Wednesday, April 25, 2012

The Reality-averse Illinois Government Is On Route To A Probable Plunge Into Insolvency -

The Reality-averse Illinois Government Is On Route To A Probable Plunge Into Insolvency -

For Illinois, The Bills Come Due As Reality Closes In

Illinois was more heavily taxed than its five contiguous states (Indiana, Kentucky, Missouri, Iowa, Wisconsin) even before January 2011, when Quinn got a lame duck Legislature (its successor has fewer Democrats) to raise corporate taxes 30% (from 7.3% to 9.5%), giving Illinois one of the highest state corporate taxes, and the fourth-highest combination of national and local corporate taxation in the industrialized world.

Since 2009, Quinn has spent more than $500 million in corporate welfare to bribe companies not to flee the tax environment he has created.

Quinn raised personal income taxes 67% (from 3% to 5%), adding about $1,040 to the tax burden of a family of four earning $60,000. Illinois' unemployment rate increased faster than any other state's in 2011.

Its pension system is the nation's most underfunded, and the state has floated bond issues to finance pension contributions — borrowing money that someday must be repaid, to replace what should have been pension money it spent on immediate gratifications.  [Please click on the link above to see the entire article.]

Thursday, April 19, 2012

Evidence Counts--Evaluating State Tax Incentives for Jobs and Growth by The Pew Center on the States, April 2012

015_12_RI Tax Incentives Report_web.pdf (application/pdf Object)


Every year, states invest billions of
taxpayer dollars in tax incentives
designed to promote economic
development, but few know whether
they are getting a strong return on their
investment. Some states do not carefully
measure the economic impact of their
incentives; others do not examine them
at all. Some have conducted rigorous
evaluations of individual tax incentives
and others have systems for regularly
reviewing all major tax incentives—
but no state has put the two together.
As a result, when lawmakers consider
whether to offer or continue such
incentives, how much to spend, and who
should get them, they often are relying
on incomplete, conflicting, or unreliable
Closing this knowledge gap should be a
top priority for policy makers, especially
as states continue their efforts to emerge
from the Great Recession. The good news
is that a number are striving to do so,
creating a blueprint for others to follow.

Friday, April 13, 2012

Public Pensions Under Stress : Shining Light on a Dark Corner, Federal Reserve Bank of Cleveland, April 13, 2012

Public Pensions Under Stress :: :: <img src="/Forefront/images/forefront_w.jpg" alt="Forefront" /><br />Spring 2012 :: 04.13.2012 :: Federal Reserve Bank of Cleveland

Public Finances: Shining Light on a Dark Corner

The financial crisis has made it all too clear that regulators failed to see into the dark corners of the financial system. With that in mind, the Federal Reserve Banks of Cleveland and Atlanta have formed a Financial Monitoring Team to study pension funds and municipal finance with an eye toward implications for the wider economy and financial system. What concerns should we have? In this article and other articles from this spring issue of Forefront, we explain where risks could be building and how reforms might help forestall their impact on the broader economy and financial system.

The Widely Ranging Estimates of Pension Underfunding

Just how underfunded are America’s public pension plans? It depends who you ask.
In the language of economics, a pension plan’s promised benefits are liabilities. They will have to be paid for someday with funds from the asset side of the fund’s balance sheet. These future liabilities should be “discounted” so that they are expressed in present-value terms. That way, you can compare the present value of the pension obligations to the current level of plan assets—essentially, a way to measure whether today’s funds on hand will be sufficient to pay for all those retiree benefits when they come due in the future. Often this comparison is expressed as the ratio of the present value of assets over the present value of obligations.
Which method to use in discounting future liabilities—that’s the crux of the issue. Public pension plans follow Government Accounting Standards Board (GASB) guidelines. This allows those plans to use the expected return on their portfolio for deter­mining the present value of their promised payments.
Following GASB guidelines, public pension funds are allowed to discount their future pension obligations by their expected rate of return, which has been in the neighborhood of 8 percent—approximately the average return of their portfolio over the past 30 years.
According to that formula, the nation’s largest 126 public pensions have liabilities with a present value (meaning they were discounted at their assumed rate) in 2010 of $3.5 trillion. The amount of assets they held was $2.7 trillion in 2010, leaving a shortfall of $800 billion.
Some economists, however, have come up with a $4 trillion shortfall. They have pointed out that for most state and local plans, promised pension benefits are protected by constitutional, statutory, or common law guarantees. (See related article, “Navigating the Legal Landscape for Public Pension Reform.”) By definition, this ought to make them riskless obligations to the pensioners. Thus, the appropriate valuation methodology should discount promised benefits using the risk-free interest rate, usually calculated as the yield on long-term U.S. Treasuries.
This method, argued cogently by Jeffrey Brown and David Wilcox in “Discounting State and Local Pension Liabilities” (2009), has the virtue of being supported by both economic and legal principles. It also produces substantially higher estimates of the present value of pension liabilities. Given the currently low yields on Treasury bonds, this approach implies a present value of accrued obligations as high as $6.7 trillion, leaving an unfunded liability of $4 trillion.
John Carlson

Thursday, April 5, 2012

Fiscal crisis of municipal and provincial gov`ts APRIL 05, 2012 06:55[English donga]

The same problems are occurring in the hot economic environment of South Korea.  Please see the article below:[English donga]

The city of Incheon has paid its civil servants one day late, blaming “a temporary lack of liquidity.” The delay in pay due to a deficit of 2 billion won (1.8 million U.S. dollars) is something not to be ignored given the city`s annual budget of 8 trillion won (7.1 billion dollars). The debt ratio of the Incheon City Hall by year`s end is expected to reach 40 percent. If the figure exceeds 40 percent, this will plunge the city into a debt crisis and prompt an audit by the central government. This is tantamount to a debt workout program for corporations. 

Incheon became debt-saddled due to a host of reckless populist projects carried out under former mayor Ahn Sang-soo. Eunha Rail, which cost 85.3 billion won (75.5 million dollars), will be torn down due to poor construction. A free economic zone into which the city injected more than 1 trillion won (885 million dollars) has attracted few investors. The construction of the main stadium for the 2014 Asian Games, a venture needing more than 500 billion won (443 million dollars), has also come under scrutiny. If Incheon`s Munhak Stadium, which hosted games of the 2002 World Cup soccer finals, had been renovated, the city would have needed just 54 billion won (48 million dollars). This is in stark contrast to Daegu, which successfully hosted the IAAF World Championships in 2011 by refurbishing Daegu Stadium.