The Milken Institute, along with the Kauffman Foundation, convened a Financial Innovations Lab to identify solutions. Participants included state and local government officials, union representatives, capital markets experts, money managers, academics, public-sector attorneys and representatives from bond rating agencies.
Michael Pagano, dean of the College of Urban Planning and Public Affairs at the University of Illinois, Chicago, said 2010 will mark the first time since the Great Depression that income, sales and property taxes will decline across the board. To strengthen tax receipts going forward, Pagano proposed broadening the sales tax to include services and extending the property tax to sites that are now exempt.
Changes are likely in store for public pensions as well, said Robin Prunty, managing director in the Public Finance Ratings Group at Standard & Poor's, which uses public pension funding ratios to formulate state bond ratings. Noting that more than a decade has passed since the Governmental Accounting Standards Board last revised public pension rules, Prunty predicted major modifications for public pension accounting, reporting and pension obligation funding methods.
Participants agreed that Chapter 9 bankruptcy and other pre-packaged proposals are an unappealing last resort for municipalities in distress. Henry Kevane, managing partner at Pachulski Stang Ziehl & Jones LLP, spoke from his past experience with Orange County's 1994 bankruptcy filing, calling the Chapter 9 process a costly, arduous gauntlet for municipalities. To better deal with municipalities on the verge of bankruptcy, participants suggested revisiting the concept of oversight control boards such as New York's Municipal Assistance Corporation of the 1970s, and models such as the Pennsylvania Intergovernmental Cooperation Authority.
Among the more noteworthy remedies suggested were:
Participants agreed that long-term solvency for states and municipalities will require structural, even painful paradigm shifts. But kicking the can down the road is no longer a viable option.
To read the results of the Lab, including recommended next steps for implementation, view the full report. For more information, contact Caitlin MacLean, manager of Financial Innovations Labs, at firstname.lastname@example.org.