A Guide To The Public Pension Funds Divesting From Russia

Link: https://www.forbes.com/sites/lizfarmer/2022/03/11/the-pension-plans-divesting-from-russia/

Excerpt:

As economic sanctions against Russia for its invasion of Ukraine spread, state and local public pension plans are looking at selling off their Russian-related assets and some are already doing so.

Lawmakers in at least a dozen states are pressuring their pension funds to divest from Russian-related investments. Divestment isn’t likely to have much impact on the funds themselves as Russian-domiciled investments make up less than 1% of most (if not all) state portfolios. But collectively, it sends a message. For example, California’s CalPERS is the largest pension fund in the world and it alone holds nearly $1 billion in Russian assets.

However, it’s likely that at least some (if not all of) these funds will be selling at a loss. Here is a snapshot of what’s happening across the U.S.

Author(s): Liz Farmer

Publication Date: 11 March 2022

Publication Site: Forbes

How AI and federal funding can revolutionize city budgets

Link: https://lizfarmer.substack.com/p/ai-federal-funding-city-budgets

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The big takeaway from the GFOA’s Rethinking Revenue project is that the modern economy is shifting the tax burden toward those who can least afford it. Now, the association and its partners are launching pilot programs to test some of the ideas the project has explored.

One will target the inequities built into relying on fees and fines and the GFOA is inviting governments to apply for a pilot project testing segmented pricing as a potential solution. Instead of a one-size-fits-all fine, segmented pricing is designed around a user’s ability or willingness to pay. For example, a $100 speeding ticket for someone who earns just $500 a week is a much larger financial burden than it is for someone who earns $2,000 a week. So for the lower-income transgressor, the fine is lowered to $50. It still stings, but it’s much more likely to get paid.

Shane Kavanagh, GFOA’s senior manager of research, said they’re looking for around five places to test this idea and that the tested revenue source would have to be large enough (such as traffic fines) and also be one that the government has had difficulty collecting.

Author(s): Liz Farmer

Publication Date: 24 Feb 2022

Publication Site: Long Story Short

Three subtle ways inflation helps state and local government coffers

Link: https://lizfarmer.substack.com/p/inflation-impact-local-governments

Excerpt:

If inflation pushes up interest rates and accelerates wage growth, that could take some of the pressure off of public pension plan performance. Since the Great Recession, pension plans have been steadily lowering their assumed annual rate of return to better match the low-interest rate environment. Pension plan actuaries factor that rate when in calculating a government’s annual pension bill. Lowering that rate results in a higher bill because governments have to make up the difference. 

More stable returns. Rising inflation can result in higher returns from a pension plan’s fixed-income assets. Unlike the volatile equities market, the nice steady investment return from fixed-income securities is much nicer to rely on from a planning perspective. In fact, bonds used to be pensions’ bread and butter until interest rates began falling in the 1990s.

The National Association of State Retirement Administrators’ research director Keith Brainard told me this week that if inflation is sustained, governments could decide to stop lowering their investment return assumptions and some could even start raising them again. 

That could result in lower pension bills for governments with healthy plans. Or in the case of struggling plans like Chicago or Kentucky, it could at least slow the pace of their rising pension bills.

Higher worker contributions. What’s more, noted Brainard, accelerated wage growth also means those workers paying into pension plans will be contributing slightly more. “What wages will do when inflation is 2% is a lot different than when it’s 6%,” he said.

Author(s): Liz Farmer

Publication Date: 15 Dec 2021

Publication Site: Long Story Short at substack

The muni market: How two big changes could impact government borrowing

Link:https://lizfarmer.substack.com/p/municipal-market-trends-outlook

Excerpt:

The pandemic created a lot of uncertainty around state and local government revenues for much of 2020. That was a big reason for the dramatic boost in the rate of bonds issued with insurance that year: In total, $34.45 billion in new bonds carried insurance — the highest since the Great Recession ended in 2009. Even with the economic stabilization this year, insurance is still going strong. Through October 2021, wrapped municipal bond issuance totaled $31.5 billion, according to RBC Capital Markets.

Looking ahead, the chatter about municipal climate risk has been increasing in recent years. Extreme weather events linked to climate change have called into question the preparedness and resiliency of utilities and other government issuers, while studies point to the potential long-term economic effect. One BlackRock Investment Institute report estimated that some vulnerable cities could see economic losses of up to 10% of GDP without decisive action.

The bottom line: Insurance provided safety for muni market investors during the pandemic and its continued use indicates that investors and issuers are both finding it attractive in situations where there might be a little more long-term uncertainty. Climate risk plays right into this notion. While no one expects bond insurance to dominate the market as it once did, it’s likely that the pandemic spike in usage is here to stay.

Author(s): Liz Farmer

Publication Date: 8 Dec 2021

Publication Site: Long Story Short at substack

States Are Seeing Steep Income Tax Revenue Growth. Will It Last?

Link:https://www.forbes.com/sites/lizfarmer/2021/12/01/states-are-seeing-steep-income-tax-revenue-growth-will-it-last/

Excerpt:

States collected nearly $455 billion in total income tax revenue in fiscal 2021—an astounding 14.7% increase over the prior year. That’s according to the latest report from the National Association of State Budget Officers (NASBO), which covers spending through June 2021. Over two years, income tax revenue is up 15%.

However, these numbers are highly influenced by unusual economic times. For starters, states delayed their tax filing deadline by several months when the pandemic began. For most, this pushed their 2020 income tax revenue into the next fiscal year. This artificially deflated 2020’s numbers while inflating 2021 collections.

The federal stimulus has also played a role. Since March 2020, the feds have doled out $867 billion in cash to households via three Economic Impact Payments. While those payments weren’t taxable, they could indirectly increase state tax liability for some. (The New York Times NYT +1% has a good explainer on that.) Plus, unemployment insurance — which most states do tax — received a massive boost for about 15 months.

Author(s): Liz Farmer

Publication Date: 1 Dec 2021

Publication Site: Forbes

Equity, tech and climate change: Three big takeaways from the infrastructure bill

Link:https://lizfarmer.substack.com/p/equity-tech-climate-change-infrastructure-bill

Excerpt:

Green bonds. Issuance is expected to hit a record high this year and so are municipal green bond offerings. My friend and colleague Mark Funkhouser explains why local leaders should take advantage of this alignment of financial interests and moral ones.

More spending flexibility in the American Rescue Plan. Legislation now making its way through Congress would allow governments to use some of their ARP funds for highway and transit projects and to address natural disasters.

Rising income tax revenue. The K-shaped recovery and federal stimulus has resulted in the largest median state personal income jump in 14 years. According to Fitch Ratings, state income tax revenues increased by 6.3% last year and this year is expected to produce similar growth. This has implications for public pensionstax cuts and — of course — the 2022 midterms.

Author(s): Liz Farmer

Publication Date: 17 Nov 2021

Publication Site: Long Story Short at substack

Biden’s Falling Approval Ratings Are Bad News For The Municipal Market

Link:https://www.forbes.com/sites/lizfarmer/2021/10/16/bidens-falling-approval-ratings-are-bad-news-for-the-municipal-market/?sh=7c3aed496a80

Excerpt:

Advanced refunding bonds allowed governments to refinance debt earlier, thus letting them take advantage of lower interest rates years sooner and save taxpayer money. The 2017 tax reform eliminated their tax-exempt status which effectively nixed their cost-saving value for governments. But the move increased federal government revenues by billions of dollars each year. Reinstating the bonds, according to a report from the Joint Committee on Taxation (JCT), would cost $11 billion over the next five years.

A federally subsidized taxable bond — what market watchers are calling BABs 2.0 — works differently. Unlike tax-exempt municipal bonds, BABs are taxable, and, as a result, open up the municipal market to new investors, such as pension funds or those living abroad. More buyers is a good thing, but BABs are also more expensive for governments. So to defray the added cost, the federal government in 2009 offered a direct subsidy of 35% of state and local governments’ interest payments on BABs.

That is, until sequestration in 2013 dramatically cut the subsidy and left state and local governments scrambling to fill the void.

BABs 2.0 would work similarly, but also lock in the federal subsidy — a much better deal for governments. They’re expected to cost the federal government more than $22.5 billion between 2022 and 2031, according to estimates from the JCT. 

Author(s): Liz Farmer

Publication Date: 16 Oct 2021

Publication Site: Forbes

Stock Market Helps State Pension Debt Hit 10-Year Low, But Crisis Still Looms Large

Link: https://www.forbes.com/sites/lizfarmer/2021/09/23/stock-market-helps-state-pension-debt-hit-10-year-low-but-crisis-still-looms-large/

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After state pension debt grew to more than $1.4 trillion last year, two new reports estimate that gap between the total amount states have promised to retirees and what they’ve actually set aside in their pension investment funds will shrink dramatically. A recent analysis by the Pew Charitable Trusts says the gap could dip below $1 trillion this year. And a report released today by the Equable Institute estimates that 2021 returns will shrink state pension debt to $1.08 trillion.

The gains in the stock market played a big role. Equable’s report calculates that preliminary 2021 investment returns averaged an astounding 20.7% return. That’s nearly triple the average assumed rate of return in any given year. Those gains will boost the average pension plan to about 80% funded, the highest funding ratio since 2008.

Author(s): Liz Farmer

Publication Date: 23 Sept 2021

Publication Site: Forbes

Gig Workers In This State – Not California – Benefited Most From Federal Unemployment Benefit Expansion

Link: https://www.forbes.com/sites/lizfarmer/2021/09/09/gig-workers-in-this-statenot-californiabenefited-most-from-federal-unemployment-benefits/

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Federal unemployment benefits ended this month for millions of Americans and data show that workers in Virginia might feel it the most.

The federal government’s enhanced unemployment benefit added $300 to weekly unemployment checks issued by states and also expanded coverage to the self-employed and freelancers, such as rideshare drivers and musicians. That expansion, called pandemic unemployment assistance (PUA) was a lifeline for these gig workers who previously weren’t eligible for any unemployment help.

An analysis I did for the Rockefeller Institute of Government on unemployment benefits given to non-traditional workers shows that the PUA program had the biggest financial impact in Virginia, where those payments accounted for nearly 26% of all unemployment benefits paid in 2020.

Author(s): Liz Farmer

Publication Date: 9 September 2021

Publication Site: Forbes

How States Are Letting Small Businesses Avoid The SALT Cap On Their Tax Returns

Link: https://www.forbes.com/sites/lizfarmer/2021/07/01/how-states-are-letting-small-businesses-avoid-the-salt-cap-on-their-tax-returns/?sh=7ef5a29127c5

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Colorado recently became the 14th state to enact the new workaround, which allows (or in Connecticut’s case, requires) pass-through businesses to pay state income taxes at the entity level rather than on their personal income tax returns. For small businesses like partnerships, declaring that income as a business instead of passing it through to their individual tax returns means the state taxes paid on that business income don’t count toward their SALT cap.

The new mechanism is called a pass-through entity (PTE) tax, which is exempt from the $10,000 cap on the state and local tax (SALT) deduction that was part of President Trump’s 2017 tax reform. For business owners in high property tax states like New Jersey and Connecticut, it’s a critical change because it allows those taxpayers to deduct more of their local taxes from their other personal income.

Author(s): Liz Farmer

Publication Date: 1 July 2021

Publication Site: Forbes

Even With Federal Aid, States Slashed Spending By $4.1 Billion To Avoid Shortfalls

Link: https://www.forbes.com/sites/lizfarmer/2021/06/24/even-with-federal-aid-states-slashed-spending-by-41-billion-to-avoid-shortfalls/?sh=1a1c2ceb4a93

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A total of 12 states had to cut a combined $4.1 billion from their budgets in order to balance out projected shortfalls before the end of their fiscal year, according to a new report released Thursday by the National Association of State Budget Officers (NASBO). (Most state fiscal years end on June 30.) Nevada, New Mexico and Washington state cut the most, accounting for 42% of the total.

Many of these states targeted staff for these cuts, including implementing hiring freezes, eliminating open positions, cutting salaries and ordering furloughs. They also turned to Medicaid, which saw more than $1 billion in combined cuts from the 12 shortfall states while higher education cuts totaled more than $500 million from the group. Washington State focused its cuts mainly on K-12 education, slashing more than $1 billion from the budget over the past year.

Author(s): Liz Farmer

Publication Date: 24 June 2021

Publication Site: Forbes

Days Ahead Of First Federal Stimulus Payments, Local Governments Still Don’t Know How—And In Some Cases If—They’ll Spend The Money

Link: https://www.forbes.com/sites/lizfarmer/2021/05/06/days-ahead-of-first-federal-stimulus-for-governments-lawmakers-still-dont-know-how—and-in-some-cases-if–theyll-spend-it/?sh=2abe348711d8

Excerpt:

The first round of aid for state and local governments is set to go out next week, but with no guidance yet on the spending rules, leaders are becoming increasingly frustrated.

The American Rescue Plan Act (ARPA) included $350 billion in direct aid to states and localities and the law requires the U.S. Department of Treasury to distribute the first tranche by May 10. Since it passed on March 11, the department has been developing guidance on the spending rules with input from government organizations. The ARPA law says governments can use the money for public health crisis expenses and for budget deficits, but more specifics are needed because governments are required to track and report on their spending.

Now, with just days to go until the first round of aid is to be delivered, the rules still aren’t out and frustrations are mounting. This is particularly true for those governments who are receiving direct federal aid for the first time since the pandemic began.

Author(s): Liz Farmer

Publication Date: 6 May 2021

Publication Site: Forbes