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.
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.
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.
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.
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.
Mayors in blue states are lining up with Democrats in Congress to pressure the White House into restoring a tax break that was significantly reduced by former President Trump’s tax reform.
On Wednesday, Rep. Thomas Suozzi (N.Y.) joined officials from Albany; Columbia, S.C.; Philadelphia and San Diego to call for a repeal of the rule that limits state and local tax (SALT) deductions. They are calling for President Biden’s $3 trillion infrastructure proposal to include the repeal.
“No SALT, no deal,” Suozzi said on a conference call hosted by the U.S. Conference of Mayors.
New Hampshire and Massachusetts are fighting over whether the Bay State still has the right to tax the incomes of 103,000 former commuters now working from home in New Hampshire. But this tax spat deals with issues that spread far beyond the Massachusetts border — it has national implications and could impact millions of Americans.
Because of this, scores of tax organizations and states have filed briefs with the U.S. Supreme Court in support of the Granite State. In fact, an analysis by the National Taxpayers Union Foundation estimated at least 2.1 million Americans that previously crossed state lines for work are now working from home in accordance with public health guidelines.
Of those states suffering at least a 3% drop in revenue since the start of the pandemic in March 2020, two-thirds (eight in 12) are red states. Alaska, Florida, North Dakota and Texas are seeing some of the worst revenue losses of 9% or higher over the comparable period in 2019, according to the latest data from the Urban Institute.
Across the 47 states from which the institute has full data, total state tax revenues were down by $14 billion in the first ten months of the pandemic (between March and December 2020) compared to the same period a year earlier. That’s an average drop of 1.8% and is largely driven by declines in sales tax revenue.
Between August and mid-December of 2020, at least one-quarter of large bond issuances in the municipal market involved some form of deficit financing, according to an analysis by Municipal Market Analytics (MMA). The firm analyzed 442 municipal bond issuances that totaled at least $100 million.
MMA’s Matt Fabian and Lisa Washburn added that their tally was conservative and that as many as half of those 442 issuances may have involved deficit financing because the ultimate use of the money wasn’t always clear.
“These are not typical uses of the municipal bond market, where an overwhelming majority of financing is for long-term infrastructure projects,” they told the Pew Charitable Trusts. “But last year, with state and local governments seeking as much as possible to avoid cutting spending, raising taxes, or postponing pension payments, they shifted their emphasis to short-term and temporary solutions. As the pandemic continued and federal stimulus money dried up, they increasingly took on debt for budgetary help.”
Orlando Cruz, senior vice president of ICMA-RC, says the layoffs following the Great Recession took years to recover from. “The layoffs, the furloughs, the early retirements we saw then really put states and localities in a hole through next decade to the point where — even before Covid — they had hard time recruiting in certain skill sets,” he said.
Now, he added, “governments are thinking strategically in terms of hiring.” State and local worker layoffs appear to have peaked in April — that’s different from the slow and steady layoffs that occurred over many months during the last recession. “Governments know they have to compete with other sectors for talent,” Cruz said during a call with reporters. What’s more, he said, budget constraints in the coming years will “make it harder to back fill those positions laid off.”