held a decade earlier, federal data show.


Municipals once held little allure overseas because federal tax breaks depress the yields. But in the era of low and even negative yields on global bonds, foreigners have taken a closer look, particularly in the taxable sector, where rates are higher.

Higher Quality
European insurers in particular are drawn to the higher quality of municipals compared with corporate debt. Sixty-seven percent of the Bloomberg Barclays Municipal Index is rated AA or higher, while just 11 percent of the comparable U.S. investment-grade corporate bond index is, according to an analysis by Matt Caggiano, who helps oversee more than $9 billion of insurers’ municipal holdings at Deutsche Bank AG.

And for the higher credit quality, foreign investors are getting more in return, even considering currency fluctuations, according to an analysis from Bloomberg Intelligence.


To better match their liabilities, life insurers also favor longer-maturity bonds, which are more common in the municipal market than in the corporate world. And European Union regulations effective in 2016 allow insurers to put aside less in capital for holding infrastructure debt than corporate bonds.

"Municipals are an attractive investment, and we will use opportunities to accentuate our positions," said Josef Wild, a spokesman for MEAG, the asset manager for Munich Re, which provides reinsurance and insurance. The company likes municipals for their high ratings and spreads over Treasuries and are using them to diversify its investments, he said by email.

New Funds

While Munich Re handles its investments internally, other insurers have outsourced their municipal strategies. Goldman Sachs Asset Management has seen its holdings of taxable municipals for European insurers increase by 89 percent in about a year. In September, Nuveen Asset Management launched a new high-grade municipal fund spurred by interest from clients outside the U.S., according to John Miller, co-head of fixed income. Overall, it’s managing $2.5 billion in taxable municipals for foreign insurers as of the end of 2017 from nothing a little more than a year ago, he said.

To make room, some insurers are selling Treasuries, as well as European and U.S. corporate bonds, while others don’t necessarily need to.

"There’s a lot of cash being thrown off, and it’s an easy way for them to make another allocation in decent yielding credit markets," said Jason Pratt, head of insurance fixed income at Neuberger Berman, which manages about $30 billion in assets for insurers.

Foreigners have made an impact: liquidity in taxable municipals has improved as trading activity shows, said Goldman’s Barber. And new taxable deals have more potential buyers than bonds available than was seen in the past, said Deutsche’s Caggiano.

The European insurers are likely to step up their purchases as they grow more comfortable with municipals, as yields remain competitive globally and as supply of taxable municipals picks up. Some analysts expect that the recent ban on advance refundings in the U.S., a previous source of tax-exempt debt, may compel issuers to refinance via taxable securities.

"We know from talking to potential clients that there’s still capacity," Caggiano said.
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Old 01-22-2018, 02:30 PM
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https://money.usnews.com/investing/b...unicipal-bonds

Quote:
When Is It Best to Invest in Municipal Bonds?
A robust tax base separates strong issuers from weak ones as defaults rise.

Spoiler:
Construction Worker Standing on Beams
To meet the nation's infrastructure needs, the American Society of Civil Engineers estimates that federal, state and local governments must spend $4.6 trillion by 2025. (Getty Images)

The municipal bond market isn't what it used to be. The old tag line "munis don't default" is untrue, as Puerto Rico reminded us last year by defaulting on $74 billion of debt.

Puerto Rico isn't alone – municipalities are defaulting at an increasing rate. According to Moody's Investor Service, almost 44 percent of the defaults the agency recorded between 1970 and 2016 occurred since 2007.

While default among munis remains relatively rare – the five-year cumulative municipal default rate since 2007 was only 0.15 percent compared to 6.92 percent for corporate bonds – there is no denying that the municipal bond market is changing.

"One reason for the historically low municipal default rates is that governments in distress have shown a high tolerance for raising revenues and/or making cuts to public services to avoid default," says David Strungis, assistant vice president at Moody's Investor Service in New York.

[See: The 9 Best Municipal Bond Funds for Tax-Free Income.]


But as the number of bankruptcy filings increased, the taboo against bankruptcy has begun to weaken. "As bankruptcy taboos dissipate, distressed governments may choose to seek bankruptcy relief sooner than they had in the past," Strungis says.

For muni investors, this means an issuer's creditworthiness is more important than ever, because when push comes to shove, bondholders will fall to the back of the repayment line. "These issuers are there to provide a basic need to their constituents, not take care of bondholders," says Julio Bonilla, a New York-based a portfolio manager and municipal bond specialist at Schroders.

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Rather than sacrifice critical public services, a government in distress "will seek to divert money away from bondholders and pensioners" to maintain or restore public services, Strungis says. "Past default and bankruptcy experience suggests that pension benefits will be difficult to cut, and consequently, bondholders will likely bear the brunt of the loss."

With unfunded pension liabilities rising, muni bondholders may have to wait even longer to see repayment in times of distress. In their default report, Moody's points out that unfunded pension liabilities barely existed 15 years ago. Today, they total approximately $5 trillion nationwide.

That said, "it's important to remember that these numbers represent obligations not due immediately but often over the coming decades," says Joe Rosenblum, director of municipal credit research at AllianceBernstein in New York. The question muni bond investors should be asking is how an issuer's debt stacks up against its revenue.

Local demographics and industry can say a lot about creditworthiness. To distinguish a financially strong issuer from a weak one, look at its obligations in the context of the revenue it can generate, Bonilla says. While an issuer's liabilities may appear astronomical when viewed alone, "some of these municipalities, even at the local level, are massive revenue generators."

[See: 9 Ways to Invest in America With Bond Funds.]

For instance, a municipality that is a center of industry or has a growing or affluent population can provide a strong tax base for revenue. "States have an enormous amount of inherent flexibility to solve their fiscal issues through increasing taxes and cutting costs," says Daryl Clements, a senior portfolio manager who oversees municipal bond accounts at AllianceBernstein in New York. He suggests looking for issuers with strong underlying economies and revenue streams that provide good coverage of their annual debt service requirements.

Financial reports can be deceptive. The trouble is issuers also have a number of tools at their disposal to rig the game in their favor, Bonilla says. For instance, they may use a higher assumed rate of return when reporting their investments on financial statements to make their anticipated revenue appear larger than may be reasonably expected. Similarly, applying a higher discount rate to their obligations will make the net present value, or the size of future obligations in today's dollars, appear smaller.

To give an example of how the discount rate affects governments' obligations, the California Public Employees' Retirement System elected in 2016 to reduce the discount rate used on pension liability calculations from 7.5 percent to 7 percent. This will result in additional state contributions of $2 billion per year.

So objects on financial statements may be larger or smaller than they appear; it all depends on the financial alchemy applied to them. You can often find the discount rate and expected rate of return on investments in the notes section of an annual report.

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Investors have research tools at their disposal. Investors can view an issuer's financial statements on its website or the Electronic Municipal Market Access website, a free site provided by the Municipal Securities Rulemaking Board, the regulatory agency charged by Congress with promoting a fair, efficient and transparent municipal securities market.

"An investor in any kind of security should do their homework," says Lynnette Kelly, executive director of the rulemaking board who oversaw the launch of the EMMA website. "The good thing about the EMMA system is that the information is all there in one place for free."

The site provides information on issuers as well as individual bond issues, including notices about credit rating changes, late payments, bankruptcy and other financial events. Investors looking to stay on top of the ever-changing municipal market can set up alerts for news related to particular issuers.

[See: 11 of the Best Fixed-Income Funds to Buy.]

The municipal market is here to stay. Today, municipal bonds are a $3.8 trillion market responsible for financing two-thirds of the nation's infrastructure projects. The American Society of Civil Engineers estimates that federal, state and local governments must spend $4.6 trillion by 2025 to meet the nation's infrastructure needs.

"So I don't think [the municipal market] is going anywhere," Kelly says. The question is: Will it remain the trusted and largely default-free market we have come to expect?
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