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Old 04-25-2018, 12:21 PM
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Mary Pat Campbell
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CALIFORNIA VS ILLINOIS

https://www.capitaliq.com/CIQDotNet/...ZlQ5bDJsIn0%3D

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For California, The Road To Fiscal Recovery; For Illinois, The Road Not Taken
Apr 19, 2018

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Key Takeaways
California and Illinois suffered similar economic contraction in response to the Great Recession, which exacted a heavy fiscal toll in both states by exacerbating existing structural budget deficits.
Although both states turned to temporary tax increases to boost revenues, only California paired the tax increases with spending adjustments, which has been an underappreciated linchpin of its fiscal recovery.
Illinois had weaker pre-recession pension funded ratios, which continue to this day.
Both states have tightened pension funding assumptions, but only California has exhibited contribution discipline and established a path to full funding.
Illinois pension plans' negative amortization and negative cash flows compound the risks of low funding and restrain funding progress.

Spoiler:
Despite the widespread economic and fiscal stress associated with the Great Recession, most U.S. states weathered the historic downturn with their credit ratings intact. California (AA-/Stable) and Illinois (BBB-/Stable) were not as fortunate. The recession triggered sharp declines in tax revenue and asset values that plunged both states into severe budget crises, weakened the condition of their pension systems, and undermined their credit quality. During the period from late 2007 when the recession began, through its immediate aftermath in early 2010, S&P Global Ratings lowered its ratings on both states by two notches.

In response to large fiscal gaps caused by the downturn, both would turn to temporary tax increases. However, of the two, only California paired its revenue enhancement with material spending-side policy changes designed to close its structural deficit. With the added advantage of a capacity for stronger post-recession economic and revenue growth, California was able to stabilize and then improve its credit quality. Conversely, Illinois--which did little beyond temporarily raise taxes--saw the initial signs of its modest fiscal recovery quickly falter. The state's unprecedented two-year budget negotiation stalemate compounded its fiscal problems, and by further diminishing its already weakened capacity to withstand unanticipated stress, pushed its credit rating to the brink of non-investment grade.

Synopsis
Already mired in a years-long fiscal crisis, California faced a $27 billion projected budget deficit at the time of Gov. Edmund G. Brown, Jr.'s inauguration in January 2011. Within four months of taking office, however, the governor navigated through the legislature a package of deficit reducing budget reforms. Crucially, the fiscal measures reoriented the state general fund to a lower spending trajectory and improved the structural alignment of its finances which was a linchpin to the stabilization of its credit outlook. Enactment of the budget legislation had become easier in the wake of a 2010 voter-approved constitutional amendment that lowered the legislature's vote threshold for passing budget laws. Over the course of that and subsequent budget cycles, the simple majority-vote budget process made it easier for the governor to get a sufficient number of legislators to cosign his agenda of fiscal restraint. The state's budget condition would benefit further following the approval in 2012 of a voter initiative that temporarily raised personal income and sales tax rates.

Voters approved another budget reform in 2014, this time establishing a new budget stabilization account (rainy day fund). Although California remains susceptible to wide swings in revenue performance because of its volatility-prone tax structure, these institutional changes should better enable the state to manage the cyclicality.

Illinois entered the recession burdened by the consequences of its practice of chronically underfunding its pension systems. Even as the economy reached its pre-recession peak in 2007, the state's pension systems had a combined funded ratio of less than 63%, which foreshadowed its deterioration into fiscal distress. Whereas California matched—and even led--its fiscal balancing efforts with spending-side adjustments, Illinois relied primarily on temporary increases to its corporate and individual tax rates that provided only transitory relief to its balance sheet. When the tax hikes partially expired, the state's misaligned fiscal structure fell deeper into debt as its backlog of unpaid bills mushroomed. From early 2015 through mid-2017, and faced with a large and growing structural deficit, the state's budget went from being a source of leverage in negotiations to collateral damage in a protracted ideological stalemate. Before the impasse ended, it would severely weaken the state's fiscal condition and push the state's credit rating to the precipice of below investment grade.

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Illinois And California Suffered Similar Economic Weakening During The Great Recession
To an underappreciated extent, the economies of Illinois and California experienced a similar degree of contraction during the Great Recession. Nationally, the recession was most severe from 2008 through 2009, when real GDP contracted 2.7%. Illinois' economic decline that year was similar to the nation at -2.6% and substantially milder than the downturn that struck California's economy (-4.1%). However, more so than for either California or the U.S. as a whole, the recession in Illinois began earlier, in 2007. When ranked by real GDP performance from 2007 through 2009, California and Illinois had the forty-first and forty-second worst performing economies in the nation, declining 4.4% and 4.9%, respectively. Their growth during the first two years after the recession officially ended was also similar, ranking them twenty-eighth and thirty-second in the nation from 2009 through 2011. In 2011, real GDP growth in Illinois (1.9%) outpaced California's (1.4%).

Chart 1 | Download Chart Data
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Since 2012, however, Illinois' economic expansion has slowed, averaging just 1.1% real GDP growth annually from 2012 through 2016, lagging both the nation (2.0%) and, to a more significant extent, California (3.4%). In effect, Illinois suffered a downturn that—similar to California's—was among the worst in the nation without the subsequent benefit of California's stronger than average recovery from 2012 through the present.

Illinois and California also both experienced significant labor market deterioration, though unemployment rates and total job losses were more acute in California. The unemployment rate in California peaked at 12.2% in 2010, 1.8 percentage points higher than Illinois' 10.4% that same year. Consistent with this, California's more pronounced peak-to-trough decline in nonfarm payroll jobs ranked forty-fifth in the nation during that period and was weaker than in Illinois, which was thirty-fifth. From July 2007 through February 2010, California lost nearly 1.3 million nonfarm payroll jobs, equal to 8.1% of total payroll jobs in the state. Illinois' job losses from its peak in January 2008 to trough in December 2009, reached 408,900, which was a smaller hit in relative terms, at 6.8% of its job base.

As with other parts of its economy, California's more dynamic labor market allowed it to replace all the jobs that had been lost in the recession by April 2014, 16 months ahead of Illinois. Moreover, California's economy has continued to add jobs while Illinois' job growth—after returning to pre-recession job levels—has plateaued.

Chart 2 | Download Chart Data
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With the U.S. and most state economies (including Illinois and California) now operating near full employment, there is limited additional cyclical upside to the pace of growth. As is expected when the labor market tightens, job growth in both states has begun to slow, though the deceleration both began earlier and has been more pronounced in Illinois. From this point forward, additional economic expansion will increasingly reflect the underlying growth potential of each state's economy. Potential economic growth comes from the sum of increases in total hours worked and gains in output per hour, or labor productivity. Anemic gains in labor productivity have become endemic to the macroeconomic landscape of recent years, and is not an economic problem easily solved by any individual state. As for the other factor, total labor hours worked, domestic outmigration of residents places both states at a disadvantage, though to an even greater extent for Illinois.

Net domestic outmigration—more residents moving to other states than moving in from other states—has weighed on the population growth rates in California and Illinois in recent years. However, California's overall net migration remains positive because of greater net in-migration from other countries. While Illinois' international migration is also a net positive, on balance it is not sufficient to offset its larger domestic out-migration, which has accelerated in recent years. California's slow but steady population growth and above-average economic recovery have allowed its labor force to increase more rapidly than the nation or Illinois. A shortage of affordable housing supply has emerged as a leading threat to California's ability to continue expanding its pool of workers, however. In Illinois, a more lackluster cyclical recovery and outright population losses have led to a declining labor force that undermines its underlying capacity for economic growth relative to other states. For both states, shifts in federal policy that restrict international in-migration have the potential to further constrain potential economic growth.

Chart 3 | Download Chart Data
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Revenue trends are a function of economic performance and tax structure
California's general fund revenues have a well-documented penchant for volatility. True to form, as the recession took hold, California's general fund revenues plummeted by 19.3% from fiscal 2008 through 2009. Illinois' general funds' revenues also experienced a significant slump, though at 9% the decline was both smaller and spread across two years (fiscal 2008 through 2010). On the other hand, until the full-year uplift from its 2011 temporary tax increase materialized in 2013, Illinois' initial revenue recovery was comparatively slower. Although California's revenue collections were initially stronger after the recession, this was a byproduct of a temporary sales tax increase. Revenue growth slowed when it expired in 2011. Tax receipts once again began to accelerate in 2013, following approval by voters in 2012 of Proposition 30, which temporarily raised California's retail sales and use and personal income tax rates.

California relies on the personal income tax for a significant majority (70%) of its general fund revenue. A graduated rate structure and the state's upwardly skewed income distribution cause California's general fund revenue performance to correlate with that of its high-income taxpayers. The faster pace of income growth among the state's top income percentiles in recent years has provided additional lift to its post-recession revenue performance. However, because these high-income taxpayers receive a relatively large share of their incomes from capital gains on their investments in financial assets, California's revenues are also sensitive to fluctuations in financial markets. For Illinois, the individual income tax is a less prominent revenue source, making up approximately half of its general funds' revenue. Additionally, Illinois' constitution requires a flat income tax rate, resulting in a much less top-heavy reliance on its high-income taxpayers than California. Whereas taxpayers with adjusted gross incomes above $500,000 accounted for 73.3% of California's total personal income tax liability in tax year 2015, they represented just 19.7% of the total in Illinois.

Pronounced revenue elasticity is a perennial risk to California's budget, but it also facilitates a more robust recovery during expansionary periods and when financial markets are rising. Throughout the post-recession years, the average annual rate of general fund revenue growth in California, at 4.9%, has outpaced that of Illinois at 3.3%. However, from a through-the-cycle perspective, taking into account its downside volatility, California's revenue advantage is less clear. Indexed to 2007, just prior to the recession's start and incorporating the effect of California's severe decline in 2009, Illinois' general funds revenue performed better than California's in eight of the past 11 years (see chart 4).

Chart 4 | Download Chart Data
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Budget Management: Integral To California's Fiscal Recovery; Gone Missing In Illinois
The economic contraction in California and Illinois from 2007 through 2009 ranked among the worst in the nation and directly contributed to their ensuing budget crises. But one reason the recession took an outsized toll on the finances of the two states, in our view, is that both were running structural deficits before it began. Despite a growing economy from 2002 through 2007, each state had come to rely on borrowing and other nonrecurring accounting gimmicks to bridge fiscal gaps. Both had used proceeds from long-term bond issues to finance their recurring deficits along with, in California's case, school aid deferrals and, in Illinois, accumulating a backlog of unpaid bills. In each case, the latter of these practices is evident in the negative fund balances they had accumulated by the end of fiscal 2007—before the recession had begun. For California and Illinois, therefore, the recession unmasked and exacerbated their structural deficits more than it created them.

Chart 5 | Download Chart Data
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As the recession got underway, cash receipts in both states were to an increasing extent insufficient to cover all their payment obligations. Episodes of critically low liquidity prompted the chief financial officers of both to triage the cash they had on hand, favoring payments deemed to hold priority claims, including debt service. While these maneuvers provided near term flexibility that illustrated how state sovereignty over resource management can backstop credit quality in times of stress, both states pushed the boundaries of these extraordinary measures to unprecedented extremes. Payment deferrals in California and unpaid bills in Illinois piled up rapidly from 2009 through 2012 and contributed to deeply negative fund balance positions, equal to more than 20% of their expenditures. The accumulation of large net liabilities in their general funds was associated with rating deterioration for both states.

The Recession's Aftermath
Political stalemate undermines Illinois' post-recession fiscal recovery
Illinois' financial condition initially showed modest improvement thanks to the increased revenue from its 2011 temporary tax increase, which shrunk its structural deficit. The additional revenue enabled the state to pay down its bill backlog and improve the health of its general funds' balance sheet from fiscal 2012 through 2015. This was despite economic performance that lagged the national growth rate and, to a larger degree, that of California. In our view, the state's fiscal gains were limited, short-lived, and largely the byproduct of its temporarily enhanced revenue base. Because the tax increases would partly phase out in January 2015, the full revenue benefit they provided (between $7.5 billion and $8.0 billion annually) lasted just three fiscal years (2011 through 2014). On the expenditure side, the General Assembly closed some state facilities and passed the Save Medicaid Access and Resources Together (SMART) Act, which took effect in fiscal 2013. The SMART Act aimed to produce programmatic savings of $1.6 billion by trimming certain Medicaid benefits. Actual savings were lower, however, at $1.04 billion. Therefore, although the SMART Act improved the state's budget condition to a degree, its finances remained overextended and reverted into decline following the partial expiration of its tax increase in 2014.

The ensuing political stalemate and corresponding fiscal logjam that began in early 2015 exacerbated the state's weakening budget situation. For two consecutive fiscal years, 2016 through 2017, lawmakers were unable to agree on a comprehensive budget and made essentially no adjustments to fiscal policy. Left on autopilot, court mandates, continuing appropriations, and stopgap spending bills dictated state spending. Untethered to any guiding fiscal objectives, outlays in fiscal 2016 continued to drift higher even as $2.9 billion in annual revenue from its 2011 temporary tax increase fell away (and after the revenue base had already decreased by $1.9 billion in fiscal 2015). This caused the state's backlog of unpaid bills to balloon to more than $16 billion by September 2017 after having fallen to $5 billion at the end of fiscal 2015. Deficit operations also drained the state's budget reserve to depletion by the end of fiscal 2017.

In July 2017, the General Assembly enacted permanent increases in the individual and corporate income tax rates, thereby adding approximately $5 billion to the general funds' revenue base. The revenue enhancements alone were insufficient to eliminate the state's structural deficit, however. With no material changes to the state's expenditure base, the Governor's Office of Management and Budget projected in October 2017 that in fiscal 2019, the state faces a deficit of approximately $2.2 billion, equal to 6.1% of expenditures.

In February 2018, Gov. Bruce Rauner proposed his budget for fiscal 2019, which included provisions that would bring finances closer to structural alignment by shifting a portion of the normal cost of pension contributions to universities and local school districts. While the details differ, the proposal is analogous to the approach proffered by California's Gov. Brown in 2011 and 2012, which shifted some educational funding responsibility away from the general fund.

California adopts strengthened budget management practices
Prior to 2011, it was common for California to begin its fiscal year without an enacted spending plan. The state's constitution required approval from two-thirds of the legislature in order to pass budgets. Given the pronounced ideological polarization of its two main political parties, assembling this high level of consensus among state legislators proved difficult, especially when the state faced budget deficits. When they voted as a bloc, minority party legislators held the equivalent of a veto over budget passage. In our view, the political impracticality of the supermajority requirement facilitated the state's tendency to rely on budget gimmicks and a stopgap approach to fiscal policymaking. Perennially late budget adoption often compounded by a reliance on politically expedient but unrealistic revenue assumptions also provoked periodic cash shortages and fiscal emergencies.

This changed in November 2010, when voters approved Proposition 25, which removed the supermajority requirement. Shortly thereafter, when Gov. Brown took office in January 2011 as Proposition 25 took effect, he promptly proposed mid-fiscal year legislation to shrink the deficit. Three months prior to finalizing the budget for fiscal 2012, the legislature approved the governor's package of approximately $13.4 billion in deficit reducing measures. The policy changes had the effect of shifting a portion of the responsibility for funding kindergarten through community college to local property tax bases, providing relief to the general fund. Together with other spending reductions, including cutbacks to various social services, the fiscal reforms helped lower the state's expenditure base by approximately $10 billion as it approached fiscal 2012. Although the budget that year fell short of eliminating the state's $20 billion structural gap altogether, it made significant headway, cutting it approximately in half. The emphasis on lowering the spending trajectory in order to achieve structural fiscal alignment helped stabilize the state's credit quality. We revised our outlook on California's rating to stable from negative in July 2011, 16 months before the vote to temporarily raise taxes would occur.

Chart 6 | Download Chart Data
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In January 2012, the governor proposed another austere budget for fiscal 2013, this time pairing an absence of new spending commitments with the expectation of additional revenue from a temporary tax increase. Unable to obtain the requisite two-thirds legislative support still necessary for tax increases under Proposition 13, the governor went on to endorse a ballot initiative (Proposition 30) that temporarily raised both the personal income tax rate for high-income taxpayers and the sales and use tax rate. Voters approved the tax measure in November 2012, and in so doing increased the state's revenue base for several years by $6 billion to $8 billion annually. (Although Proposition 30 tax rates will phase out entirely in 2018 when the personal income tax provisions sunset, voters extended the elevated income tax rates through 2030 with approval of Proposition 55 in November 2016.)

In our view, the additional revenue combined with a reduced expenditure base—which, again, was largely absent in Illinois--was integral to California's fiscal recovery. Furthermore, policymakers in California directed much of the additional revenue from the 2012 tax increase toward reversing the state's accumulated school aid deferrals (and other forms of budgetary debt) and later, to capitalize the budget reserve. Importantly, the emphasis on debt retirement meant that most of the Proposition 30 revenues, presumed by budget officials to be temporary, did not go toward funding recurring commitments.

In short, while both states would turn to temporary tax increases as a response to the fiscal holes created by the recession, only California matched them with material policy adjustments on the spending side. Without policy changes addressing its underlying structural imbalance, Illinois' expenditures continued on their path upward. Inevitably, any modest improvement in its financial position quickly faded when its tax increase expired in 2014.

Outright declines are not the only way to cut spending
For most states, formulaic inflation adjustors and trends in caseloads drive a significant portion of programmatic spending. Viewed across the span of several years, this feature of state government finance results in an inherent upward trajectory to spending trends. Consequently, genuine spending restraint and even budget austerity does not necessitate outright declines in year-over-year expenditures. For example, California's general fund expenditures reached $114 billion in fiscal 2016 (on a budgetary basis), an increase of $1.0 billion from 2015. Despite the increase, expenditures in 2016 remained $11.6 billion below what the state's Legislative Analyst's Office had projected in November 2010, when the state faced annual deficits of $20 billion.

The results of the two states' disparate approaches to budget management are evident when viewing state spending in real terms—as a share of their respective state economies (see chart 7).

Chart 7 | Download Chart Data
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Preserving Budgetary Gains Through Stronger Fiscal Institutions
In addition to improved budget management, California took steps to cement some of the fiscal gains it would achieve during the recovery by strengthening certain governing institutions. Among these are two constitutional amendments including the aforementioned streamlined budget adoption process (Proposition 25) and an enhanced rainy day fund requirement (Proposition 2). A provision of Proposition 2 requires that tax revenue from capital gains income—when it exceeds 8% of general fund tax revenue—be deposited in the budget stabilization account (or spent on infrastructure if the account balance equals its maximum allowed 10% of revenues). The requirement to capitalize a budget reserve encourages policymakers to run countercyclical fiscal policy that should help avoid an overcommitting state resources based on temporary revenue surges.

California's revenue structure, with its concentrated reliance on a narrow segment of its high-income taxpayers, remains unaltered, however. In fact, passage of Proposition 30 and, subsequently, Proposition 55 have increased the state's dependence on its highest income taxpayers. Consequently, while the majority-vote budget process should facilitate a timelier response, we expect the state will remain susceptible to disproportionate revenue declines in response to even moderate recessions and stock market corrections.

Early in 2015, budget negotiations in Illinois stalemated when its temporary tax increase expired. In exchange for any replacement tax increase, the governor insisted on a package of policy changes he said would improve the state's business climate. They included measures that the majority party in the state's General Assembly steadfastly opposed. For two years, the gridlock precluded lawmakers from agreeing on a budget, let alone any fiscal reforms or elements of the governor's agenda. There was a breakthrough in 2017 when the legislature approved, over the governor's veto, the state's first comprehensive budget since fiscal 2015. Lawmakers also enacted the Debt Transparency Act, which requires state agencies to report to the comptroller monthly any bills they are holding that lack an appropriation or are subject to processing delays. Considering that previous law required agencies to report such bills annually, we expect the more frequent reporting should make the state's financial condition less opaque. Continuing political discord between the governor and key legislative leaders casts a shadow on the state's budgetary outlook and ability to assemble a sustained fiscal repair effort. Complicating matters is that from June 1 through Dec. 31, the constitution requires a three-fifths supermajority of the legislature to pass budgets--an impediment to budget enactment like California's previous two-thirds requirement.

Table 1 | Download Table
Select Credit Metrics Comparison
California Illinois
Population (2017 est) (000) 39,536 12,802
GDP (2016) ($ mil.) 2,622,731 796,012
Per capita personal income % of U.S. (2017) 116 105
Unemployment rate (2017) (%) 4.8 5
General fund budget (FY 2018) ($ mil.) 126,512 37,403
Ending balance and budget reserve (2018) ($ mil.) 12,597 0
Reserve % of expenditures 10.0 N/A
Tax-supported debt (FY 2017) ($ mil.) 84,396 31,320
Debt per capita ($) 2,135 2,446
Source: 2017 population from IHS Markit
Pension Liability Profiles Are A Key Fault Line In Fiscal Sustainability
The liability profiles of California and Illinois, particularly with respect to pension benefits, are an important fault line in the longer-term sustainability of each state's finances and creditworthiness. In both states, promised pension benefits have strong legal protections, effectively locking in the long-term liabilities associated with them as well as the costs to fund them. However, pension contributions in Illinois account for 21.2% of general fund expenditures in fiscal 2018 versus just 4.2% in California. The gap in burdens these differing contribution levels represent is a substantial share of overall state fiscal capacity. Moreover, Illinois has consistently held fast to policies that defer necessary contributions and weigh down its pension plans' funded status. This staunch resistance to dedicated funding discipline is apparent in a review of its funded status during 2007 through 2016 (see chart 8). In 2007, even before the recession began, Illinois' combined funded status was a poor 62.6%. It has also failed to make any improvement from the bottom of the recession, falling to its lowest point in 2016. We view unfunded liabilities consistently rising during a long economic recovery as a clear sign of weak pension management.

By contrast, California had capitalized on the surging pre-recession economy by starting 2007 at nearly 100% funded. Entering the recession with more assets meant it had more to lose, reporting a drop in position of nearly $100 billion across its pension plans at the time. As a result, in 2009 California's unfunded liability nearly reached Illinois' for the first and only time, even though California's population is nearly three times as large. During the subsequent recovery period, California worked through challenging choices around long-term sustainability by updating to more conservative assumptions and improving funding policies. These decisions created a drag on funding progress as they reflected a higher valuation of liabilities, but the stagnation is somewhat transient in nature as both primary California systems have committed to a contribution path that targets full funding.

Chart 8 | Download Chart Data
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The Ghost of Illinois' Past, Present, And Future: Deferred Pension Contributions
Illinois has a long history of treating pension liabilities as "soft" debt, deprioritizing prudent actuarial contributions in the face of competing expenditures. The report from the Illinois Commission on Government Forecasting and Accountability on the state retirement systems notes that from fiscal year 2002 to fiscal year 2016, unfunded liabilities increased $94.8 billion, with the first cause of increase labeled as "actuarially insufficient employer contributions." As a result, all five state plans project asset depletion (insolvency) within the century. The lengths of time until these crossover dates hit are contingent on Illinois maintaining the fiscal capacity to accommodate a doubling of its contributions between now and 2045. However, the state's past contribution practices and current political gridlock cast doubt on its ability to do so. Furthermore, even if underlying assumptions hold, Illinois' pension plans exhibit negative cash flows given that annual benefit payments exceed incoming contributions. As a result, these plans are required to sell assets each year to maintain benefit payments, compounding system liquidity constraints and raising the specter of sub-optimal market timing, both of which can create headwinds for healthy investment returns. Illinois' plans in particular are vulnerable to these challenges and any significant market correction, with less than 40% of assets on hand to pay liabilities and a steep contribution road ahead.

Illinois' retirement benefits enjoy strong constitutional protections, complicating the legal path to reform even if it managed to assemble the necessary political support. The Illinois Supreme Court's on May 8, 2015, struck down the pension reform legislation passed by the General Assembly in 2013. In its decision, the court affirmed the circuit court's decision declaring Public Act 98-599 to be unconstitutional and enjoining its enforcement. Among other things, this sweeping legislation required the state to fund the plans more evenly over time using the Entry Age Normal cost methodology, and replaced the 90% funding target with 100%. In our view, the Supreme Court ruling, along with the earlier ruling on other postemployment benefits (OPEBs), calls into question the legal viability of future pension and OPEB reform initiatives and underscores the profound credit challenges facing the state from a budget and liability standpoint.

Nevertheless, Illinois has taken some initial steps toward tempering the financial impact of these unyielding liabilities. On Jan. 1, 2011, it implemented a second tier which significantly lowered benefits for all new future hires. This tier will provide minimal savings in the short term but will curtail costs significantly once the entire active population has shifted over to tier 2 in about 30 years. Illinois has also established more conservative liability assumptions and moved toward an actuarially determined contribution--albeit in a slow and incomplete manner. The state passed statutes to set contribution rates to target 90% funded after 50 years with a 15-year ramp-up. In our view, pension plans with long, 30-year amortizations reflect weak funding discipline, and were one of the primary causes of significant pension plan underfunding in the 21st century. Pushing that timeline to 50 years and lowering the target to 90% funded compounds the risk--setting in place many years of negative amortization where the unfunded liability is set to grow while full contributions are being made (and even if all assumptions are met). In the meantime, unfunded liabilities are calculated at $11,000 per capita or 21.2% of total personal income.

The Golden State Muddles Through Its Share Of Pension Challenges
California, while much larger than Illinois with less unfunded pension liability, has certainly had a rocky path of its own. At the turn of the century the legislature, spurred on by unions, voted in extremely generous retirement benefits and applied those benefits retroactively to past service--service which had not been funded based on the increased provisions. California rolled back a significant portion of those benefits in 2013 with AB 340, but could only do so prospectively for new hires after the effective date, leaving a massive portion of liabilities today based on the pre-reform levels.

The largest California system, CalPERS, has worked through rounds of tightening its funding discipline through adjustments to actuarial assumptions and methods. It moved out of open (or rolling) amortizations that essentially refinanced the unfunded liability every year and in February shortened the payback period to 20 from 30 years, overhauled its mortality assumptions to be forward looking, and lowered its discount rate multiple times. We view these adjustments as necessary steps towards achieving long-term sustainability for the system. However, implementing these changes on a reactionary basis instead of building them into the system proactively has caused the state to see required contributions nearly double in the last five years, with more increases projected to come.

The second largest California system, CalSTRS, has shared some challenges with Illinois plans in that historic required contributions were set statutorily by the state and did not necessarily address the level of unfunded liabilities, which has precipitated significant underfunding in recent years. However, in 2014 California passed AB 1469 that steps up contributions (employees, local districts and the state) to address actual unfunded liability and target full funding within 30 years. Similar to CalPERS, CalSTRS has also significantly lowered its discount rate and adjusted its mortality assumptions to be more forward looking--increasing the valuation of liabilities but allowing those liabilities to be addressed instead of underfunded going forward. In total, California unfunded liabilities are $2,400 per capita or 4.2% of total personal income.

Beyond The Headlines
While Illinois and California are among the worst three states in terms of pension unfunded liability, a number of differences set them firmly apart when examined more closely. Illinois ranks clearly worse than California on measures such as total unfunded liability, unfunded liability per capita, unfunded liability as a percentage of budget expenditures, and others. Perhaps more importantly for the long run, California has set both its plans on a target to full funding and has never paid less than required for a given year--neither of which is true of Illinois. In our view, that difference in funding discipline illustrates both the historic and projected divergence of trajectories for these states' pension plans which will have a strong influence on their respective budgets for years to come.

Table 2 | Download Table
Select Pension And OPEB Metrics
California Illinois
Pension unfunded liability (FY 2016) ($ bil.) 95.2 129.8
Pension funded ratio (FY 2016) 64.0 37.6
General fund pension contributions (FY 2017) ($ mil.) 5,600 6,951
Unfunded OPEB liability (FY 2017 California, FY 2016 Illinois) ($ mil.) 91,008 38,138
OPEB liability per capita 2,139 2,979
Source: 2017 population from IHS Markit
On Deck: Other Post-Employment Benefits
For OPEB, both California and Illinois have historically failed to prefund their promises, resulting in inefficient funding with large exposure to unfunded liabilities and growing costs. We expect this cost, and its volatility, to grow progressively worse as the baby boomer cohort continues to retire and live longer, and medical costs sustain significantly higher growth rates than inflation. Here again, however, California's long-term outlook is more favorable than is Illinois for two reasons. First, the Illinois State Supreme Court ruled in 2015 that OPEB benefits enjoy the same constitutional protection as pension benefits. Absent a constitutional amendment, the ruling would seem to lock in the state's $38.1 billion (fiscal 2016) unfunded OPEB liability. Second, California has commenced an initiative of prefunding the normal cost of its OPEB benefits. The state's strategy envisions continuing to fund benefits on a pay-go basis while the annual normal cost contributions—split between employees and the state—accumulate in an OPEB trust established in 2016. According to its plan, the state would not withdraw funds from the OPEB trust to pay benefits until the trust reaches a fully funded status, projected to occur in 2045. Although any number of developments could interrupt the state's progress toward funding the liability on an actuarial basis, its prefunding initiative is a step in the right direction.

We expect implementation of GASB statements 74 and 75 to bring further transparency on OPEB liabilities. California's measured unfunded liability increased to $91 billion from $75 billion in fiscal 2017, largely because of the more conservative discount rate required under the new GASB accounting standards. On a per capita basis, California's 2017 OPEB unfunded liability is approximately $2,100. Illinois' 2016 unfunded liability is $38.1 billion or $3,000 per capita. It is worth noting that despite California's economic base being 2.5 times that of Illinois, the two states have very similar total unfunded liabilities when combining both pensions and OPEB.




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  #542  
Old 05-25-2018, 04:33 PM
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Mary Pat Campbell
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http://www.governing.com/week-in-fin...ank-loans.html
Quote:
The Week in Public Finance: Governments Haven't Had Rules for Revealing Their Private Debt -- Until Now
A new requirement forces states and municipalities to annually report the terms and amount of loans they have taken directly from banks. It's a growing source of financing for many public entities.
Spoiler:
A new rule is going into effect next month that many believe will shed light on a controversial spending area for state and local governments: how much they owe banks for private loans.

The rule, issued by the Governmental Accounting Standards Board (GASB), lays out standards for reporting these loans in government financial reports. Unlike public debt -- which is issued through the municipal bond market and subject to regular disclosure requirements -- disclosures about direct loans from banks are not regulated. So, up until now, governments revealed as much -- or as little -- as they wanted about their private debt.

The lack of continuity has been a source of growing frustration, particularly as governments’ private debt rolls have ballooned. Since 2009, banks have more than doubled their municipal holdings to $536 billion in securities and loans.

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Governments like the loans from banks because they come with lower costs and can be more convenient than going through the cumbersome public debt process. But observers worry that the terms of these loans aren't transparent enough, obscuring an important part of a government's financial health.

The new rule requires governments to include in their annual reports a statement called GASB 88 that will include not just the amount of money borrowed directly from banks but any unused lines of credit, any public assets pledged as collateral and any terms laid out in the lending agreement that could trigger early payment or financial penalties.

The rule goes into effect for government fiscal years that start after June 15, meaning most governments will begin including the information in their fiscal 2019 annual reports. It could apply -- by one estimate -- to as much as $50 billion to $60 billion in bank deals a year. That's significant considering that last year $448 billion in total debt was issued publicly in the municipal bond market.

Bank loans have been a point of contention, particularly with bondholders and ratings agencies, because some contain language that, in the event of a bankruptcy or default, makes private debt a priority for paying back over public debt.

What's more, the terms are so broad in some cases that the bank can recall the loan more easily. A Stanford University study of these types of loans in California concluded that more than half of the municipalities there that have borrowed from banks have put themselves at “financial risk” thanks to stringent terms in the loan. That, the paper concluded, makes direct loans riskier than bonds.

A credit rating downgrade could trigger a financial penalty or even a requirement from the bank to immediately pay off the remainder of the loan -- and ironically, such an event could strain finances so much that it could put a government at further risk for a downgrade. For example, in 2015, a downgrade by Moody’s Investors Services on Chicago triggered a $58 million penalty for the already fiscally beleaguered city. (The city ended up negotiating a new deal to avoid the full penalty.)

The rule is supported by many industry trade groups, such as the Government Finance Officers Association (GFOA) and the National Federation of Municipal Analysts, as well as regulators like the Municipal Securities Rulemaking Board.

The change for governments, says Michele Mark Levine, GFOA’s technical services director, shouldn’t be too onerous because most places have been reporting some part of their bank deal information in some fashion.

However, she warns, a federal proposal regarding bank loan disclosures could be far more cumbersome. Last year, the Securities and Exchange Commission proposed a rule that, among other things, would require governments to disclose direct loans from banks within 10 days of closing. The proposal has yet to move forward.
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PROVIDENCE, RHODE ISLAND
HARTFORD, CONNECTICUT

http://www.courant.com/opinion/edito...529-story.html
Quote:
Editorial: Providence, We Feel Your Pain
Spoiler:
Here in Connecticut, we should be grateful that Rhode Island is next door. Not only does it provide us with great day trips, but it has problems that make us feel better about our own.

Take Providence. That charming city has a financial migraine that makes the city of Hartford look almost healthy by comparison. Providence’s pension fund is only 26 percent funded. Hartford may have a lot of other ailments, but at least the pension plan for city employees is more than 72 percent funded.

These numbers come from the online blog GoLocalProv essay titled “The State Should Intervene in Providence — Hartford Style,” written by Rhode Island resident and financial expert Michael G. Riley. It’s not often that Connecticut and its capital city are held up as models, so this essay caught our attention.

Hartford’s Tax Problem
Mr. Riley argues that Providence Mayor Jorge Elorza should do what Hartford Mayor Luke Bronin did — ask the state to step in and oversee the city’s finances, in exchange for a bailout. “Bronin opted for saving the city of Hartford instead of his own job,” Mr. Riley wrote. “He deserves congratulations for this selfless act.”

Instead of congratulations, however, Hartford’s mayor is getting a lot of guff. Other mayors were jealous that the state had agreed to pay off half a billion dollars in city debt over 20 years — although the legislature has since modified the bailout. Legislators felt bamboozled by the deal they approved but evidently didn’t read very carefully.

And critics still insist that Hartford’s wasteful spending is the cause of its current problems. It isn’t.

The city didn’t flounder because of mismanagement and extravagance, although there were mistakes made in the past. Hartford could do all the right things — save for city employee pensions, get concessions from city unions, cut services — and still end up looking at bankruptcy.

Hartford can never collect enough in taxes to cover all its expenses because it is home to so many tax-exempt state offices, hospitals, colleges and other nonprofits. Half its property value is off the tax rolls.

Providence’s Pension Problem
Providence, unlike Hartford, failed for years to put aside any money for retirement benefits for its city employees. Now some Providence leaders are threatening the dreaded B-word. “If the city does not solve its pension issue, bankruptcy will follow,” they said in a report. Mayor Elorza wants to privatize the city-owned water supply to get cash for the pension fund, though the Providence Journal calls his plan “dubious and possibly illegal.”

Providence is far from alone in its pension problems. The Coventry, R.I., police department has only 16 percent of what it needs to pay off benefits. Closer to home, New Haven’s City Employee Retirement Fund is funded at just 33 percent.

Many cities, like Hartford, are switching from traditional pension plans to 401(k)-style plans, in which employees take greater responsiblity for saving for their retirements.

Hartford has been, in fact, more responsible than a lot of other Connecticut communities when it comes to saving for retirement. But many cities are finding that the stock market hasn’t kept pace with the money needed to pay pensions, says the Center for Retirement Research at Boston College.

And so pension costs are eating up larger and larger portions of city budgets. Even cities with good savings habits, like Hartford, are seeing their pension liabilities growing faster than their assets.

So, with our own capital city in trouble, we feel sympathy for Providence. Misery loves company.

Editor's note: This piece was changed to correct the name of the publication in which the essay on Providence was published.


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http://www.governing.com/week-in-fin...m_medium=email

Quote:
The Week in Public Finance: For an Increasing Number of Governments, One Credit Rating Is Plenty
A decade ago, most sought two or three ratings before selling their bonds. Not anymore.
Spoiler:
For years, governments paid for the extra cost of getting multiple credit ratings when they sold bonds, mainly to appease the investors who bought them. But now, more and more governments are forgoing multiple ratings in favor of just one -- and 2018 is shaping up to be the biggest year yet for the trend.

Through the first five months of this year, 25 percent of bond sales have involved just one credit rating, according to data analyzed by the research firm Municipal Market Analytics. That’s far higher than the 13 percent rate a decade ago and the 20 percent average over the past few years.

Lisa Washburn, a managing partner at Municipal Market Analytics, says she expects the trend to continue, especially since issuances with just one rating don’t appear to be penalized with higher interest rates.




Source: Municipal Market Analytics


Seeking more than one rating has its risks. It increases the cost of issuance for a government to go to market and it raises the possibility that agencies will assign two different ratings, potentially increasing the interest rate a government would have to pay on the debt.

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But until recently, research had found that it was generally worth it: Investors valued a second rating, and bond issues with two identical ratings typically got more favorable rates for governments than bond issuances with only one rating.

So what’s changed?

For starters, most governments don’t use bond insurance -- which used to account for more than half of bond sales -- anymore. Bond insurance allows a government to pay a AAA-rated insurer to guarantee the bond. This, in turn, essentially gave the sale a AAA rating. The bond insurance package also made it easier to obtain multiple ratings because governments didn't have to solicit ratings on their own.

With the downfall of most bond insurance companies following the financial crisis, governments now have to do the legwork themselves. And the more ratings they solicit, the higher the cost. Getting just one rating can run a government between $7,500 and $495,000 per municipal bond offering based on factors like the sector, amount financed, structure and complexity, according to research by Marc Joffe, a senior policy analyst for the Reason Foundation and Governing contributor.

Meanwhile, the process itself has become more transparent. Governments provide their financials online now and are increasingly hosting investor conferences to build relationships. New rules have also made it easier to find and compare a government’s hidden costs, like foregone tax revenue, and liabilities, such as pension debt.

“People have gotten much more comfortable buying asset-backed securities in the last few years,” says Joffe. “With the financial crisis well in the rearview mirror, I don’t think people are really that worried anymore.”

On the surface, this one-rating shift is a cost-saver for governments. Washburn notes that “curtailing costs related to borrowing is even more important in the current environment,” because for most governments the growth in expenses is outpacing revenue growth. But, she warns, “fewer constraints on borrowing reduces fiscal discipline and may encourage ill-advised borrowings for deficits, pensions, [retiree health care] and riskier economic development projects.”

Ksenia Koban, vice president and municipal strategist at the Los Angeles-area investment firm Payden & Rygel, disagrees with that assessment. She says that many firms have beefed up their municipal desks over the past decade and conduct their own independent analysis of each bond sale. Therefore, they should have considered and priced in any risks outside of what a credit rating agency assesses.

“You have all the tools -- you shouldn’t only be relying on ratings,” she says. “In the market, it’s buyer beware today more than we’ve ever had it.”
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http://www.csg.org/pubs/capitolideas...issue65_3.aspx

Quote:
3 Questions on State Bankruptcy

Spoiler:
States face colossal fiscal pressures, including mounting public pension obligations that now represent a $1 trillion unfunded gap, according to the Pew Center on the States. That gap—combined with other mounting fiscal woes—has led to a national conversation about whether states should be allowed to file for bankruptcy. That conversation has prompted state officials to react, most arguing that the mere existence of a federal law allowing states to declare bankruptcy would increase interest rates, rattle investors, raise the costs of state government, create more volatility in financial markets, and erode state sovereignty under the 10th Amendment to the U.S. Constitution. To help explain this complicated issue, CSG asked Kenneth Katkin, a law professor at the Salmon P. Chase College of Law at Northern Kentucky University, a few questions about bankruptcy and states.
Why can’t states use the federal bankruptcy system to reorganize their debt?
“There are two reasons why state governments currently cannot use the federal bankruptcy system to reorganize their debt. First, the federal bankruptcy code does not allow—and has never allowed—state governments to declare bankruptcy. Since 1937, the bankruptcy code has allowed ‘municipalities’ to declare bankruptcy. The term ‘municipality’ is defined in the bankruptcy code as a ‘political subdivision or public agency or instrumentality of a state.’ This definition is broad enough to include cities, counties, townships, school districts and public improvement districts. It also includes revenue-producing bodies that provide services which are paid for by users rather than by general taxes, such as bridge authorities, highway authorities and gas authorities. But it does not include state governments.
“The second reason stems from the U.S. Constitution. The contracts clause of the U.S. Constitution prohibits state governments from ‘impairing the obligation of contracts.’ As originally understood and enforced, this clause prohibited state legislatures from passing any laws to relieve either private debt or the state government's own debt. Beginning in 1934, however, the Supreme Court began to interpret the contracts clause more flexibly and not as an absolute bar to state debt relief laws. Even under the flexible modern approach, however, the Supreme Court in 1977 reiterated that ‘a state cannot refuse to meet its legitimate financial obligations simply because it would prefer to spend the money (on something else.)’ Thus, were Congress to amend the federal bankruptcy code to authorize states to repudiate debt, the Supreme Court would then need to decide the novel constitutional question of whether such debt repudiation would nonetheless violate the contracts clause of Article I, Section 10.”
What benefits would allowing states to file for bankruptcy provide?
“Bankruptcy is designed to give a ‘fresh start’ to debtors who enjoy no reasonable prospect of satisfying their financial obligations. It is difficult to predict all the consequences that would follow a state government's voluntary entry into bankruptcy. Clearly, state governments that pursue voluntary bankruptcy would seek relief from certain debt obligations, particularly pension debt now owed to retired state employees and interest payments now owed to holders of state bonds. In bankruptcy, state governments also might seek relief from contract debt owed to vendors and contractors that have done business with the state. A federal bankruptcy court has the power to grant all such relief.
Like private parties who declare bankruptcy, a state government that declared bankruptcy would find it more difficult and more expensive to obtain credit in the future. Vendors would be justifiably hesitant to conduct business with the state unless they were paid in full for their work, in advance. Morale within the state government's career work force could be expected to suffer. And although state legislators presumably would recoil at the loss of state government buildings or state parks or state vehicles to foreclosure, liquidation of some components of a bankrupt's estate to satisfy creditors is an ordinary incident of bankruptcy.”
What steps would the federal government have to take to allow for state bankruptcy?
“To allow for state bankruptcy, Congress would need to amend the federal bankruptcy code to add state governments to the list of entities who may apply for bankruptcy. In addition, a state would need to amend its own state laws to authorize it to make application for federal bankruptcy. Finally, the United States Supreme Court would need to rule on whether the contracts clause of Article I, Section 10 of the United States Constitution prohibits states from declaring bankruptcy even if authorized to do so by Congress, or imposes any restrictions on the terms, conditions or circumstances under which state governments might declare bankruptcy. If it chose to do so, Congress could require the Supreme Court to rule expeditiously on these questions.”
Kenneth Katkin teaches and writes in the areas of constitutional law, communications law, legislation, federal jurisdiction and entertainment law at the Salmon P. Chase College of Law at Northern Kentucky University. He received his law degree from the Northwestern University School of Law.

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Old 06-13-2018, 05:43 PM
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STOCKTON, CALIFORNIA
https://californiapolicycenter.org/f...ing-to-others/

Quote:
Formerly bankrupt Stockton is fiscally healthy again, but offers warning to others
Spoiler:
Two mid-sized California cities, Irvine and Stockton, have topped a national list of financially healthy governments compiled by an influential watchdog group. Irvine’s top ranking shouldn’t surprise anyone, given that the affluent Orange County city has long been a model for prudence, despite some high-profile spending miscues over the years. But the second-place ranking for the formally bankrupt and chronically mismanaged Stockton is an eye-opener.

Is the poor San Joaquin Valley city really a model for the nation?

“Unlike most cities, Stockton’s elected officials have only promised the amount of benefits they can afford to pay,” according to a report from Chicago-based Truth In Accounting. “Because of this, Stockton has enough money to pay all of its bills.” The group finds that after bills are paid, the city has an impressive surplus of $3,000 for each taxpayer.

This is noteworthy, but something requiring a more skeptical take. If a city overspends its income for decades and then finds itself unable to pay its bills, it can declare bankruptcy, stiff its creditors, slash health benefits for public employees and impose a new “public safety” sales tax and a library/parks tax on city residents. After starting fresh, so to speak, it can be on the way to fiscal health.

Indeed, the report notes that Stockton is in a far better financial position “since a judge ruled the city was eligible for Chapter 9 bankruptcy protection in 2013” as a way to get out from under its “staggering debt burden.” The good news is the city now has plenty of assets to pay its bills and is enjoying the fruits of a recovering economy. The bad news is Stockton still has $390 million in unfunded pension liabilities.

It’s also far from certain that city officials, led by a progressive mayor who has been touting a “universal basic income” plan (that’s privately funded, for now), has the discipline necessary to keep tight control on its spending. Stockton previously embraced a variety of profligate policies that brought it to federal bankruptcy court. Can it control itself in the future?

The city had lavished generous pensions on its employees and embraced what one councilmember called a “Lamborghini” healthcare plan that provided lifetime medical benefits after a relatively short period of work. The city also provided public subsidies for a variety of downtown projects. Meanwhile, the aging city’s infrastructure was – and still is – crumbling. Stockton residents used to joke that one should never call the police unless there was blood in the streets, given cutbacks in safety spending. The city’s inadequate public services are widely known.

Nevertheless, the city now is in a solid financial position. Truth in Accounting’s Director of Research Bill Bergman told me that the bankruptcy enabled Stockton to clear the decks – and it shows that municipal bankruptcy is “not necessarily bad for you.” That’s true even though it was most definitely bad for the creditors who took a haircut.

At the time of its crisis, Stockton, with a population of around 300,000 people, was the nation’s most populous city to head for bankruptcy court. Shortly thereafter, 700,000-population Detroit, Mich., gained top honors when it filed Chapter 9 in July 2013. The Stockton bankruptcy proceedings were closely watched nationwide, because the largest state pension fund in the nation, the California Public Employees’ Retirement System (CalPERS) had argued that cities could not abrogate their pension obligations even if they became insolvent.

In the end, federal Judge Christopher Klein wrote that “CalPERS has bullied its way about in this case with an iron fist insisting that it and the municipal pensions it services are inviolable. The bully may have an iron fist, but it also turns out to have a glass jaw.” He ruled that pensions could indeed be reduced if a city declares bankruptcy, but nevertheless approved Stockton tax-raising work-out plan that did not reduce pensions because the city showed that it could pay its bills going forward.

The latest report confirms that Stockton is now solvent, although critics note that the city was able to get its fiscal house in order with tax hikes and thanks to an improving economy. Some complain that the city hasn’t provided the number of new police officers that it had promised under one of its tax measures, but has saved the money instead. That has helped assure that it can pay its bills, but not that it can provide a good level of service.

For instance, the report doesn’t look at what’s known as “crowd out.” That’s the common phenomenon where cities have enough cash to stay solvent – but not enough to provide an adequate level of public services as pension costs crowd out other forms of spending. “We have much higher taxes and much lower service levels than before the bankruptcy,” said former Assemblyman Dean Andal, a Republican from Stockton. “We get to pay more for less and the tax revenue goes to pensions.” He questioned the purpose of a city. Is it to pay for retired public employees or to provide services to the citizenry?

Stockton’s fiscal crisis came to a head, whereas many other cities’ similar problems did not, because of the housing crash around 2008. The crash sent shockwaves throughout the country, but it was particularly severe in California’s Central Valley. Stockton is located in an agricultural region 80 miles northeast of San Jose, the heart of the booming Silicon Valley. As home values in the Bay Area soared, people flocked over the Altamont Pass. New subdivisions flourished. Home values increased dramatically throughout the Stockton area. After the crash, prices plummeted there by 60 percent and more. Stockton’s streets were lined with foreclosures.

But, as the report indicated, the Stockton economy is booming again. Home prices are up again and neighborhoods are fixing up. People are moving to the area, especially from the Bay Area. So many people commute from the Stockton area to parts of the Bay Area that San Joaquin County now is considered by the Census Bureau to be part of the Bay Area. That’s not necessarily a problem, but it is a warning to Stockton officials of the importance of keeping spending in line given that an economic slump always is a possibility.

The Truth In Accounting report does offer some sobering news – and some useful warnings – for municipalities across the country. Note that Irvine and Stockton, though topping the list for fiscal health, only received a “B” ranking. The group looked at a total of 75 cities, but found that 64 of them “did not have enough money to pay all of their bills. This means that to balance the budget, elected officials have not included the true costs of the government in their budget calculations and have pushed costs onto future taxpayers.” Forty-one of those cities received a “D” or “F” grade and only nine others received the middling “C” grade.

Furthermore, the report from earlier this year found that U.S. cities in general don’t have enough money to pay all of their bills, leading to an astounding $335 billion in combined unfunded liabilities for pensions, healthcare and other promises. And there’s a disturbing deficit of public information, also. “The lack of accuracy and transparency in government accounting prevents even an experienced user of government financial documents from understanding and evaluating a public-sector entity’s financial health,” the report explained.

So Stockton’s fiscal recovery is encouraging, but the path it took to get there is problematic. Let’s hope more cities learn the right lessons about spending, especially on long-term benefits for public employees and on the importance of fiscal transparency. They can do all the wrong things, end up in bankruptcy court and start with a fresh slate – or they can try to get control of their costs without all that drama.

Steven Greenhut is contributing editor for the California Policy Center. He is Western region director for the R Street Institute. Write to him at sgreenhut@rstreet.org.
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Old 06-15-2018, 01:17 PM
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NASHVILLE, TENNESSEE

https://www.tennessean.com/story/opi...nia/665102002/

Quote:
Why Nashville should not be like Stockton, California | Opinion
Spoiler:
Stockton, California and Nashville are mid-sized cities run by liberal Democrats. Local leaders in each city have championed high-dollar projects that ultimately work against the public interest.

As a result of this extravagant spending, both cities have found themselves in fragile financial positions. Music City would be wise not to follow in the footsteps of Stockton, which declared bankruptcy in 2012.

Nashville has a capitalist bent that favors big businesses and developers, while showing little heart when it comes to the perceived need of regular people and its poor.

Last year, Nashville’s Metro Council gave an estimated $13.6 million in city incentives to Ryman Hospitality to build a waterpark at Opryland Hotel. Nashville’s government has also approved the issuance of $225 million in revenue bonds to pay for a soccer stadium for a Major League Soccer team owned by billionaires.

► Read More: Nashville soccer fans come out in force for $275M MLS stadium proposal

Nashville, like Stockton, stands to be a prime example of what happens when the public is not paying enough attention to hold their elected officials accountable for extravagant spending, corporate greed and cronyism.

In Nashville, the mayor and city council seem at ease with a status quo that has left many of our citizens behind and our balance sheet on tenuous footing, at a time when the city has seen its greatest growth in revenue.


For the past 11 months, photographer George Walker IV, and Opinion Engagement Editor David Plazas — with support and guidance from The Tennessean team — have told the story about the growing gap between prosperity and inequality in this booming city.

Nashville leaders must take heed of this in deciding how to spend and invest money in Music City without making the same mistakes that Stockton has made.

Stockton found itself stymied by underfunded pension liabilities, a housing crisis and skyrocketing municipal borrowing costs. Six years after its bankruptcy filing, Stockton remains stuck with an ailing economy and roughly 26 percent of the population living below the poverty level.

► Read More: Financial stress is rising for low- and middle-income U.S. households

Stockton now intends to experiment with radical wealth redistribution; obviously, the city has failed to learn from its previous financial mistakes. Stockton, which has a population of about 320,000, has announced that it will test an ill-advised universal income program for about 100 participating families.

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The cartoonist's homepage, freep.com/opinion/mike-thompson Mike Thompson, Detroit Free Press
Each family will be given $500 a month with no strings attached, and city administrators will study how those families spend the “free” money.

Ultimately, the money being distributed isn't free. The California-based Economic Security Project is providing the first round of funding for this program. ESP is a basic income advocacy group co-chaired by liberal activists from Silicon Valley. Stockton Mayor Michael Tubbs sees the city continuing the program as a public-private partnership.

Disaster looms with this questionable decision as taxpayers will have to foot the bill for a project that addresses only the symptoms of poverty. It does nothing to address the structural and cultural problems contributing to the poverty.

Carol Swain, professor of political science and law
Carol Swain, professor of political science and law at Vanderbilt University. (Photo: Submitted)

While Stockton's intentions are virtuous, the city is not in a financial position to provide funding for a universal income now, nor will it likely be soon.

The idea of redistributing wealth is nothing new. It is the mantra embraced by Liberal America, our so-called progressives. The term “universal basic income” is political doublespeak for the basic tenants of socialism.

► Special series: Costs of Growth and Change

Progressive liberals in the United States should take a lesson from the numerous failed states that have fully embraced the tax-and-spend policies of socialism, including Venezuela, North Korea, Libya, Afghanistan and Greece.

Governments would be better off restructuring the currently failing public education system and working with nonprofit organizations to provide trade schooling and job-training to the less fortunate.

Carol M. Swain, Ph.D., is a former professor of political science and law at Vanderbilt University. She ran for Nashville mayor in the 2018 special election. Twitter: @carolmswain Facebook: Profcarolmswain.
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Old 06-18-2018, 11:20 AM
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Oh, there's a hideous graph in this one.

https://muninetguide.com/municipal-b...stics/#new_tab

Quote:
Chapter 9 Municipal Bankruptcy Statistics: Use by Number, Type and Year
Jun 14, 2018
Categories: Municipal Bankruptcy, Municipal Finance
Spoiler:
Historically, the use of Chapter 9 bankruptcy by a municipality his still rare, and a last resort. MuniNet Guide’s update on historical and current municipal bankruptcy statistics
We are providing an update on our 2015 piece on municipal bankruptcy statistics. One of the consistent trends that marks Chapter 9 users are small municipal utilities and special purpose districts, or cities, towns, villages, and counties with a relatively small debt profile. Since 1954, virtually all of those cities, towns, villages, and counties that filed Chapter 9 were small or not major issuers of bonded debt, except for Bridgeport, CT in 1991, Orange County in 1994, Vallejo, CA in 2008, Jefferson County, AL in 2011, Stockton and San Bernardino, CA in 2012 and Detroit in 2013. Both Harrisburg, PA and Boise County, ID were dismissed, as was Bridgeport in 1991.

There have been a total of 680 Chapter 9 filings since 1937. Of the 311 Chapter 9 filings since 1980 (and 336 filings since 1954), 181 (196 since 1954) have been municipal utilities and special districts, and only 54 (64 since 1954) have been cities, counties, towns and villages (primary governments). The remainder have been 61 hospitals or healthcare systems, eight transportation authorities, and seven school or educational facilities. Less than 70% of the Chapter 9 filings resulted in a confirmed plan of debt adjustment.



No tsunami of Chapter 9 filings from 2012 to 2017, or so far in 2018
Only 13 Chapter 9 filings occurred in 2011, 12 in 2012, eight in 2013, 10 in 2014, and three 2015, six in both 2016 and 2017, and three so far in 2018.

Only four cities, towns, counties or villages filed Chapter 9 (municipal bankruptcy) in 2011, namely Jefferson County, Central Falls, Boise County and Harrisburg, PA (Boise County and Harrisburg were dismissed), 3 in 2012, namely Stockton, San Bernardino and Mammoth Lakes (which was dismissed that year) and only 1 in July, 2013 – namely Detroit. Since the Detroit Chapter 9 was filed in 2013, only one city, Hillview, KY in August 2015, filed for Chapter 9 and that was dismissed in April, 2016 without filing. No other city, town, village, or county has filed Chapter 9 bankruptcy since July 2013.

In the last 60 years, only 64 cities, towns, counties and villages have filed out of 318 Chapter 9 filings that have been made. Twenty-nine of the 64 (44%) were Chapter 9 cases dismissed before any plan of debt adjustment was confirmed; purportedly the city, town, village or county finding a better resolution or was not authorized to file under state laws. (NOTE: Puerto Rico, its instrumentalities, and its public corporations are not included because they are not debtors under Chapter 9 but under Title III of PROMESA, a separate law for U.S. territories.

The largest cities, towns, villages and counties to have filed Chapter 9 bankruptcy in the last 60 years (including Detroit):
Approximate
Population Approximate
Debt in Millions
Orange County (filed 1994) 3,000,000 $1,974
Vallejo, California (filed 2008) 115,942 $175
(2008)
Jefferson County (filed 2011) 658,931
(2011) $4,200
Stockton, California (filed 2012) 291,707
(2010) $1,032
(2011)
San Bernardino (filed 2012) 213,012
(2011) $492.3
(2011)
Detroit, Michigan (filed 2013) 701,475
(2012) $18,500
(2013)
Chapter 9 Filings by State
This chart shows the number of filings in each state over a 38-year period, from 1980-2018. Nebraska leads all states by far with 62, mostly due to filings by Sanitary and Improvement Districts, taxing authorities unique to that state. California (the largest state) and Texas (mainly municipal utility districts) are second and third, with 44 and 38 filings, respectively.

Municipal Bankruptcy Statistics

Chapter 9 Filings by Type
Since 1980, more than half (58%) of all Chapter 9 filings have been filed by utilities and special districts, while the rest are largely split between primary governments (counties, cities, and villages) and hospital/heath care systems. Few filings have been made by transportation authorities (eight), and schools/education districts (seven).



Chapter 9 Filings by Year


A spike in Chapter 9 filings by municipal governments occurred in the periods from 1986-1987 and 1991-1994, in part due to the recessions of 1981-1982 and 1990-1991, and filings-per-year stayed elevated before declining from 1995 through 2008. Chapter 9 filings rose again in the years immediately following the Great Recession, but that increase in filings was very modest compared to that experienced in the 1980s and early 1990s. Filings have again declined from 2015 through the present.

The data shows the frequency of Chapter 9 municipal bankruptcy filings is generally rare, and is trending downward. Chapter 9 is and should generally be considered a last resort for governments experiencing fiscal distress.
here's the hideous graph:


These people have no shame, tarting up something so simple as 4 numbers like that. That should have been a table.

A little bit better graphs below (but I'm going to fix later)
Spoiler:






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Old 06-18-2018, 11:21 AM
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There are so many things wrong with that graph now that I'm really looking at it. JEEZ
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Old 06-19-2018, 12:39 PM
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NEW MEXICO

https://www.abqjournal.com/1186379/m...nd-rating.html

Quote:
Moody’s downgrades NM’s bond rating

Spoiler:
SANTA FE – Concerns over New Mexico’s pension liabilities and deeply rooted spending challenges prompted a national credit rating agency to downgrade the state’s bond rating on Monday – a blow to the state’s fiscal reputation and its second downgrade in two years.

Moody’s Investor Service noted in its announcement that the state’s cash reserves have been built back up after being depleted during a recent budget crunch but that the growing pension liabilities, a high Medicaid enrollment rate and other budget-related issues prompted the downgrade from an AA1 to an AA2 rating.

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Although the credit rating agency set the state’s outlook as “stable,” the rating downgrade could lead to higher borrowing rates for infrastructure projects. It also represented Moody’s first rating change for a state this year.


Sen. John Arthur Smith

“It’s not a surprise – disappointed, but not a surprise,” Sen. John Arthur Smith, a Deming Democrat and chairman of the influential Senate Finance Committee, said of the rating downgrade.

After having its top bond rating downgraded in October 2016, New Mexico appeared to have dodged an additional downgrade last year, which Gov. Susana Martinez’s office said at the time validated the governor’s anti-tax increase stance.

But New Mexico’s two large retirement systems’ unfunded liabilities have increased in recent years, as 2013 solvency fixes aimed at shoring up the Public Employees Retirement Association and the Educational Retirement Board have not been as effective as intended.

As a result, the state could be facing big questions about how it plans to pay future retirement benefits for thousands of state workers and teachers.

In a statement, a Martinez spokesman appeared to blame lawmakers and pension fund officials for the downgrade. He also said the state’s rating outlook was shifted from “negative” to “stable” after the downgrade.

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“The governor has also ensured New Mexico has maintained a budget that lives within its means and is currently overseeing an unprecedented reserve level,” Martinez spokesman Ben Cloutier said. “But until the Legislature and Educational Retirement Board address true pension reform, we will continue to face the same extremely high levels of liability with our pension funds.”

Some lawmakers, including Smith, have suggested the solution might involve requiring government agencies and employees to contribute more financially to the pension funds to help put them in a stronger fiscal position. But it’s no small challenge to tackle, given that the funds are billions of dollars away from being actuarially sound.

Demographic changes in the workforce, the early retirement allowed for public safety officers and other factors have contributed to the challenge of addressing the state’s pension funds, Smith said.

Combined, the state’s two large retirement systems had unfunded liabilities of roughly $12.5 billion as of June 2017, with the pension fund covering nearly 60,000 active teachers, professors and other school workers having the larger liability of the two.

Unfunded liabilities represent the difference between current assets on hand and future retirement benefits owed, and both pension funds’ liabilities have increased in recent years.

Meanwhile, New Mexico also faces other systemic economic problems, despite a recent revenue uptick driven primarily by an oil drilling boom in southeastern New Mexico that has led to the state collecting $582.1 million more in revenue through March – or 14.5 percent – than it had during the same time period in the most recent budget year.

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Some of those challenges were cited by Moody’s analyst, along with the pension funding issue.

“That pressure is compounded by spending challenges associated with a large Medicaid caseload, a revenue structure more concentrated and volatile than most similarly-rated states, an economy that has lagged the nation’s, below-average wealth levels, and financial reporting practices which, while improving, are weaker than typical for a U.S. state,” Moody’s analyst Kenneth Kurtz wrote.

New Mexico has one of the nation’s highest unemployment rates, although it has dropped in recent months, and more than 40 percent of the state’s population is enrolled in Medicaid. The state’s unemployment rate was 5.1 percent in May.

Lawmakers did take action in 2017 aimed at shoring up the state’s budget – including setting aside more money in cash reserves and creating a rainy-day fund to help keep state government operations running in future cash-lean years – that were signed into law by Martinez.
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