9 big surprises in public finances in 2021



Americans entered this year with the hope that COVID-19 would be defeated and life would return to normal, but that did not happen. A lot of unexpected things happened, as it always does of course, and much of it was felt by the government, from insurgents storming the United States Capitol in January to surprise upheavals (and almost upset) in the national and local elections last month. The world of public finance has experienced its own twists and turns: Congress finally funded infrastructure, for example, but then stalled on tax provisions favorable to municipalities. Here’s where the year brought results few had predicted:

1. Budget surpluses. Economists almost universally expected states and local governments to suffer a shortfall as a result of the pandemic. Congress approved multibillion-dollar aid plans to get them out of a pandemic recession no one had ever experienced. But a “fiscal tiercé” has materialized: the federal government helicopter money sent directly to households provided billions for expenses that supported sales taxes. The stock market surged, resulting in record tax revenues from capital gains from investors. And house prices have skyrocketed, raising property tax rolls. Most states ended fiscal 2021 with a budget surplus, not a deficit. One exception: Oil-producing states saw their extraction revenues decline until oil prices rebounded at the end of the year.

2. A bargain on property tax. There is a lot of noise in professional circles these days about “Rethinking the revenues of local communities”. Some of the goals of the reform are fines and fees, which tend to impose a disproportionate burden on low-income residents, and sales taxes are also seen as regressive. But the main driver of money in the municipal sector is in the property tax, which is also hated by proponents of progressive taxation. Nevertheless, whether the reformers like it or not, the stability and reliability of the property tax are now reinforced by soaring house prices, which make it a little-known engine of growth in the revenue base of local communities. While some jurisdictions now face a property tax backlash if they do not lower tax rates to offset the increase in plot assessments, reform advocates will face an uphill battle if they seek to replace the current powertrain reliance in municipal budgets.

3. The return of inflation. Despite mid-year assurances from federal officials and central bankers that inflation would be transient, the rise in costs persisted and worsened. The November Consumer Price Index (CPI) of 6.8% was the highest in 39 years. Government purchasing departments have struggled throughout the year to foil the pressures of the sticker shock: the costs of everything from police cars at highway icebreaking supplies went up and remained standing. A rising CPI also drives up wages and pension costs. Even when supply chain issues are resolved, housing and rent costs continue to skyrocket, and who will continue to put pressure on inflation indices in the coming months due to lag effects in these data series. November producer prices jumped 9% from last year, which will also put pressure on consumer prices in early 2022. Inflation appears to be the main driver at the moment. problem and the biggest unknown in public and local finances next year.

4. Resigning country. Experts predicted that the workforce would change forever with remote working and hybrid office / home employment models becoming more prevalent, but no one expected to see the level of job jumps and “downtime” workforce departures that are now motivating human resources departments and batty municipal managers. While some public service occupations continue to attract new hires and have been more stable than the volatile hospitality industry workforce, the terrain has changed. Governments are no longer employers of last resort as the unemployment rate decreases. Employee retention has become a challenge nationwide, and government employers are hardly immune. Incentives such as childcare and flexible working hours need to be accompanied by top-down efforts to make public agencies a more pleasant place to work, because that is what more employees are asking for. Psychic income from public service alone is no longer sufficient motivation, unless it is backed by team commitment – and a higher salary. New York paid $ 35,000 in rehiring bonuses for retired transit workers filling vacancies, and the Big Apple isn’t alone. Some public employers are even using federal COVID-19 assistance, directly or indirectly, to pay premiums.

5. Work in the catbird seat. With inflation and tight labor markets now the dominant environment for labor negotiations, public sector unions have more leverage than they have seen since before the Great Recession. On the fiscal front, budget makers should now expect to see contract demands for “CPI plus X%” and catch-up salary increases to make up for a decade of frugality. As employers in the service sector, state and local governments will now face increasing cost pressures. With all of this (one-time) federal tax assistance swirling and swirling, some of it should come in the form of permanent pay increases. The next year promises to be controversial for public sector labor negotiators and their budget cronies who manage the numbers. Expect more arbitration of compensation disputes in jurisdictions where rocks hit hard spots.

6. The armed bond market that Dems left at the altar. Almost everyone in the public finance community who works in Washington, DC, had high hopes that Congress’ tortured budget reconciliation bill would eventually include goodies for the municipal bond market. The relaunch of Build America Bonds, prepayment and improving bank eligibility for municipal investments have all been included in past House plans, but they were scuttled when Senate centrists took over. and sliced ​​the size of the package, which forced the tax commissions to eliminate them as income losers. Like fans of the Detroit Lions and Seattle Mariners, it now looks like we’ll just have to wait until next year unless the magic of Christmas arrives in the Senate in the next few days. In retrospect, the sad and inexplicable surprise here was that these low-cost municipal bond market incentives weren’t built into the bipartisan infrastructure bill, to leverage and optimize federal spending.

7. SALT Relief Rigged by Jerry. Rather than wait for Congress, 20 states have developed bypass schemes for business owners to obtain credits for their national and local taxes at the state level. However, such Rube Goldberg programs do not help working middle class households. The SALT congressional relief remains in placeholder status. Until and unless President Biden’s Build Back Better tax and spending package authorizes the Senate, we won’t know for sure which federal taxpayers, if any, will see higher SALT deduction caps. and who will end up with coal in their stockings. (As of this writing, the elves of SALT were still harassing Santa, but Beltway insiders are now doubting a breakthrough this month.)

8. Pensions: big gains for ESG. Public pension trustees and advocacy groups have increasingly focused on environmental, social and governance (ESG) considerations in their investment policies, but 2021 has exceeded the expectations of most supporters. EU leaders, shareholders and the courts have succeeded in putting pressure on the big oil companies like Shell to migrate to a low-carbon economic model, and American activists won seats on Exxon’s board of directors. Even the New York Stock Exchange now has a high priority ESG initiative. As the tide turned, US portfolio managers quickly upgraded their profiles and marketing arguments: ESG has become a fashionable strategy for mutual and retirement fund managers as young investors demand to more and more that their investments match their values. The proof of the pudding is that “Zero carbon offsets”Are now traded on global financial exchanges and Big Money buys them on a large scale. Expect ESG to become a recurring topic on the pension agenda, as ESG mutual funds are now quickly slipping onto the menus of the 457, 403 (b) and 401 (a) as products of the day.

9. And a leveraged CalPERS. This is still only the culmination of their first round in this new game, but a summary of the surprises in 2021 cannot ignore the recent move by the country’s largest public pension fund. take advantage of its strengths by borrowing approximately $ 25 billion for investments aimed at increasing portfolio returns. Critics say the California public employee retirement system’s 6.8% target for compounding annual returns on investments with this leverage initiative is wishful thinking and administrators would rather play with fire rather than increase contribution rates. Although supporters claim it is “diversification”, others would say this strategy is even riskier than issuing pension funding bonds. Would you like to take out a home equity loan to fund your IRA, in a year where stocks have gained 20% and are now trading near the highest levels with high valuations? Or is it really just a nifty CalPERS shortcut to larger positions in high yield asset classes like private loans as interest rates rise? Time will tell us.

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