Category: Public Finance

The federal budget outlook

Mary Pat Campbell

Link: https://www.brookings.edu/research/the-federal-budget-outlook-2/

PDF of report: https://www.brookings.edu/wp-content/uploads/2023/03/20230313_TPC_Gale_FiscalOutlookFINAL.pdf

Graphic:

Excerpt:

The basic story is familiar. Low revenues coupled with rising outlays on health-related programs and Social Security drive permanent, rising primary deficits as a share of the economy. Net interest payments also rise substantially relative to GDP due to high pre-existing debt, rising primary deficits, and gradually increasing interest rates. Unified deficits and public debt rise accordingly.

Under current law for the next 10 years, the CBO’s projections imply that persistent primary deficits will average 3.0% of GDP. Net interest payments will rise from 2.4% of GDP currently to 3.6% in 2033, an all-time high. The unified deficit, and even the cyclically adjusted deficit, will exceed 7% of GDP at the end of decade. Debt will rise from 98% of GDP currently to 118% by 2033, another all-time high.

Over the following two decades, the projected trends are even less auspicious. Primary deficits rise further as spending on Social Security and health-related programs continue to grow faster than GDP and revenue growth remains anemic. The average nominal interest rate on government debt rises to exceed the nominal economic growth rate by 2046, setting off the possibility of explosive debt dynamics.  By 2053, relative to GDP, annual net interest payments exceed 7%, the unified deficit exceeds 11%, and the public debt stands at 195%. All these figures would be all-time highs (except for deficits during World War II and in the first two years of the COVID-19 pandemic) and would continue to grow after 2053.

Author(s): Alan J. Auerbach and William G. Gale

Publication Date: 14 Mar 2023

Publication Site: Brookings

The End Is Near for Outdated Government Financial Reporting

Mary Pat Campbell

Link: https://www.route-fifty.com/finance/2023/02/end-near-outdated-government-financial-reporting/382747/

Excerpt:

By way of a few paragraphs inserted into the recently enacted 4,000-page 2023 National Defense Authorization Act, Congress mandated that state and local governments prepare their annual financial statements in a standardized format that is electronically searchable. The provision effectively drags state and local governments kicking and screaming into the 20th century, if not the 21st.

As worthy an accomplishment as this appears to be, it was resisted mightily by the state and local government financial community. Most prominently, they argue, the measure can potentially result in a major transfer of accounting and reporting regulatory authority from states to the federal government, thereby undercutting what many consider a fundamental principle of federalism. Moreover, state and local officials see it as one more costly unfunded mandate imposed upon their governments.   

The opposition by state and local governments is understandable. But they have no one to blame but themselves. To this day they are wedded to a technological past. In a perverted way, they may be getting their just desserts. The act requires them to do little more than what they should have done years ago on their own for the benefit of their investors and other stakeholders.  

Implicit in the act is that governments will have to prepare their financial statements using XBRL (eXtensible Business Reporting Language) or some comparable reporting framework. This is the format that the Securities and Exchange Commission, which would be charged with implementing the new provision, currently demands corporations use in their financial filings. XBRL requires all entities to classify each of the elements of their financial statements (e.g., assets, liability, revenues and expenses) by identical rules and in machine readable form.    

Author(s): Michael Granof and Martin J. Luby

Publication Date: 8 Feb 2023

Publication Site: Route Fifty

IRS Issues Clarification on Rebates, Says Illinois Taxpayers Can File Returns

Mary Pat Campbell

Link: https://www.nbcchicago.com/news/local/irs-issues-clarification-on-rebates-says-illinois-taxpayers-can-file-returns/3070195/?utm_source=Wirepoints+Newsletter&utm_campaign=acdd8da238-RSS_EMAIL_CAMPAIGN&utm_medium=email&utm_term=0_895ee9abf9-acdd8da238-30506353#new_tab

Excerpt:

Millions of taxpayers were asked to delay filing their 2022 tax returns after questions arose over whether or not specific rebates should be included as taxable income, and now the Internal Revenue Service has given their answer.

The IRS said in a press release that “in the interest of sound tax administration,” residents in most states, including Illinois, will not be required to report rebates on their federal tax returns, and that filing of those returns can continue.

There were limited exceptions, including Alaska’s Permanent Fund Dividend, but for the most part all states that were included in the original notice will not require their taxpayers to report the rebates as income.

Illinois was included in a large group of states whose residents were advised to potentially delay filing their taxes after questions arose about the reporting of rebates given to taxpayers and property owners.

Those rebates, passed as part of the state’s fiscal year 2023 budget, were given to individuals who made less than $200,000, or couples who made less than $400,000. Those rebates returned $50 to each taxpayer.

Property tax rebates of up to $300 were also made available as part of the program.

Under the new IRS guidance, those payments are considered to be “general welfare” payouts, and therefore are not subject to federal income taxation.

Author(s): James Neveau

Publication Date: 12 Feb 2023

Publication Site: NBC Chicago

When States Take Over Financially Troubled Local Governments

Mary Pat Campbell

Link: https://www.route-fifty.com/finance/2023/02/state-takeover-city-government-chester-pennsylvania-bankruptcy/382677/

Excerpt:

A number of states have programs in which they actively monitor municipal finances and roughly 20 have emergency manager laws allowing for direct intervention. People have long debated how effective these oversight programs are at generating a real recovery and what the right level of intervention even is. Duly elected city officials don’t like being told what to do by state overseers. States on the other hand, typically want troubled cities to just buckle down and take their advice—even if it’s tough medicine.

So while the whole point of these programs is to avoid or mitigate extreme distress, they can also create or exacerbate tension between cities and states along the way. 

By all accounts, Chester’s approach to being placed in Pennsylvania’s municipal distress program in 1995 was to just ignore the state’s advice. Fred Reddig, a retired state official who has coordinated recovery plans for a number of distressed municipalities, worked on Chester’s case from 1995 to the early 2000s. He recalls that during that time, it was difficult to compel local officials to follow any of the state’s recommendations and that relations were tense. 

….

Rob DiAdamo, a lecturer at Boston University’s law school who teaches a class on state and local governance, noted many communities that end up under some form of state oversight had structural economic problems long before the state intervened.

“It may be more effective for the state to be looking at how to bring opportunities back to these communities than wait for the crisis and have people argue about the best way to address it,” he said. “It’s like waiting for the patient to have a heart attack and discussing treatment options when the crisis could have potentially been avoided by first encouraging healthier eating habits and exercise.”

Author(s): Liz Farmer

Publication Date: 7 Feb 2023

Publication Site: Route Fifty

What Happens if US Debt Defaults? Just Short-Term Pain, Sages Say

Mary Pat Campbell

Link: https://www.ai-cio.com/news/what-happens-if-us-debt-defaults-just-short-term-pain-sages-say/

Excerpt:

So what is likely to occur this year?

Everything will be settled without a big problem for investors, predicts Robert Hunkeler, International Paper’s vice president of investments.

“I guess Congress and the White House will eventually finish their game of chicken, and the debt limit will be raised,” he opines. “There might be a little more drama and brinksmanship this time around, because there are more cooks in Congress than usual, and that’s saying a lot. Either way, I wouldn’t change my investments because of it.”

To Kostin and his Goldman staff, the risk that Congress fails to boost the debt limit by the deadline is “higher than at any point since 2011,” but “the team believes it’s more likely that Congress will raise the debt limit before the Treasury is forced to delay scheduled payments.”

If the debt ceiling is not raised in time to make those payments, in Goldman’s estimate, the economy would shrink by about $225 billion per month, or 10% of annualized gross domestic product. That’s provided that the Treasury does what policy wonks call, “prioritize,” meaning somehow continuing to pay interest on the national debt, but to stop payment on other obligations.

For Thomas Swaney, CIO for global fixed income at Northern Trust Asset Management, another credit downgrade for the government is possible.

“The practical implications of a credit downgrade are not entirely clear,” he writes in a report. “But we don’t expect a modest downgrade to result in market disruptions for Treasuries, U.S. agency debt or overnight repurchase agreements.”

Author(s): Larry Light

Publication Date: 6 Feb 2023

Publication Site: ai-CIO

How a Bankrupt City’s Pension System Hit a Breaking Point

Mary Pat Campbell

Link: https://www.route-fifty.com/finance/2023/01/chester-pennsylvania-municipal-chapter-9-bankruptcy/382142/

Graphic:

Excerpt:

A key driver of the conflict is around fiscal management and disclosure. Amid its budget troubles, the city has racked up $750,000 in Internal Revenue Service penalties related to unpaid payroll taxes, fell victim to a $400,000 phishing scam that wasn’t publicly disclosed for months, cycled through two chief financial officers in as many years and has failed to produce an audited financial report since 2018. But perhaps the most striking example of the problems surrounding the city’s bankruptcy is the discord—and conflicting information—around Chester’s underfunded police pension. 

Like other distressed cities, Chester has an outsized pension liability and annual pension bills that would take up a substantial portion of its budget if paid in full. But also like other cities, Chester hadn’t been paying its entire bill—called the Minimum Municipal Obligation (MMO) in Pennsylvania. In 2021, the city paid its full MMO for the first time since 2013 and it was a significant lift. The total it spent on pension and retiree health care costs that year—$14.6 million—took up 28% of its entire general fund.

But there’s a bigger problem: Due to accounting practices that inflated the plan’s assets and a dispute over what the city’s police pension formula actually is, no one really knows what Chester’s true unfunded liabilities are.

Author(s): Liz Farmer

Publication Date: 24 Jan 2023

Publication Site: Route Fifty

France Won’t Accept Emmanuel Macron’s Attack on Pensions

Mary Pat Campbell

Link: https://jacobin.com/2023/02/france-emmanuel-macron-pension-reform-protest-strike-welfare

Excerpt:

According to police figures, Tuesday’s nationwide protests marked the largest single-day union-backed demonstration in France in thirty years. Some 1.272 million turned out to the streets. That’s more than the already-impressive January 19 turnout, it’s more than any of the single-day peaks of the 2010 and 2003 movements over retirement reforms — it even topped the height of the legendary 1995 protests.

And there’s more to come. The united union coalition has called for two further days of strikes and protest: Tuesday, February 7, and Saturday, February 11. “Until then,” the coalition has also called on the public to “multiply actions, initiatives, meetings, and general assemblies across the country, in workplaces [and] at places of study, including through strikes.”

After two successful national mobilizations, the movement seems to be entering a new phase. Public opinion is clearly on its side — and yet, the government isn’t budging on the proposed hike in the retirement eligibility age from sixty-two to sixty-four. Clearly, it’s going to take more for organized labor to win this battle.

….

Clearly, the strike calls over pension reform have resonated beyond organized labor’s traditional bastions of support in the public sector: namely, schools, health services, and transit networks (the national SNCF rail company and the Paris metro network). Workers in all these sectors have walked off the jobs, but so have others in the private sector. The General Confederation of Labour (CGT) has shared a list of strikes on January 31 that illustrates this point: five thousand strikers at Airbus; a walkout from 90 percent of the staff at a FNAC department store outside of Toulouse; a strike from 80 percent of the workers at a LU Mondelēz factory in Normandy, etc.

Author(s): Cole Stangler

Publication Date: 2 Feb 2023

Publication Site: Jacobin

Why the French are protesting against pension reform

Mary Pat Campbell

Link: https://www.dw.com/en/france-pension-reform-plans-trigger-public-backlash/a-64513082

Excerpt:

A reform of France’s pension system is set to push up the minimum retirement age from 62 to 64. The government has said the measures are needed. But most French, and even a number of economists, disagree.

The demonstration on a recent Thursday afternoon could be a bad omen for President Emmanuel Macron. About 80,000 people gathered in Paris, and over 1 million across France — more than at any other French protest in over a decade. They were there to show their opposition to the government’s pension reform plans, which even some economists disapprove of.

Protesters in the street leading from Place de la Republique to Place de la Bastille in northeastern Paris were holding up placards saying things like “I love my pension” and “This [reform] is not inevitable, it does not create social justice.”

….

But the government has said the reforms are necessary to save France’s pay-as-you-go system, where workers pay for pensions through their levies. “The ratio of workers to pensioners is going down and that is threatening our system. With this project, we’ll guarantee the future of our retirement model,” Prime Minister Elisabeth Borne said before the Senate in mid-January.

As opposed to certain other European countries, France’s pension system does not include any capital-funded elements. It comprises general branches for private employees and public servants, and 27 so-called special pension schemes for, for example, ballet dancers or police officers that benefit from an earlier retirement.

The government now aims to increase the system’s overall minimum retirement age from 62 to 64 years by 2030. And from 2027 on, people will need to work for 43 years — instead of the current 42 — to receive a full-rate pension.

Macron’s plans would maintain an earlier retirement for people who started working at a young age and preserve certain special pension schemes. Others, such as the plans for metro drivers in Paris, are to be cut. The government also aims to increase the minimum pension by about €100 ($108) to €1,200 per month.

Money is, of course, Macron’s main argument. The reform is based on a report by a government-mandated expert committee that predicts pension payments will amount to up to 14.7% of GDP in 2032, instead of the current 13.8%.

Author(s): Lisa Louis

Publication Date: 30 Jan 2023

Publication Site: DW

Does the GOP Want a Government Default So It Can Kill Social Security?

Mary Pat Campbell

Link: https://jacobin.com/2023/01/republicans-debt-ceiling-shock-doctrine-spending-cuts

Excerpt:

The debt ceiling is normally a dull topic, and many have understandably neglected to follow along. To recap, the debt ceiling is the artificial cap Congress places on the amount of money the government can borrow. As Secretary of the Treasury Janet Yellen and others have pointed out, there is little practical reason for the debt ceiling to exist at all. From a technical point of view, it is a formality to authorize the Treasury to pay bills the government has already incurred. Through creative accounting, the Treasury can keep paying for a few more months, and then it will have to stop unless Congress votes to raise the debt ceiling.

All sides agree that the US government deliberately defaulting on debts would be the financial equivalent of an atom bomb, causing immediate painful shocks across the world economy and unpredictable long-term effects. In order to avoid this scenario, voting to raise the debt ceiling is usually a matter of course — though the number of near and actual government shutdowns from Congress playing chicken with the ceiling have increased in recent decades.

But it might be different this time. As Politico reported last week, a number of former government officials who negotiated during previous standoffs over the debt ceiling think there’s much less room for a negotiated settlement this year.

The main reason is that, at least on the surface, House Speaker Kevin McCarthy is in a weak position, effectively held hostage by conditions that were imposed on him by the most extreme members of the House Republican conference during his election to speaker. Those conditions specifically require significant spending cuts in exchange for raising the debt ceiling.

….

Democrats also argue that though Republicans insist on reducing spending, they have refused to make specific demands for what they want cut. Here is where The Shock Doctrine might provide a hint of what’s to come. The idea of privatizing Social Security has been “lying around” since George W. Bush’s presidency. Joe Biden himself has a long, well-documented history of trying to cut Social Security and Medicare, though in public statements since 2020 he has consistently said he would not agree to do so.

Kevin McCarthy and other Republicans have repeatedly floated the idea of cutting the popular programs over the past year. While McCarthy appeared to abruptly back off the idea of cutting Social Security and Medicare as part of the debt ceiling negotiations on Sunday, his ambiguous promise to “strengthen” the programs without specifying what that means leaves plenty of room for privatization.

Author(s): Ben Beckett

Publication Date: 31 Jan 2023

Publication Site: Jacobin

France: Over 1 million march against raising retirement age

Mary Pat Campbell

Link: https://apnews.com/article/france-retirement-age-limit-protests-866eb86aea5cf0d39894b96d2888c26f

Excerpt:

At least 1.1 million people protested on the streets of Paris and other French cities Thursday amid nationwide strikes against plans to raise the retirement age — but President Emmanuel Macron insisted he would press ahead with the proposed pension reforms.

Emboldened by the mass show of resistance, French unions announced new strikes and protests Jan. 31, vowing to try to get the government to back down on plans to push up the standard retirement age from 62 to 64. Macron says the measure – a central pillar of his second term — is needed to keep the pension system financially viable, but unions say it threatens hard-fought worker rights.

Out of the country for a French-Spanish summit in Barcelona, Macron acknowledged the public discontent but said that “we must do that reform” to “save” French pensions.

….

In a country with an aging population and growing life expectancy where everyone receives a state pension, Macron’s government says the reform is the only way to keep the system solvent.

Unions propose a tax on the wealthy or more payroll contributions from employers to finance the pension system instead.

Polls suggest most French people oppose the reform, and Thursday was the first public reaction to Macron’s plan. Strikes severely disrupted transport, schools and other public services, and more than 200 rallies were staged around France.

….

Under the planned changes, workers must have worked for at least 43 years to be entitled to a full pension. For those who do not fulfil that condition, like many women who interrupted their career to raise children or those who studied for a long time and started working late, the retirement age would remain unchanged at 67.

Those who started to work under the age of 20 and workers with major health issues would be allowed early retirement.

Protracted strikes met Macron’s last effort to raise the retirement age in 2019. He eventually withdrew it after the COVID-19 pandemic hit.

Retirement rules vary widely from country to country, making direct comparisons difficult. The official retirement age in the U.S. is now 67, and countries across Europe have been raising pension ages as populations grow older and fertility rates drop.

Author(s): SYLVIE CORBET and JADE LE DELEY

Publication Date: 19 Jan 2023

Publication Site: Associated Press

More and Better Uses Ahead for Governments’ Financial Data

Mary Pat Campbell

Link: https://www.governing.com/finance/more-and-better-uses-ahead-for-governments-financial-data

Excerpt:

In its lame duck session last month, Congress tucked a sleeper section into its 4,000-page omnibus spending bill. The controversial Financial Data Transparency Act (FDTA) swiftly came out of nowhere to become federal law over the vocal but powerless objections of the state and local government finance community. Its impact on thousands of cities, counties and school districts will be a buzzy topic at conferences all this year and beyond. Meanwhile, software companies will be staking claims in a digital land rush.

The central idea behind the FDTA is that public-sector organizations’ financial data should be readily available for online search and standardized downloading, using common file formats. Think of it as “an http protocol for financial data” that enables an investor, analyst, taxpayer watchdog, constituent or journalist to quickly retrieve key financial information and compare it with other numbers using common data fields. Presently, online users of state and local government financial data must rely primarily on text documents, often in PDF format, that don’t lend themselves to convenient data analysis and comparisons. Financial statements are typically published long after the fiscal year’s end, and the widespread online availability of current and timely data is still a faraway concept.

…..

So far, so good. But the devil is in the details. The first question is just what kind of information will be required in this new system, and when. Most would agree that a complete download of every byte of data now formatted in voluminous governmental financial reports and their notes is overwhelming, unnecessary and burdensome. Thus, a far more incremental and focused approach is a wiser path. For starters, it may be helpful to keep the initial data requirements skeletal and focus initially on a dozen or more vital fiscal data points that are most important to financial statement users. Then, after that foundation is laid, the public finance industry can build out. Of course, this will require that regulators buy into a sensible implementation plan.

The debate over information content requirements should focus first on “decision-useful information.” Having served briefly two decades ago as a voting member of the Governmental Accounting Standards Board (GASB), contributing my professional background as a chartered financial analyst, I can attest that almost every one of their meetings included a board member reminding others that required financial statement information should be decision-useful. A key question, of course, is “useful to whom?”

Author(s): Girard Miller

Publication Date: 17 Jan 2023

Publication Site: Governing

Nevada’s Pension Debt Soars to $18B, Teachers Pay Nation’s Highest Retirement Costs

Mary Pat Campbell

Link: https://www.npri.org/pension-debt-soars-nv-teachers-now-pay-highest-rates-in-us/

Graphic:

Excerpt:

PERS consists of two separate plans: one for police and fire members (the safety plan); and one for everyone else (the regular plan).

The annual contribution rates for safety plan members will rise to 50 percent in July — which means taxpayers must send PERS an additional 50 cents for every $1 in salary paid to police officers and firefighters. The contribution rate for regular plan members, which includes teachers, will rise to 33.5 percent of salary.

PERS costs are split evenly between taxpayers and the employee, with the employee typically paying their half through an equivalent salary reduction. This means that regular plan members, which include teachers, will see their paychecks reduced by nearly 17 percent annually starting this July — a rate that is higher than what any other group of comparable public employees nationwide pays for their respective PERS plan.

Unfortunately, these record-high contributions will not be enough to stop PERS’s debt from continuing to grow, according to the system’s just-released actuarial report.

Indeed, PERS’s actuary had determined that much larger rate increases are needed (37.5 percent for regular plan members and 57.5 percent for safety members), but the PERS Board directed the actuary to “phase-in” the necessary cost increase incrementally over four years, rather than all at once. But there is a cost to delaying the implementation of the necessary contribution rate increases — more debt, and thus a greater likelihood of future rate hikes.

Author(s): Robert Fellner

Publication Date: 9 Jan 2023

Publication Site: Nevada Policy Research Institute