Congress must plan for states to go insolvent.

A number of states, including large ones like New Jersey, Illinois, and Ohio, could become insolvent during the next decade.

These states are burdened with underfunded pensions and other post-retirement benefits (mainly health care) that will impose a growing burden on governments as more baby boomers retire. At the same time, the states’ ability to fund these pensions will be compromised by two factors. The first is a long-term fall in the labor participation rate, requiring younger workers to bear a heavier burden of funding legacy costs. The second is a decrease in long-term growth rates, which will cause both tax revenues and returns on pension investments to fall below expectations.

Reforms are needed to restore fiscal solvency.

It is not too early for Congress and the next president to start planning for a state to go insolvent. Both the Detroit and Puerto Rico bankruptcies were preceded by years of denial in the face of inevitable facts. Given the combination of high unfunded liabilities, slow growth, deadlocked politics and, in some cases, legal barriers to reform, some states are likely beyond the point of saving. Illinois is a good bet to go first, but five or 10 states are in similar positions.

One approach is for Congress to pass legislation dealing with the specific state involved. This need not be a bailout. In fact, a bailout would be extremely unwise. It would tax states that had managed their finances responsibly, reward unions and bondholders who had enabled poor government, and eliminate any pressure to deal with the problems early. However, the legislation must contain enough financial assistance to restore both short-term liquidity (the ability to pay bills now) and long-term solvency (the ability to stay afloat). This assistance need not cost the taxpayer much. Indeed a careful combination of loan guarantees conditioned on significant structural reforms may be all that is needed. This process would resemble that followed in New York City and Washington, D.C., both of which are widely regarded as successes.

A benefit of this approach is that it allows for continued financial supervision of the state’s finances, thus maximizing the chance of overcoming barriers to reform and ensuring a return to long-term solvency.

A large problem with this approach is that it may not be able to reduce the state’s debt burden. Congress’ ability to erase debts may be limited legally to the formal bankruptcy process. Although governments may use a combination of economic and legal pressure to encourage creditors to settle their claims for less than par, it would have a much more difficult time forcing holdouts to accept losses. In such circumstances, it could be that the political and economic burdens of making all creditors whole are just too great outside of the bankruptcy process.

The odds of a state becoming unable to pay its obligations grow every year. Many state retirement plans are significantly underfunded and are unlikely to meet their investment goals over the next decade. The financial demands on state budgets will increase significantly. At some point, making a concerted effort to catch up imposes too much political pain and only delays the inevitable. When the end game happens, it usually comes as a surprise to many.

Congress can nevertheless prepare for insolvency by choosing its strategy now. The ideal solution would treat holders of unsecured debt the same as unfunded pensions, it would impose enough losses to ensure that the state regained its financial solvency, and it would condition debt relief on significant reforms. Ideally, the process would be available long before a state technically became insolvent but after it was willing to make significant reforms. Unfortunately, political resistance and unrealistically exuberant projections may prevent a state from taking advantage of any solution before insolvency.

New Jersey Officials Close Out May with a Flourish

 

Atlantic City Bailout Bills Pass Both NJ Houses

New Jersey legislation that aims to help Atlantic City financially recover from poor gaming revenue and successful tax appeals now awaits Gov. Chris Christie’s signature, after passing both houses of the state Legislature on Thursday.

During their regular voting sessions, the New Jersey Senate and Assembly approved a pair of bills that would give city officials 150 days come up with a financial plan to avoid bankruptcy and would create a tax deferral arrangement for casinos.

The two Senate bills evolved from Senate and Assembly proposals that had been merged and advanced Monday by the Assembly Judiciary Committee, giving rise to new bailout legislation that leaves collective bargaining agreements intact and gives officials of the struggling resort town more time to hash out its budget before state officials intervene.

The two points of contention had sparked showdowns between Assembly Speaker Vincent Prieto, D-Bergen, and Senate President Steve Sweeney, D-Gloucester, but lawmakers hailed the latest versions of the Municipal Stabilization and Recovery Act, or S1711, and the payment-in-lieu-of-taxes plan, memorialized in S1715.

The two sides had worked on a series of amendments to the Senate versions to bring them in line with the Assembly’s vision. For example, casinos are not allowed to opt out of the PILOT program, and the Municipal Stabilization and Recovery Act — formerly known as the “state takeover” bill, before Prieto and unions decried the stripping of the city’s autonomy — now extends early retirement incentives to all full-time employees to save money.

The Municipal Stabilization and Recovery Act won 32-5 approval in the Senate and 60-12 passage in the Assembly. The PILOT bill got 33-4 approval in the Senate and 61-12 passage in the Assembly.

Twelve casinos had made up 70 percent of annual property taxes in Atlantic City as of 2013. But competition from surrounding states and other factors have left the city with eight operating casinos, after four closed in 2014, and a tax base that dropped from $20.5 billion in 2010 to $7.3 billion in 2015.

The dire situation prompted Christie in January 2015 to tap an emergency manager for the resort town, after which Moody’s Investors Service slashed the municipality’s bond rating.

The pressure to come up with a plan to avoid insolvency reached fever pitch in recent months as city officials braced for a shutdown and battled legal wars.

Previously, the state Department of Education sued the town to ensure its school district got its share of taxes, although a state court judge last month declined to freeze the city’s assets. Compounding the fiscal woes are $240 million the city allegedly owes to bondholders and $150 million for successful tax appeal, including $88 million allegedly owed to Borgata Hotel Casino & Spa.

Prieto and Sweeney locked horns again earlier this month, when Prieto said the Assembly was not going to consider the Senate’s state takeover, which was the only plan Christie had said he would endorse to fix the resort town.

NJ Assembly Passes $15 Minimum Wage Bill

The New Jersey Assembly on Thursday advanced legislation that would gradually boost the minimum wage to $15 an hour in phased increases over the next five years, an initiative touted by the chamber’s Democratic leaders as a tool to help reverse the trend of poverty in the state.

Unveiled in February, the bill previously passed the Assembly Labor Committee and now sits before the Senate after its 42-30-1 passage Thursday. The legislation heeds the call of the nationwide Fight for $15 movement and its advancement comes a month after New York and California signed the initiative into law.

Assembly Bill 15 would increase the state’s current base hourly rate of $8.38 to $10.10 at the start of next year and make incremental boosts annually from 2018 to 2021 until the minimum wage is $15

Stating their case for the proposal’s importance in the Garden State, the bill’s primary sponsors cited Legal Services of New Jersey’s estimates that the state is home to 2.8 million adults and 800,000 children living in poverty as of 2014, marking a 40 percent increase in the poor population since the recession of 2008, according to LSNJ estimates.

The take-home pay for a full-time minimum wage worker is less than $18,000 a year in a state that has among the highest costs of living in the country, the sponsors said.

The bill’s primary backers also include Assembly Budget Chairman Gary Schaer, D-Passaic/Bergen, and Assemblywoman Cleopatra Tucker, D-Essex.

An identical Senate version of the legislation sponsored by Senate President Steve Sweeney, D-Gloucester, and Sen. Joseph Vitale, D-Middlesex, was advanced by that chamber’s Labor Committee last week.

Republican leaders have expressed opposition to the legislation. In statements issued when the Senate proposal was announced, Sen. Christopher J. Connors, Assemblyman Brian E. Rumpf and Assemblywoman DiAnne C. Gove said seniors and small businesses would be hit particularly hard while Senate Republican Leader Tom Kean said the minimum wage increase — along with pushes to mandate paid sick leave and add more flexible leave and benefit options — would make life more unaffordable for all New Jerseyans.

The Ailing Transportation Trust Fund

With a crisis in Atlantic City apparently averted, Trenton’s attention will turn — after the Memorial Day weekend — to the virtually exhausted Transportation Trust Fund.

With competing schemes to revive the fund being floated, there will be plenty to argue about. And just to keep things interesting, lawmakers will also be pushing to wrap up a new state budget by the June 30 deadline.

The trust fund pays for more than $3 billion in annual road, bridge, and rail-network improvements, with money that comes from federal matching funds and New Jersey’s 10.5-cent per-gallon tax on gasoline and the its 4-cent per-gallon tax on the gross receipts of petroleum products. Revenue from the sales tax and highway tolls also help subsidize annual state spending of about $1.6 billion under a five-year financing plan that Christie put forward in 2011.

But money from the gas tax will be enough to service only the fund’s extensive debt starting July 1.

Up for debate: whether to create a new “tax-fairness package” that makes cut in the general budget to offset a gas-tax hike that is set aside of for transportation projects.

The alternative? A pay-as-you go system that trims existing budget lines but primarily relies on an expectation of tax revenue to grow each year.

The pay-as-you-go folks, led by Sen. Jennifer Beck (R-Monmouth) dug in launching a petition drive that’s intended to push back against the bipartisan tax-fairness package, which has gained momentum in the State House in recent weeks.

Gov. Chris Christie will also have a say, and over the next month the issue will likely put to a test two of his longest-standing records. He’s yet to approve a major tax increase since he took office early in 2010, and he’s yet to be overridden by a Legislature that’s controlled by Democrats, but not with veto-proof majorities.

Many in Trenton expect the issue will eventually be resolved with a bipartisan deal that will involve hiking either the 10.5-cent tax on gasoline, the 4-cent tax on petroleum products, or some combination of increases that will affect both levies. New Jersey has the second-lowest gas tax in the nation, which was last raised in 1988.

Democrats have been working diligently behind the scenes to secure votes for a gas-tax increase – which they’ve yet to define publicly – by offering up a series of tax cuts to entice Republicans into endorsing what’s being described as a broader “tax fairness” deal. They include proposals to phase out the estate tax over five years; increase current state income tax exemptions for retirement income like pensions and annuities; create a state income tax deduction for charitable contributions; and increase the state version of the Earned Income Tax Credit.

For his part, Christie hasn’t ruled out a gas-tax increase, but he also hasn’t clearly defined what he would like to see in any deal that could win his support. When asked about the issue by a woman calling into his monthly radio show on NJ 101.5 FM radio earlier this week, Christie said he expects to hear more from lawmakers now that they’ve resolved their differences on the Atlantic City rescue.

But Beck, the Monmouth County senator, has been clear in her opposition to a gas-tax increase. She’s launched an online petition to rally opposition that a recent Quinnipiac University poll measured to be 54 percent of New Jersey’s registered voters.

As part of a trust fund renewal plan that she’s put forward, Beck introduced two bills yesterday that are designed to help free up cash in the annual budget to pay for $1.6 billion in transportation upgrades each year through the 2023 fiscal year.

One bill seeks to save about $50 million annually by consolidating several state transportation agencies like New Jersey Transit and the New Jersey Turnpike Authority. But the bulk of the new revenue would come from another, more controversial measure that would reduce healthcare benefits for public workers at all levels and then repurpose most of the savings for transportation projects.

Beck’s plan is also relying on some new borrowing and at least 3 percent growth in annual revenues. She would also raise additional funds by increasing motor-vehicle fines and diverting more money from the state’s Clean Energy Fund.

Her efforts drew support from the New Jersey chapter of the conservative Americans for Prosperity organization, which has been making phone calls to stoke grassroots opposition to a gas-tax hike.

But transportation advocates and public-worker unions criticized Beck’s proposal yesterday, questioning whether her revenue sources and forecasts are realistic.

Projections for 3 percent annual growth over seven years comes as the Christie administration was just forced to scale back its own tax-collection forecasts by a combined $1 billion for the current budget and the fiscal year that will begin on July 1. Growth has also been slow over the last decade, with revenues up just over 6 percent, from $31.2 billion during the 2007 fiscal year to a projected $33.2 billion for the current fiscal year.

Gambling mecca gone bad-Atlantic City, NJ

By Martin J . Milita, Jr., Esq.

It seems like only yesterday that Detroit filed for bankruptcy. It’s actually been more than two years since the initial filing, and almost a year since a judge approved the bankruptcy plan.

In the East, the fortunes of Atlantic City have always followed casinos, which is not a good sign in today’s economy. With four of the big gambling houses bankrupt, Atlantic City finds itself hurting for revenue.

The city has a $100 million hole in its budget. This is made worse by the fact that it keeps losing tax refund lawsuits. So far the city has been forced to refund $186 million in taxes after Casino owners contested their assessments.

But the pain isn’t all on the revenue side.

Atlantic City employs 29 city workers per 1,000 residents, almost triple the rate of Newark, with 11 employees per 1,000 residents, and Jersey City, with 10 employees per 1,000 residents. The mayor recommended laying off more than 200 workers, but that would still leave the city with a much higher worker-per-resident ratio than other cities.

So far, the New Jersey government, including the governor, has been quiet on the possibility of a bankruptcy in the state. The state has gone so far as to give the city more time to repay state loans. If Atlantic City goes under, it would be the first municipal bankruptcy in New Jersey since the depression.

While the state government hasn’t mentioned that the city might go bankrupt, it hasn’t taken that option off the table either. It could be that the governor wants to keep all avenues open, since he has the same financial issues at the state level. As long as bankruptcy is possible, he might have more leverage when negotiating pension reforms with unions.

Many other towns, counties, and states have fiscal woes that will only be addressed through some version of bankruptcy or negotiated restructuring. By the time that happens, investors and taxpayers have already lost.

Martin J. Milita, Jr. Esq. is senior director at Duane Morris Government Strategies, LLC.

Duane Morris Government Strategies (DMGS) supports the growth of organizations, companies, communities and economies through a suite of government and business consulting services. The firm offers a range of government relations and public affairs services, including lobbying, grant writing; development finance consulting, media relations management, grassroots campaigning and community outreach. Milita works at the firm’s Trenton and Newark New Jersey offices.

Visit his blog at: https://martinmilita1.wordpress.com

Follow him on twitter: @MartinMilita1

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http://www.dmgs.com/

Congress to take up Puerto Rico Bankruptcy?

This week, nothing mattered much beyond Greece. The situation has been well-covered, so no reason to recount the story here.

But, the governor of the island state of Puerto Rico (which is a U.S. territory) told the New York Times that Puerto Rico cannot pay its debts. The government and various agencies risk default this month.

Puerto Rico had two big economic contributors in the past – the U.S. military and favorable tax treatment for pharmaceutical companies operating on the island. Both of these things went away over the past 15 years, leaving the country with a big hole in its economy and a bloated government. The territory ran a deficit in every year since 2007 except one, and yet continues to increase government spending. The government employs roughly 27% of the workforce..

As a territory, the island operates like a state in the U.S., and there’s no provision in the Federal Bankruptcy Code for such an institution to declare bankruptcy. Puerto Rico has been pushing Congress to take up a couple of bills that would allow some of the public agencies on the island to declare bankruptcy, but nothing has happened on that front.

The territory’s constitution explicitly states that it must pay its debt before all other expenses, which includes rent, wages, and pensions. What are the chances that Puerto Rican leaders will send all available cash to bondholders and not pay their workers or retirees?  Zero. Anticipate congressional action after the Fourth of July Holiday.