In January the Department Of Finance will issue the Governor’s Budget for 2022-23. No section will be more important than the Stress Test, which forecasts revenue losses in the event of a stock market decline such as in 2001-3 and 2008-9.
Last January, the Governor’s Budget forecast revenue losses of $100 billion. Just two years earlier, the 2019-20 Governor’s Budget forecast losses of $50 billion. That makes sense because, as DOF explains, “the higher levels and valuations in the stock market increase the risk of a large stock market drop leading to a large decline in capital gains revenues” on which California is extraordinarily dependent.
Schools and other services need predictable annual funding. You should build reserves to the levels predicted by stress tests.
Author(s): David Crane
Publication Date: 5 Dec 2021
Publication Site: Govern for California (Mail Chimp)
In a white paper for The Pew Charitable Trusts, Eric Scorsone and Natalie Pruett of the Michigan State University Extension’s Michigan Center for Local Government Finance & Policy assessed local government early warning systems through case studies in Colorado, Louisiana, Ohio, and Pennsylvania. Each of these states applies various financial ratios—an approach known as ratio analysis—and other indicators to identify signs of local fiscal distress. Ratio analysis uses fractions that capture financial or economic activity within a locality—such as total expenditures over total revenues—to measure solvency, the ability to pay debts and liabilities over the short or long term. Ultimately, the authors determined that there isn’t one optimal system and instead offer several recommendations for states to build or improve their early warning systems.
The authors present detailed descriptions of the four states’ systems and analyze trade-offs and implications of the indicators employed to measure different types of solvency. They offer a variety of recommendations for states to consider, including use of indicators for four types of solvency:
Overall, the typical pension fund is now expected to return approximately 6% annually over the next 20 years, compared with 6.4% pre-pandemic (Figure 4). This change in outlook is consistent with the reduction in the median long-term return found by a recent survey of pension investment consultants13 and aligns with revisions for public pension return expectations published by S&P Global.14