State & Local Fiscal Budgeting for Sustainability

eBlog
June 9, 2015
The Municipal Sustainability Project

When a Government Begins to Run out of Money. Approaching insolvency—especially absent a mechanism available to every corporation—public and private—except municipal corporations, which, may only seek such protection to ensure there is no disruption to vital public services if authorized by their respective state, forces hard choices. In the case of Puerto Rico, where Congressional dithering is threatening essential services by the U.S. territory’s nearly 160 municipalities, the ebbing treasury has now forced the government to slow the issuance of income tax refunds. Governor Alejandro García Padilla’s Puerto Rico chief of staff Victor Suárez Meléndez yesterday said some refunds may be delayed beyond July 31st. The aide’s announcement came in the wake of yesterday’s payments from the rapidly depleting treasury of some $200 million tax and revenue anticipation notes and the island government’s payroll—but the on-time payments leave the government with fewer resources for other purposes. Last month, Puerto Rico’s most recent financial report indicated that the commonwealth could pay off its debts for the rest of this fiscal year, at the end of this month; however, the report cited concerns over its ability to pay off all its debts in July and August. The screws are tightening as the Governor is seeking to get a balanced budget through the legislature—a critical step if Puerto Rico is to have access to the municipal market so that it can sell a $2.9 billion bond to rebuild liquidity, which could be used to make those payments. The complex minuet of actions—including the nearly 40 percent increase in the U.S. territory’s sales and use tax Gov. Padilla signed into law a week ago Friday—appear to at least be stemming the tide—or, as Mr. Meléndez put it yesterday: “With this consensus measure, the difficult fiscal situation facing the Government of Puerto Rico has been mitigated…Now we will turn to adopting a balanced budget and implementing austerity measures to ensure essential services and projects for our development as a people.” The key now is in the Puerto Rico Senate, which is holding hearings on the budget—tasked with the challenge of trying to cut discretionary spending by $674 million to balance the budget.

State Budget Reform. The Volcker Alliance yesterday released a report examining in detail the budgeting practices of California, New Jersey, and Virginia, and assessing the effectiveness of each state’s practices. The report follows in the wake of the State Budget Crisis Task Force reports issued in December of 2012—to which our Center contributed—but this time focusing on the need for effective and transparent budgeting practices by, as Mr. Volcker yesterday noted, “shining a spotlight on opaque and confusing practices and by identifying more appropriate approaches” when creating state budgets and fiscal policy. With tax revenue barely recovering since the last recession and discretionary Congressional funding limited by the sequester and continued Congressional disinvestment in the nation’s physical infrastructure; the report warns that states have been tempted to resort to gimmickry to produce balanced budgets that may be balanced in name only. Consequently, in releasing the report, the Center is hoping to create a foundation for a common approach toward responsible budget practices in all 50 states, including developing a framework for a scorecard with respect to budgeting and financing practices, and providing incentives for officials to clarify financial issues and encourage debate on basic policy choices. Mr. Volcker has become increasingly concerned about what he fears is a growing state practice of state budgeting that attempts to push costs into the future for other generations of taxpayers to pay—or, as he put it yesterday: when the states live beyond their means in this way, their budgets may seem balanced every year, but they are in fact piling up hidden mountains of unpaid bills. The invisible mountains grow bigger every year and eventually become crushing — something that seems to be happening in states from Kansas to Louisiana this summer as lawmakers find themselves caught between a rock and a fiscal and taxing hard place. In the report, the study noted California has improved its budget practices, and Virginia has enacted pension reforms, but cited New Jersey as unable to get past chronic pension and budget problems. The study, Truth and Integrity in State Budgeting, which builds on the work done from 2001 to 2014 by the State Budget Crisis Task Force, chaired by Chairman Volcker and Richard Ravitch, the former Lt. Gov. of New York—as well as special, unpaid assistant to U.S. Bankruptcy Judge Steven Rhodes in Detroit’s municipal bankruptcy, looks at the three states to assess how their budgetary practices have been doing in a period of revenue growth as the economy continues to recover from the Great Recession—warning that “many states continue to balance their budgets using accounting and other practices which could obscure rather than clarify spending choices,” noting: “These practices make budget trade-offs indecipherable, lead to poorly informed policymaking, and limit future spending options. Beyond that, they weaken the fiscal capacity of states to support the cities and counties that desperately need their aid.”

* California. The report found that the Golden State has improved its fiscal health through changes in budgeting practices: Voters approved three key economic reforms that resulted in a $254 million surplus in 2013, the passage of five consecutive on-time budgets, four general obligation credit rating upgrades from three major rating agencies and the reduction of state accumulated debt obligations to $26.9 billion in 2015 from $34.7 billion in 2011. The reforms included Proposition 25, which reduced the requirement for budget approval from 2/3 votes to a simple majority vote and Propositions 30 and 39, which temporarily raised sales and income taxes and changed the formula for calculating corporations’ income taxes, respectively. However, challenges remain, such as $131 billion in unfunded pension liabilities, $64 billion in unfunded retiree healthcare benefits, an estimated $64 billion needed to infrastructure maintenance and improvements, as well a tendency to spend too much during economic booms.

* Virginia: The report credits Virginia’s budget practices with employing strategic planning for both revenues and capital spending, repeated re-estimates of revenues, strict statutory constraints on borrowing, and an actively employed rainy day fund. These policies encouraged Virginia to adopt three major pension reforms with a goal of 100% funding by 2019 and to raise revenues for infrastructure improvements through targeted tax increases.

* New Jersey: The report noted New Jersey “continues to rely on short-term maneuvers to balance [its] budget such as debt restructuring, diversion of funds, and inconsistent management of revenue collection…New Jersey’s reliance on these measures correlates with the chronic inability of the state’s revenue streams to match its expenses,” noting the state’s public schools are underfunded despite the fact that it has the fifth-highest cost per student in the country. The report adds New Jersey also has few funds to address its growing infrastructure issues, and it has a combined $90 billion pension and other post-employment benefits gap.

Disinvesting in the Future? Mr. Volcker yesterday warned that it is the annual debate over state budgets and the focus on only one year’s proposed cash outlays, rather than the accumulated costs from the past or the bills being deferred for the future that are, in effect, masking the true fiscal picture, making it nearly impossible to have a coherent public debate about priorities and fairness: “These practices make budget trade-offs indecipherable.” As a result, he warned, bridges and roads are being left to crumble, public schools and state universities are being starved, “rainy day” funds are being drained, and public workers are counting on pension plans that may melt down at some point. He added: municipal and county services, such as courthouses and jails, are being battered, too, because they get much of their money from the states….“It’s like termites eating at a structure…The building hasn’t fallen down yet. But if you get enough termites, the building’s going to get pretty rickety.”

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