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Monday
Oct312011

Local Government Finances

The New York Times article on Rhode Island’s pension system “Little State with a Big Mess” is an excellent read. Rhode Island is a microcosm of the national issues of public sector debt, pensions, and the political difficulty in rebalancing government finances. Rhode Island’s pension problem is best articulated through three facts. First, the state has more retirees than current state workers, a problem facing many old industrial firms in the U.S. Second, and more importantly, the Times stated,

In each of the last 10 years, the state pension fund paid more money to retirees than the fund collected from state employees and taxpayers combined.”

Lastly, the state pension fund assumes annual returns of 8.25%, versus the actual return of 2.4% a year over the last decade. Clearly not a sustainable path for the state. The situation in Europe and Greece reinforces why this is an important issue and one best tackled in a timely manner, before it becomes a crisis. My friend Bill says, “Bad news doesn’t get better with age.” Not only will the cuts be more painful in a crisis, but the political calculus becomes more complicated. Europe has been fighting to solve the crisis for Greece with half measures and the situation threatens to boil beyond their control.

The article reminded me of the role local and state government finances play in corporate site selection. It’s an important issue that doesn’t get much coverage. Site selection consultants evaluate state and local government credit ratings and overall finances during the site selection process. If the client cares about tax rates, they certainly care about the potential for future tax rate increases. U.S. states are generally considered low risk by the rating agencies as you can see from the map below. Although it is worth noting California’s credit rating is lower than the recently downgraded Italy.

 

A state with serious existing fiscal problems, which is cutting services and raising taxes, is less appealing than the alternative. A looming fiscal problem is a forecast for service cuts and tax increases. The political process to solve a serious fiscal problem is never fun. The ensuing fight will only worsen political infighting and corporate end-users are sure to be targeted for tax increases.  When has a tax increase not caused trouble?

Locations of most concern:

  • States and cities downgraded or put on a ratings watch by a major credit rating agency.
  • Company towns or small cities with a concentrated tax base.
  • Cities and states with limited flexibility in budgeting or taxing.

Resource: http://www.municipalbonds.com/  Excellent site. Free registration provides access to state and municipal bond ratings, current yields, and related research. 

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