The letter was issued by a new nonprofit organization called For The Long Term, which says it “supports state, city, county, and tribal Treasurers in managing the unique challenges they have in interfacing with each other and nonprofit organizations to support the long-term well-being of their beneficiaries.” The letter begins:

Several states in our country have started blacklisting financial firms that don’t agree with their political views. West Virginia, Idaho, Oklahoma, Texas, and Florida have created new policies and laws that restrict who they will do business with, reducing competition and restricting access to many high quality managers. This strategy has real costs that ultimately impact their taxpayers.

These blacklists are a backlash response on behalf of political and corporate interests seeking to interfere with the progress made by those of us who believe in collaboration and engagement. We work towards developing common goals, along with other investors and enlightened companies throughout the world. Our joint efforts have resulted in increased corporate responsibility, transparency, disclosure, and long term positive outcomes for the funds that we oversee, with greater benefits to employees and customers alike.    

Oregon State Treasurer Tobias Read, who signed on to the letter, also recently wrote an op-ed in The New York Times elaborating on it. Read specifically called out the implementation of a Texas law, Senate Bill (SB) 13 (2021), that prohibits the state’s pension funds from investing in firms the government deems hostile to the fossil fuel industry. As previously argued at Reason.org, this legislation may end up costing taxpayers and retirees because it limits Texas pension plans’ ability to invest in Blackrock and nine other publicly-listed companies, as well as 348 mutual funds that Texas claims “boycott energy companies.”

Texas’ actions have also caused some investment banks to stop doing business with state and local governments in the state. Another Texas law, SB 19 (2021), prohibits state agencies from doing business with companies that oppose the firearms industry. 

The combined impact of Texas’ fossil fuel and firearms legislation appears to have deterred some financial firms from participating in the state’s municipal bond market. According to a working paper by the University of Pennsylvania’s Daniel Garrett and Ivan Ivanov of the Federal Reserve Bank of Chicago that was cited by Oregon Treasurer Read, Texas’ governments incurred between $303 million and $532 million in extra borrowing costs over the eight months following the effective date of SB 13 and SB 19—Sept. 1, 2021.

Garrett and Ivanov determined that five major banks exited the market for underwriting state and municipal bond offerings in Texas after that date. Those institutions are Bank of America, Citigroup, Fidelity, Goldman Sachs, and JP Morgan Chase.

Using a difference-in-differences model comparing underwriting results in Texas before and after the new laws came into effect, the researchers estimate that the reduced competition caused interest rates paid by Texas municipal bond issuers to rise 15.4 basis points (0.0154%) above what they otherwise would have been. 

With $31.7 billion of Texas municipal bond issuance in the eight months ending April 30, 2022, Garrett and Ivanov estimate that issuers will pay $532 million in extra interest over the life of the bonds, assuming they are not paid off until maturity. If instead, issuers prepay (or call) the bonds at the earliest allowable date, the extra interest would total $303 million.

Although this is not a public pension issue, this finding appears to support the contention made in the letter by the Democratic state treasurers that “new policies and laws that restrict who they will do business with” is a “strategy [that] has real costs that ultimately impact their taxpayers.”

Less convincing is the treasurers’ assertion that buying the stocks of ESG-oriented companies will produce better long-term investment returns. They claim:

Today stakeholders, customers and employees are more diverse and informed. Companies that acknowledge these changes, and incorporate strategies to capture this reality are more innovative, creative and more financially successful, consequently better investments for long term investors. Organizations that recognize the threat of climate change are already working toward reducing their carbon footprint, while the automobile manufacturers have begun rapid movement to electric vehicles. Engaged investors are working with the fossil fuel companies to help them effectively manage the energy transition, supporting their efforts to seize new opportunities in renewable energies. Doing otherwise would be a huge risk to them and their investors.

But market outcomes thus far do not appear to validate this claim. The largest US ESG Exchange Traded Fund, iShares ESG Aware MSCI USA ETF (ESGU), underperformed the S&P 500 for the 12 months ending August 31, 2022. During that one-year period, EGSU returned -13.96% compared to –11.23% for the S&P 500. 

Similarly, Bloomberg reports:

Global ESG funds have underperformed the broader market in the past five years, returning an average of 6.3% per year, compared with 8.9% for broader funds, according to data compiled by Bloomberg. An investor who put $10,000 into an average global ESG fund in 2017 would have $13,573 today, roughly $1,720 less than if they’d put it into a non-ESG portfolio.

In a 2019 paper, the Pacific Research Institute’s Wayne Weingarden found that the vast majority of ESG funds returned less than an S&P 500 ETF for the 10-year period ending April 2019.

The Democratic treasurers who signed the letter are right to highlight the potentially negative financial impacts of narrowing the eligibility for contractors vying to provide financial services to public entities. What remains unclear after reading both the FTLT letter and Mr. Read’s supplemental opinion, however, is how these Democratic financial officials and financial institutions can prove their preferred ESG strategies directing capital away from firearms or fossil fuels are any better for their own taxpayers and retirees.

The post Democratic treasurers defend ESG investing appeared first on Reason Foundation.

But before expanding on this criticism, ESG deserves its due. Individual investors have, for decades, considered factors other than maximizing risk-adjusted returns. Personally, I never wanted to buy stocks in tobacco companies from the time I first had money to invest forty years ago. To the extent that ESG analysis assists individual investors (as opposed to fiduciaries) in selecting financial products that assist them in meeting their non-pecuniary goals, it is not all that worrisome.

Further, it is possible that insights derived from ESG orientation could lead to more prudent investments. For example, if we believe that climate change is going to cause sea-level rise that, if unmitigated, will inundate coastal real estate within a period that is relevant for investment purposes, it would be prudent to avoid Real Estate Investment Trusts that are heavily weighted toward oceanside properties. Whether environmental projections constitute useful news for investors depends on the reliability of climate and sea-level models, as well as the success or failure of mitigation measures that property managers and local governments might implement in response.

However, ESG proponents often cite such examples to justify moving away from conventional investment analysis. One must wonder how frequently or rigorously institutional investors model the impacts of ESG considerations on future cash flows. And it is this potential lack of rigor that makes the growing influence of ESG in modern investing troubling.

Predicting earnings before interest, taxes, depreciation, and amortization (EBITDA) and earnings multiples for equity investors, or default probabilities and recovery rates for fixed-income investors is already very difficult. Investors and the analysts they rely on often get these numbers very wrong. An example is when rating agencies messed up their projections of mortgage risk prior to the Great Recession of 2007-2009.

Now rating agencies, other analytical firms, and investors themselves are weighing in on a much wider set of metrics that often lack precise definitions, let alone clean data. Across third-party ESG-score providers, there are varying criteria for determining scores.

For example, Moody’s and S&P list the following elements of their “social” scores:

Some of these concepts appear to overlap: For example, Moody’s lists “labor relations” while S&P mentions “labor practice indicators.” Other elements, such as Moody’s “demographic change” indicator or S&P’s “asset closure management,” do not appear to have a parallel in the rival’s rating scheme.

Under the circumstances, it should not be surprising to see a lot of divergence among ESG-score providers. In the chart below, I list ESG scores for Pfizer from Moody’s, S&P, and three other firms. The assessments range from dire (in the case of finance company MSCI) to celebratory (in the case of CSRHub, a web-based rating tool).

Complicating the comparison is the divergent scales different agencies use. Moody’s, for example, has ESG Credit Impact Scores (CIS) ranging from 1 (Positive) to 5 (Very Highly Negative). It also provides individual sub-scores on the E (environmental), S (social), and G (governance) components, respectively.

But even if analysts could all get on the same page, large-scale ESG investing poses an even greater concern: misdirection of capital. As aforementioned, it is difficult to determine the future profitability of any given firm. As a result, capital is often allocated to firms or projects that fail to produce the type of return that might reasonably be expected. For every successful company, there are often many competitors with skilled management teams attempting to serve a similar market that fail. 

While critics of capitalism might dismiss this circumstance as a market failure, it is more properly understood as an experimentation process necessary for economic advancement. Or, in the words of Joseph Schumpeter, a process of “creative destruction.” No one can predict with certainty which businesses and product plans will succeed; we must learn through trial and error.

But if investable funds are not even chasing profitability, many more dollars are likely to be invested in companies pursuing product plans that do not gain support from the market or suffer from ineffective execution.

Meanwhile, startup founders and management of existing companies will likely receive market signals that steer them away from the task of efficiently meeting customer needs and toward other priorities. They may conclude, for example, that it is better to focus on diversity, equity, and inclusion than to make product improvements, causing them to expend more of their scarce resources on the former than the latter.

Individual investors should be free to consider ESG when deploying their own capital, even though it may not be economically efficient for them to do so. But this idea should not scale to the activities of large investment fund managers with billions of dollars in assets. Not only do their decisions have a much greater impact than those of virtually all individual investors, but they have a fiduciary responsibility to manage the funds with which they have been entrusted in the best financial interests of those whose money it is or, in the case of retirement funds, will be.

Like many movements in America’s past, the ESG investment movement has taken a reasonable idea and stretched it beyond reason. If institutional investors continue to deploy funds according to shifting criteria other than long-term profitability and rely on imprecise metrics while doing so, they will likely undermine the ability of the U.S. economy to grow and thereby improve our standard of living.

A version of this commentary was first published in National Review.

The post The differences between individual and institutional investors considering ESG factors appeared first on Reason Foundation.

National Public Radio reports:

The White House is asking Congress for $47.1 billion in emergency funding to cover expected costs for Ukraine, COVID-19, monkeypox and natural disasters. The administration hopes the funding request will become part of an upcoming short-term spending bill aimed at funding the federal government beyond Sept. 30, when the current spending package is set to expire.

Congress must pass the short-term spending bill by the end of September to avoid a partial federal government shutdown on Oct. 1. But the ability to continually make emergency funding requests points to a broken budgeting process. 

Is monkeypox truly an emergency right now? As of early September, the U.S. had less than 25,000 confirmed cases of monkeypox, and the rate of newly confirmed daily cases was declining from its peak in mid-August. Less than 400 new cases are being diagnosed each day as of this writing. 

Although very painful, monkeypox is rarely fatal. Los Angeles County recently reported the first confirmed U.S. death from monkeypox. In August, health authorities reported one death potentially related to the virus, but the affected individual’s cause of death has yet to be confirmed. Notably, older Americans, who were the main victims of COVID-19, have some protection from monkeypox because anyone born more than 50 years ago received a smallpox vaccination.  

According to the Biden administration’s funding request, 1.1 million doses of the monkeypox vaccine have already been made available. By the time any emergency funding becomes available, it is likely that all these shots will have been administered, and there may not be sufficient demand for additional vaccinations. But the administration’s request still includes $1.6 billion to procure monkeypox vaccines, $1.2 billion for testing, treatment, and vaccination services, $1.1 billion for other domestic purposes, and $0.6 billion to fund responses to monkeypox outside the United States.

This last figure should certainly be questioned. With most monkeypox cases occurring in North America and the relatively affluent counties of Western Europe, it is not clear that monkeypox is a sufficient threat in low and moderate-income countries that might need foreign aid. 

It is also worth noting that monkeypox treatment for most Americans will be covered by private insurance, Medicare, or Medicaid. Some forms of coverage may also offset the cost of vaccination. 

The outbreak of monkeypox is certainly a serious public health issue, and it is understandable that it has attracted attention from Congress. But members of Congress should carefully review the proposed funding package. The federal budget process is broken. Congress’ consistent use of emergency spending bills, continuing resolutions and reconciliation rather than a transparent appropriations process, and the failure to offset new federal spending with budget reductions elsewhere are some of the reasons the national debt is already at alarming levels.

The post Biden administration’s monkeypox funding request highlights the flawed budget process appeared first on Reason Foundation.

Richmond, California, has begun offering innovative, on-demand transit service to many of the city’s residents that could serve as a model for other areas. The Richmond Moves shuttle, provided in conjunction with transit-technology startup Via, is one type of solution that could help public transit meet the needs of 21st-century transit riders. 

Richmond is a city of 116,000 residents located on the Eastern shore of San Francisco Bay, north of the Bay Bridge. Per capita income in the city is below California’s statewide average, and the poverty rate is 13.9%, far higher than cities like San Francisco and San Jose, suggesting that many of Richmond’s residents could benefit from low-cost transportation alternatives. 

To use Richmond Moves, riders use a smartphone app to arrange a pickup from one of the service’s three Chrysler Pacifica plug-in hybrid minivans. The app tells the passenger where to go to meet the van, typically within a couple of blocks of his or her current location. Currently, the system’s service zone includes a 5.6 square mile area in which average household incomes are relatively low. Vans can also drop off and pick up at the city’s ferry terminal and at a Bay Area Rapid Transit (BART) station in the neighboring city of El Cerrito.  

The fare is a flat $2, with seniors and students riding for free. To attract riders, Richmond Moves is also offering 10 free rides to all passengers during its startup period. 

The app, developed and maintained by Via, provides a similar user experience to apps offered by ridesharing companies like Uber and Lyft. Users can enter their credit or debit card numbers as a source of payment or input a voucher code provided by the city. 

Initial funding for the service came from a $1 million grant from the California Air Resources Board funded by the state’s cap-and-trade program. The grant covers two years of Richmond Moves’ operating costs.

To extend the service to a larger geographical area or beyond two years, Richmond will have to find additional grant funding from public and private sources, rely on farebox revenues, or tap into city general revenues. Other cities in the vicinity, such as Emeryville and Walnut Creek, offer fixed-route, free shuttle services that are municipally funded, but Richmond has serious financial challenges that would likely restrict its ability to fund a project like this. 

Denée Evans, Richmond’s Transportation Services Project Manager who oversees Richmond Moves for the city, told me: 

The City of Richmond has a robust set of regional multimodal options running through it, including BART, Amtrak, AC Transit fixed route buses, and ferry service to San Francisco.  This microtransit service improves local first mile / last mile connections and fills in transit deserts which can greatly improve mobility for residents of Richmond. Through the Richmond MOVES program, the city transportation department can provide additional support to seniors, low-income and disadvantaged communities who need more affordable and accessible transportation options. 

As a “first mile/last mile” option, Richmond Moves enables passengers to begin or complete their transit trips on other transportation modes that do not stop close enough to their origins or destinations. Evans does not see the service as a competitor of fixed-route bus services and noted that local bus operators, AC Transit and WestCAT, had not expressed any concerns about Richmond Moves. 

Evans also sees opportunities to integrate Richmond Moves’ technology with the city’s paratransit services and to directly serve passengers who use wheelchairs. To that end, she plans to add a 12-seat wheelchair-accessible vehicle to the system’s fleet in the coming months. The new vehicle and additional services will be funded by a $250,000 grant from the Federal Transit Administration. 

Because Richmond Moves’ current service area already includes Kaiser Permanente Richmond Medical Center, it is also an option for area residents seeking to access medical care or visit friends or relatives at the hospital. 

Micro-mobility solutions, like the one being tested by Richmond Moves, are likely to offer a more cost-effective answer to contemporary transit needs and are the types of experiments that transit agencies should be trying more of. 

The post A flexible, on-demand transit option being tested in Richmond appeared first on Reason Foundation.

At the end of the second quarter of 2022, the $30.6 trillion debt of the United States federal government was 1.2 times larger than the annual economic output of the country. The U.S. is now reaching federal debt levels, as a share of gross domestic product (GDP), that we have not seen since the end of World War II.

Federal spending is increasingly untethered from fiscal realities. From 1965 to 2022, the federal government ran an annual budget deficit in 52 of the 57 years.

The annual federal budget deficits during and following the Great Recession of 2007-2009 were dwarfed by the recent federal deficits of 2020 and 2021, however, when annual budget deficits were $3.1 and $2.8 trillion respectively. The COVID-19 pandemic and accompanying lockdowns and policies sparked the largest spending bills in American history, including the $2.2 trillion CARES Act signed by then-President Donald Trump in March 2020. A year later, in March 2021, President Joe Biden signed the $1.9 trillion American Rescue Plan Act.

After accounting for inflation, the national debt jumped by almost $5 trillion in less than two years—rising from $25.9 trillion in the first quarter of 2020 to $30.6 trillion at the end of the second quarter of 2022. To get a sense of the magnitude of the growth of the debt, the current debt of more than $30 trillion translates to each American individual owing $91,814 based on the U.S. Bureau of Economic Analysis (BEA) estimate of 333 million Americans. This is an increase in the national debt of nearly $14,000 per person just since the first quarter of 2020.

While the increase in the national debt during the pandemic has been particularly shocking, it is consistent with a decades-long, bipartisan trend of deficit spending where government expenditures consistently exceed government receipt of money. When tax revenue is insufficient to cover government spending, the government must issue U.S. Treasury bonds, shorter-term obligations like bills and notes, or other debt instruments. 

Federal Debt Holders

The federal debt is often classified into two buckets: intragovernmental holdings and debt held by the public.

Intragovernmental Debt

Intragovernmental holdings are government debt held by government agencies. As of September 8, 2022, intragovernmental holdings totaled $6.6 trillion, which is 21.4% of the total outstanding public debt. The largest share of this intragovernmental debt is held by the Social Security Trust Fund (46%).

Debt Held by the Public

Debt held by the public can be broken down into debt held by the U.S. public, foreign entities, or the U.S. Federal Reserve. The U.S. public is a broad category that encompasses domestic non-federal investors. It includes state and local governments, private pension funds and insurance companies, banks, and other investors. Foreign entities include the governments and central banks of other countries and private international investors. 

In recent years, even relative to the first two groups of debt holders, the U.S. Federal Reserve has greatly increased its holding of government debt. The Federal Reserve buys the debt with newly created reserves, but these purchases raise the risk of inflation by monetizing the debt. Since new reserves can increase the nation’s supply of money, they can lead to higher prices as more dollars chase the same volume of goods and services. The Federal Reserve asserts, “Federal Reserve purchases of Treasury securities from the public are not a means of financing the federal deficit.” But Federal Reserve asset purchases are traditionally a means of circulating newly printed bills. While new tools like interest on monetary reserves can mitigate the impact of such expansion, the dramatic increase of Federal Reserve debt purchases (which include mortgage debt and corporate bonds as well as Treasurys) is a serious concern.

Given the persistence of federal deficit spending, if demand for U.S. debt does not keep pace with debt accumulation, the risk of debt monetization via Federal Reserve purchases rises further.

Foreign Holders of U.S. Debt

Demand for U.S. debt has increased because the dollar is the de facto reserve currency of the world. The Bretton Woods system, which pegged other currencies to the U.S. dollar which was redeemable for gold, effectively ended after President Richard Nixon suspended dollar-to-gold convertibility. Since that point, the nations belonging to the Organization of the Petroleum Exporting Countries (OPEC) have principally denominated oil sales in U.S. dollars, therefore boosting demand for America’s debt.

The United States heavily relies on foreign buyers for debt financing, which can potentially be a liability if or when international conflicts arise. Russia held $139 billion in U.S. debt in 2013. After the Russian annexation of Crimea in 2014, the U.S. responded with aggressive sanctions and threats to remove Russia from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) system. In response, Russia’s central bank began divesting from U.S. Treasurys. Today the West is once again sanctioning Russia after its invasion of Ukraine.

Historically, many countries have relied on the safety and stability of U.S. Treasurys. Western sanctions on Russia are a reminder that this “risk-free” asset is not risk-free for those failing to align with American foreign policy. The mid-March reporting that Saudi Arabia may begin pricing Chinese oil sales in yuan is an indication that U.S. financial dominance is not completely unchallengeable. Yuan-denominated oil sales could further erode Chinese demand for our debt, which has declined in recent years.

Today, China and Japan account for nearly one-third of all foreign holdings of U.S. debt. Given America’s friction with China and the population decline experienced in Japan, it is not a certainty that these two countries will indefinitely continue to sweep up large volumes of additional U.S. debt.  

Ultimately, the United States government must understand that we do not have an unlimited capacity for financing our deficit spending. This will become even more difficult as we pay out the rapidly growing liabilities for programs like Social Security and Medicare.

Other Long-Term Federal Financial Obligations

Organizations incur long-term financial obligations in forms other than bonds and the U.S. federal government is no exception. Some common types of financial obligations include pension and retiree health care costs for veterans, civilian federal employees, and the general public (through Social Security and Medicare benefit commitments). Looking at the federal government's balance sheet as of 2021, public holdings of U.S. Treasury securities make up less than one-quarter of total federal liabilities. Unfunded entitlements, like Medicare and Social Security, account for the most at 59% of obligations.

Overall federal obligations have now surpassed $300,000 per American. While substantial in their own right, the debt obligations of state and local governments across the country are dwarfed by the various categories of federal debt.

Conclusion

Unfortunately, the United States does not seem positioned for economic expansion like it was the last time the debt-to-gross domestic product (GDP) ratio was this high during the post-World War II era. Following WWII, debt was reined in by brief periods of inflation and several decades of exceptional economic growth.

In the first two quarters of 2022, the U.S. economy experienced negative growth. With weak or negative economic growth expected, and no significant restriction on federal spending in sight, the debt-to-GDP ratio will continue to rise.

Jeffrey Rogers Hummel, Professor Emeritus in the Economics Department at San Jose State University, was consulted on the “Federal Reserve Assets as Percentage of Publicly Held Debt” chart.

Data & Methodology

• Federal Spending Versus Receipts: 
  • Overall data is from the U.S. Department of Commerce’s Bureau of Economic Analysis (BEA) National Income and Product Accounts data, specifically Table 3.2 (Government Current Receipts and Expenditures, which is reported quarterly). 
    • Spending data is from “Current Expenditures” on lines 24 and 44. 
    • Revenue data is from “Current Receipts” on lines 1 and 41. 
    • The inflation-adjusted data series are adjusted according to Q2 2022 dollars using the U.S. GDP implicit price deflator (FRED: GDPDEF) sourced from BEA.
    • The percent of GDP data series are calculated using quarterly Gross Domestic Product data (FRED: GDP) sourced from BEA.

• National Debt: Data are sourced from the U.S. Department of the Treasury—titled “Federal Debt: Total Public Debt” (FRED: GFDEBTN).
  • The debt data are inflation-adjusted to Q2 2022 dollars with the U.S. GDP implicit price deflator (FRED: GDPDEF) sourced from the U.S. Department of Commerce’s Bureau of Economic Analysis (BEA).
  • Per capita figures are derived from the above data and divided by U.S. population (FRED: B230RC0Q173SBEA) data sourced from BEA.
  • The percent of GDP data series are calculated using quarterly Gross Domestic Product data (FRED: GDP) sourced from BEA.

• Who Holds the Federal Debt: Data is sourced from the U.S. Department of Treasury.
  • Federal Reserve Banks: Public debt securities held by Federal Reserve banks. Data are sourced from Treasury (FRED: FDHBFRBN). The data are reported and presented at the quarterly level.
  • Foreign Entities: Federal debt held by foreign investors. Data are sourced from Treasury (FRED: FDHBFIN).
  • U.S. Public: Calculated by subtracting debt held by “Federal Reserve Banks” (FRED: FDHBFRBN) and “Foreign Entities” (FRED: FDHBFIN) from a FRED data stream, from Treasury, called “Federal Debt Held by the Public” source from Treasury (FRED: FYGFDPUN).
  • Agencies & Trusts: Federal debt held by agencies and trusts. Data are sourced from Treasury (FRED: FDHBATN).
  • All data series above are inflation-adjusted to Q2 2022 dollars with the U.S. GDP implicit price deflator (FRED: GDPDEF).
  • The percent of GDP data series are calculated using quarterly Gross Domestic Product data (FRED: GDP) sourced from BEA.

• Federal Reserve Assets
  • Total Federal Reserve Assets: The Federal Reserve has a balance sheet that contains both assets and liabilities. Notes in circulation, bank reserves, and other liabilities. On the asset side of the ledger, the Federal Reserve has securities that include things like: U.S. Treasurys, mortgage-backed securities, loans to banks or other institutions, and liquidity swaps with central banks from other countries. Total Federal Reserve assets as a percentage of publicly held debt are calculated by dividing reserve bank credit (FRED: RSBKCRNS) by total public debt outstanding (Treasury: tot_pub_debt_out_amt).
  • Total Treasury Deposits at the Federal Reserve: When the U.S. Treasury issues public debt and deposits the proceeds at the Federal Reserve this is considered a treasury deposit. This figure as a percentage of publicly held debt is calculated by taking reserve bank credit (FRED: RSBKCRNS) and backing out three other data streams (FRED: WTREGEN; FRED: WLRRAL; and FRED: WORAL) and dividing by total public debt outstanding When the Fed borrows from the private sector, it does through what is referred to as reverse repurchase agreements. That amount is calculated by backing out of reserve bank credit in two data streams (FRED: WREPODEL and FRED: WREPOFOR). The overall total of these two forms of Fed borrowing as a percentage of publicly held debt is the sum of the five data streams divided by total public debt outstanding.
    
• Biggest Foreign Holders: Data is retrieved from the US Treasury Department’s Major Foreign Holders of U.S. Treasury Securities historic tables, which due to aggregations below certain thresholds may result in missing data for certain years for some countries. Data are adjusted to 2021 dollars with the US GDP implicit price deflator (FRED: A191RD3A086NBEA).

• Beyond Publicly Held Debt
  • Federal: Data for these series are taken from the Financial Reports of the United States Government for the years 2000 through present published by the U.S. Treasury Department. 
    • The data is inflation-adjusted to 2021 dollars with the US GDP implicit price deflator (FRED: A191RD3A086NBEA). 
    • Per capita figures are derived from the above data and divided by U.S. population (FRED: B230RC0A052NBEA) data sourced from BEA. 
    • The percent of GDP data series are calculated using annual Gross Domestic Product data (FRED: GDPA) sourced from BEA.
  • State & Local: The bonded debt data come from the U.S. Census Bureau’s Survey of state and Local Government Finance (2020 and 2021 levels are extrapolated). 
    • Pension Debt: Data are sourced from the Board of Governors of the Federal Reserve System (FRED: BOGZ1FL223073045Q). Excluded here are state and local retiree healthcare liabilities for which time series data are not available. Reason Foundation has estimated that these liabilities totaled $1.2 billion in 2019. 
    • The data is inflation-adjusted to 2021 dollars with the US GDP implicit price deflator (FRED: A191RD3A086NBEA). 
    • Per capita figures are derived from the above data and divided by U.S. population (FRED: B230RC0A052NBEA) data sourced from BEA.
    • The percent of GDP data series are calculated using annual Gross Domestic Product data (FRED: GDPA) sourced from BEA.

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California’s Proposition 27 on the November 2022 ballot would authorize online and mobile sports betting throughout the state operated by tribal authorities or non-tribal businesses that partner with tribes. Revenue generated from the taxes and fees related to online sports betting would primarily go to fund programs to address homelessness and mental health, with a smaller portion distributed to all tribes in the state.  

Fiscal Impact

Proposition 27 would tax sports betting revenue from online and mobile platforms at 10 percent, which the California Legislative Analyst’s Office (LAO) estimates would increase state tax revenue by up to $500 million annually.

After enforcement costs, which LAO estimates could reach up to “the mid-tens of millions of dollars a year,” 85 percent of the tax revenue generated under Prop. 27 would go to the newly-created California Solutions to Homelessness and Mental Health Support Account to create long-term housing for those in need. The remaining 15 percent of tax revenue from the proposition would go into a fund for distribution to tribes in the state that do not participate in gambling activities. 

Arguments in Favor

Proponents of Prop. 27 include three of the state’s smaller tribes, national gambling companies like DraftKings and BetMGM, homelessness groups, local elected officials, and community leaders. Their coalition in support of Prop. 27 asserts the measure would create a competitive and safe online sports betting market in California and provide significant funding to help address homelessness in the state. They argue Prop. 27 is the only measure on the ballot that would guarantee a large and stable source of funding, an estimated $300 million annually, for homelessness, mental health, and addiction services. They also say that Prop. 27 would benefit the state’s tribal population by allocating 15 percent of the tax revenue from sports betting to non-gaming tribes. 

Arguments Against

Opponents of Prop. 27 include some of the state’s tribes, faith-based groups, political organizations, including the California Democratic Party, several elected officials, and other groups. Some of the arguments are that online and mobile wagering would put the state’s youth at risk, exacerbate problem gambling, and threaten tribal economies. Additionally, some opponents say that Prop. 27 would give large, out-of-state online gambling businesses too much control over California’s sports betting market and would put those tribes who wish to offer online sports betting on their own at a competitive disadvantage against well-recognized national brands. 

Discussion 

Since the U.S. Supreme Court overturned the federal prohibition on sports gambling in 2018, more than 30 states have legalized the activity in some form, generating more than $142 billion in wagers and over $1.5 billion in tax revenue. California, with its nearly 40 million residents, could be the largest and most lucrative sports betting market in the country, yielding operators between $350 million and $3 billion in profits and the state up to $300 million in new tax revenue, depending on the way it is regulated. 

California’s gaming tribes currently enjoy a state-granted monopoly over slot machines and casino-style games, which nets them around $8 billion in revenue each year. That money is vital for tribal economic welfare as well as tribal political power. Tribes have used that power to deftly defend their control over gambling in the state, expanding the types of games tribes can offer while blocking attempts at encroachment by competitors. Legalizing sports betting represents a significant opportunity to increase foot traffic and revenue for tribal casinos. It is also a threat should the new market bolster its competitors’ profits and influence in state politics. 

That is among the reasons many of California’s gaming tribes, 26 at last count, have thrown their support behind Proposition 26, which would restrict legal sports betting to in-person bets at tribal casinos and the state’s four licensed horse racetracks. Along with those tribes and racetracks, some chambers of commerce, faith-based organizations, and social justice-oriented groups have also backed Prop. 26. Some, but not all of these Prop. 26 supporters have also joined the ballot measure committee in opposition to Prop. 27, which would allow non-tribal entities to offer online and mobile sports betting if they strike a deal with one of the state’s gaming tribes.

Those supporting Prop. 26 argue that limiting sports betting to in-person bets at tribal casinos will mitigate the risks of underage and problem gambling, prevent profits from leaving the state, and bolster tribal sovereignty and self-sufficiency. 

Prop. 26 supporters point to the 20-year history of responsible gaming operated by tribal casinos, arguing that they are better equipped to prevent underage bets than online or mobile businesses, while Prop. 27 offers no such protections. Using the rhetoric long-used by land-based casinos opposed to online gambling, Prop. 27 opponents argue it would turn “every cellphone, laptop, tablet, and even video game console into a gambling device, opening up online gambling to anyone, anywhere, anytime.” However, it is worth noting that at least some of the tribes opposed to Prop. 27 are open to authorizing online and mobile sports betting so long as the tribes control it, with some already lending support to a 2024 ballot initiative that would do just that.

Supporters of Prop. 27 claim allegations about online gaming spurring youth betting are little more than fear-mongering and highlight the successful prevention of youth online betting in other countries that have legalized online gambling, as well as the seven U.S. states with legal online poker, the 20 states with legal online sports betting, and the 45 states with legal daily fantasy sports betting online. In the near-decade since legal online gambling has been authorized, dire prophecies about online youth gambling have failed to materialize, with online operators rarely receiving fines for underage gambling. Furthermore, technology makes it possible for online platforms to be at least as capable of verifying their customers’ age, identity, and location as land-based casinos, which rely almost exclusively on a visual scan of identification cards. In addition to scanning IDs, online gambling platforms typically ask for additional details, which, depending on state regulations, may include Social Security numbers and answering questions about personal history, such as previous addresses at which they lived. Those details are then checked against government databases to verify customer identity. They are also stored so that, if there are doubts about an operator’s compliance with state laws, regulators can follow a digital trail of evidence to prove such violations occurred, fine operators, or shut them down. 

Another fear raised by the ‘yes on Prop. 26’ and ‘no on Prop. 27″ campaigns are that online sports betting would exacerbate problem gambling or “gambling addiction.” Such concerns are an inevitable part of any debate over expanding access to gambling but based on data and real-world experience, these fears are largely unjustified. Despite extraordinary increases in access to gambling, problem gambling continues to be rare, and its prevalence has been remarkably stable in the U.S. since the 1970s. This is not to say that problem gambling should be ignored, only that the risks should not be overblown. 

As with age and identity verification, online platforms can employ technological solutions that can address problem gambling, such as pattern-recognition software, responsible gaming “speedbumps,” which force players to set limits on their spending, and the ability to self-exclude themselves from access to gambling websites. Moreover, whether land-based or online, the risks of problem gambling are better addressed when the gambling occurs in a legal, regulated market, as opposed to illicit markets. And on that note, it is worth pointing out that the absence of legal sports betting has not stopped the activity, with experts estimating that Californians already place an estimated $15 billion in illegal sports bets each year. Most of that money is sent to overseas illicit operators, and those operators do little, if anything, to stop underage or problem gambling. 

Another central argument made by supporters of Prop. 26 is that restricting sports betting to tribal casinos would be more beneficial for tribal economies and welfare. Indeed, a near-monopoly on sports betting would be in gaming tribes’ financial interest. But, supporters of Prop. 27 have controversially argued that Prop. 26 mainly benefits the wealthiest tribes with large casinos while Prop. 27 would spread the wealth more evenly, earmarking 15 percent of the tax revenue it would generate (an estimated $45 million annually) to be split among the state’s non-gaming tribes. 

Prop. 26 and Prop. 27 also impact other industries and communities. Cardrooms in the state, along with many workers’ unions, local elected officials, social justice organizations, and animal welfare groups have joined a coalition against Prop. 26 because they say it would create an unfair advantage for tribal casinos, siphoning customers away from other gambling businesses in the state and putting at risk the entire cardroom industry, along with the 32,000 jobs it supports and the $5.5 billion in economic activity it generates, which could “devastate other communities of color in California.”   

Another argument made by Prop. 27 proponents is that their measure would provide significant funding to address the state’s homelessness problem, earmarking 85 percent of the tax revenue—potentially $250 million annually—to programs aimed at creating long-term housing for those in need, a figure that could total more than  

Proponents of Prop. 26 concede that Prop. 27 would generate far more revenue by allowing large national brands, like DraftKings and BetMGM, to participate in California’s market. Those operators would be subject to taxes, unlike tribal casinos. However, Prop. 27 opponents argue that this would be bad for California and tribal casinos because it would primarily benefit out-of-state businesses and “wall street investors funding Prop 27.” While Prop. 26 would generate less revenue, supporters argue it would keep all that money in the state. 

Prop. 27 would create a more robust and competitive sports betting market than Prop. 26 by allowing online and mobile betting, generating billions in revenue for the state, gaming tribes, and operators under agreement with those tribes. Still, it could divert some revenue from in-person betting at tribal casinos. It might also put those tribes who wish to enter the online sports betting market but do not want to partner with national brands at a disadvantage in the market.

Proposition 26 would benefit the state’s gaming tribes and block out-of-state gambling companies from California’s market. But, the benefits generated by Prop. 26 may come at the cost of Californians having competitive choices of where to gamble and would mean forgoing hundreds of millions in tax revenue Proposition 27 would have generated for other communities, non-gaming tribes, and housing programs.

Voters’ guides for other propositions on California’s 2022 ballot.

The post California Proposition 27 (2022): Legalizes online sports betting, funds homelessness and mental health programs appeared first on Reason Foundation.

California’s Proposition 26 would authorize Indian tribal casinos and four-horse racetracks in the state to offer in-person sports wagering on college sports, amateur athletics, and other competitions. Still, it would prohibit wagering on high school sports and events involving California-based college teams. The measure would also authorize gaming tribes in the states to offer roulette and dice games, like craps. Revenue generated from sports betting would go to the state’s general fund, enforcement costs, and programs aimed at addressing problem gambling. 

Fiscal Impact

The measure would tax sports betting at racetracks at 10 percent. The state’s four licensed horse racetracks would be the only ones to pay that tax since tribes as sovereign entities are tax-exempt. But, gaming tribes contribute funds to the state in other ways, such as fees stipulated in tribal-state compacts that each tribe would strike with the state before offering sports betting. Altogether, Prop. 26 is expected to increase state revenue by tens of millions of dollars annually, according to the California Legislative Analyst’s Office (LAO), with 70 percent going into the general fund. The remaining 30 percent would be divided equally between paying for enforcement costs (LAO estimates in the low tens of millions of dollars annually) and programs that address problem gaming. 

Argument in Favor

Proponents argue that giving California’s tribes and racetracks exclusive authority to offer sports betting would bolster tribal self-sufficiency, create jobs, and generate revenue for the state. They point out that sports gambling online is extensive and that Prop. 26 would keep much of that spending in California rather than going to out-of-state online gambling companies. They assert that limiting the activity to in-person betting operated by facilities with long track records of responsible gaming will prevent underage gambling and mitigate problem gambling. 

Arguments Against

Opponents of Prop. 26 argue that the measure is anti-competitive, unfairly granting tribes a near-monopoly on sports betting and an actual monopoly on roulette and craps, in addition to their existing monopoly on slot machines. They allege that the measure benefits a handful of wealthy tribes with large casinos at the expense of smaller tribes, California’s non-tribal gaming industry, and other communities of color in the state, costing them thousands of jobs and millions in revenue. Some also oppose the measure for propping up the horse racing industry and promoting animal abuse. And, as with any measure to expand gambling, some oppose Prop. 26 for concerns that such expansions threaten the integrity of youth sports and could increase problem gambling. 

Discussion 

Since the U.S. Supreme Court overturned the federal prohibition on sports gambling in 2018, more than 30 states have legalized the activity in some form, generating more than $142 billion in wagers and over $1.5 billion in tax revenue. California, with its nearly 40 million residents, could be the largest and most lucrative sports betting market in the country, yielding operators between $350 million and $3 billion in profits and the state up to $300 million in new tax revenue, depending on the way it is regulated. 

California’s gaming tribes currently enjoy a state-granted monopoly over slot machines and casino-style games, which nets them around $8 billion in revenue each year. That money is vital for tribal economic welfare as well as tribal political power. Tribes have used that power to deftly defend their control over gambling in the state, expanding the types of games tribes can offer while blocking attempts at encroachment by competitors. Legalizing sports betting represents a significant opportunity to increase foot traffic and revenue for tribal casinos. It is also a threat should the new market bolster its competitors’ profits and influence in state politics. 

That is among the reasons many of California’s gaming tribes, 26 at last count, have thrown their support behind Proposition 26, which would restrict legal sports betting to in-person bets at tribal casinos and the state’s four licensed horse racetracks. Along with those tribes and racetracks, some chambers of commerce, faith-based organizations, and social justice-oriented groups have also backed Prop. 26. Some, but not all of these Prop. 26 supporters have also joined the ballot measure committee in opposition to Proposition 27, which would allow non-tribal entities to offer online and mobile sports betting if they strike a deal with one of the state’s gaming tribes.

Those supporting Prop. 26 argue that limiting sports betting to in-person bets at tribal casinos would mitigate the risks of underage and problem gambling, prevent profits from leaving the state, and bolster tribal sovereignty and self-sufficiency. 

Prop. 26 supporters point to the 20-year history of responsible gaming operated by tribal casinos, arguing that they are better equipped to prevent underage bets than online or mobile businesses, while Prop. 27 offers no such protections. Using the rhetoric long-used employed by land-based casinos opposed to online gambling, Prop. 27 opponents argue it would turn “every cellphone, laptop, tablet, and even video game console into a gambling device, opening up online gambling to anyone, anywhere, anytime.” However, it is worth noting that at least some of the tribes opposed to Prop. 27 are open to authorizing online and mobile sports betting so long as the tribes control it, with some already lending support to a 2024 ballot initiative that would do just that.

Supporters of Prop. 27 claim allegations about online gaming spurring youth betting are little more than fear-mongering and highlight the successful prevention of youth online betting in other countries that have legalized online gambling, as well as the seven U.S. states with legal online poker, the 20 states with online legal sports betting, and the 45 states with legal daily fantasy sports betting online.

In the near-decade since legal online gambling has been authorized, dire prophecies about online youth gambling have failed to materialize, with online operators rarely receiving fines for underage gambling. Furthermore, technology makes it possible for online platforms to be at least as capable of verifying their customers’ age, identity, and location as land-based casinos, which rely almost exclusively on a visual scan of identification cards. In addition to scanning IDs, online gambling platforms typically ask for additional details, which, depending on state regulations, may include social security numbers and answering questions about personal history, such as previous addresses at which they lived. Those details are then checked against government databases to verify customer identity. They are also stored so that, if there are doubts about an operator’s compliance with state laws, regulators can follow a digital trail of evidence to prove such violations occurred, fine operators, or shut them down. 

Another fear raised by the ‘yes on Prop. 26’ and ‘no on Prop. 27’ campaigns are that online sports betting will exacerbate problem gambling or “gambling addictions.” Such concerns are an inevitable part of any debate over expanding access to gambling but based on data and real-world experience, these fears are largely unjustified. Despite extraordinary increases in access to gambling, problem gambling continues to be rare, and its prevalence has been remarkably stable in the U.S. since the 1970s. This is not to say that problem gambling should be ignored, only that the risks should not be overblown. 

As with age and identity verification, online platforms can employ technological solutions that can address problem gambling, such as pattern-recognition software, responsible gaming “speedbumps,” which force players to set limits on their spending, and the ability to self-exclude themselves from access to gambling websites. Moreover, whether land-based or online, the risks of problem gambling are better addressed when the gambling occurs in a legal, regulated market, as opposed to illicit markets. And on that note, it is worth pointing out that the absence of legal sports betting has not stopped the activity, with experts estimating that Californians already place an estimated $15 billion in illegal sports bets each year. Most of that money is sent to overseas illicit operators, and those operators do little, if anything, to stop underage or problem gambling. 

Another central argument made by supporters of Prop. 26 is that restricting sports betting to tribal casinos would be more beneficial for tribal economies and welfare. Indeed, a near-monopoly on sports betting would be in gaming tribes’ financial interest. But, supporters of Prop. 27 have argued that Prop. 26 mainly benefits the wealthiest tribes with large casinos while Prop. 27 would spread the wealth more evenly, earmarking 15 percent of the tax revenue it would generate (an estimated $45 million annually) to be split among the state’s non-gaming tribes. 

Prop. 26 and Prop. 27 also impact other industries and communities. Cardrooms in the state, along with a number of workers’ unions, local elected officials, social justice organizations, and animal welfare groups, have joined a coalition against Prop. 26 because they say it would create an unfair advantage for tribal casinos, siphoning customers away from other gambling businesses in the state and putting at risk the entire cardroom industry, along with the 32,000 jobs it supports and the $5.5 billion in economic activity it generates, which could”devastate other communities of color in California.”   

Another argument made by Prop. 27 proponents is that their measure would provide significant funding to address the state’s homelessness problem, earmarking 85 percent of the tax revenue—potentially $250 million annually—to programs aimed at creating long-term housing for those in need, a figure that could total more than  

Proponents of Prop. 26 concede that Prop. 27 would generate far more revenue by allowing large national brands, like DraftKings and BetMGM, to participate in California’s market. Those operators would be subject to taxes, unlike tribal casinos. However, Prop. 27 opponents argue that this would be bad for California and tribal casinos because it would primarily benefit out-of-state businesses and” wall street investors funding Prop 27″ While Prop. 26 would generate less revenue, supporters argue it would keep all that money in the state. 

Prop. 27 would create a more robust and competitive sports betting market than Prop. 26 by allowing online and mobile betting, generating billions in revenue for the state, gaming tribes, and operators under agreement with those tribes.

Still, it could divert some revenue from in-person betting at tribal casinos. It might also put those tribes who wish to enter the online sports betting market but do not want to partner with national brands at a disadvantage in the market. Proposition 26 would benefit the state’s gaming tribes and block out-of-state gambling companies from California’s market. But, the benefits generated by Prop. 26 may come at the cost of Californians having competitive choices of where to gamble and would mean forgoing hundreds of millions in tax revenue Proposition 27 would have generated for other communities, non-gaming tribes, and housing programs.

Voters’ guides for other propositions on California’s 2022 ballot.

The post California Proposition 26 (2022): In-person sports betting regulation and tribal gaming expansion appeared first on Reason Foundation.

The XBRL taxonomy was mandated and funded in 2018 by Florida House Bill 1073, a bill written in consultation with Reason Foundation policy analysts. Florida’s first-in-the-nation XBRL government reporting taxonomy is a notable point of progress, but advocates of this technology are still overcoming objections from within the government finance sector. 

After then-Gov. Rick Scott signed the Florida law, the influential Government Finance Officers Association (GFOA) put out a statement saying it “opposes efforts to mandate the use of specific technologies by state and local governments for financial reporting and disclosure.”

GFOA also noted, “While numerous small-scale efforts have been made to develop a taxonomy that incorporates necessary elements of GASB {Government Accounting Standards Board] GAAP [generally accepted accounting principles] financial statements, there currently exists no viable taxonomy.” 

But, today, in 2022, two viable taxonomies have recently been published: one by the state of Florida and the other by the University of Michigan in conjunction with XBRL U.S., a group I’m affiliated with.

The latter taxonomy includes support for seven key financial statements and four notes that appear in annual comprehensive financial reports issued by governments nationwide and has been indexed to the Government Accounting Standards Board (GASB) pronouncements.  These are standards used by local governments in most states with only minor customization.  

Undoubtedly, these taxonomies can be improved, and a key source of ideas for improvement is GFOA and the government finance officers it represents. It is for this reason that I hope recent developments will encourage GFOA to review its current policy. 

GFOA was not always opposed to the application of XBRL to government finance. In its 2009 statement on “Best Practices for Web Site Presentation of Official Financial Documents,” GFOA stated, “Governments should monitor developments in standardized electronic financial reporting (e.g., extensible business reporting language [XBRL]) and apply that language to their electronic document process when appropriate.”

This contrasts with the organization’s current opposition to mandating any specific technology. It is certainly true that many government mandates should be opposed and there are alternatives to XBRL. For example, OpenSpending, a standard published by the Open Knowledge Foundation in the United Kingdom, offers a very easy way to produce visualizations of government revenues and spending. It is not, however, an ideal fit for U.S. audited financial reports which include balance sheets and cash flow statements as well as the income statement data supported by OpenSpending. 

By contrast, XBRL was developed specifically to handle accounting disclosures that present a comprehensive overview of an entity’s financial condition. Further, the XBRL standard has evolved over its 24-year lifetime to handle a wide variety of reporting scenarios while also attracting a community of software developers and subject matter experts. It is the best match for U.S. government financial reporting. 

Twenty years after academics first proposed applying XBRL to U.S. public sector financial disclosure, we may finally begin to see implementation. In the absence of a robust taxonomy and user-friendly tools for creating XBRL government financial disclosures, any government finance department interested in XBRL was faced with high implementation costs and a steep learning curve. And the absence of early public sector adopters deterred private software providers and accounting experts from making investments that would reduce the costs and complexity of adoption. 

While the Florida release is a major step forward, there is still a long way to go. First, no technical documentation or implementation guides were released with the taxonomy. These documents are commonplace with new taxonomies and help to ease new users into the process. Hopefully, these products will be forthcoming. Otherwise, Florida’s local governments may hold off on implementing the taxonomy, opting instead to hand-enter their results in the Division of Accounting and Auditing’s reporting portal. 

Second, the Florida taxonomy is specific to state reporting requirements which have historically been limited to a more detailed income statement than that included in annual comprehensive financial reports. Balance sheet concepts have been included in the newly released taxonomy, but it is still not a complete implementation of the GASB reporting model. Hopefully, the Florida taxonomy will evolve to cover more GASB reporting concepts in future releases 

The Florida release is an important step forward for XBRL in state and local reporting, but further advances may be slow in coming until GFOA reconsiders its stance toward machine-readable government financial reporting. 

The post Florida advances toward XBRL adoption, but Government Finance Officers Association opposes appeared first on Reason Foundation.

California’s Proposition 30 would increase state taxes on personal income over $2 million by 1.75% for individuals and married couples. Prop. 30 would allocate the increased tax revenues as follows: (1) 45% for rebates and other incentives for zero-emission vehicle purchases and 35% for charging stations for zero-emission vehicles, with at least half of this funding directed to low-income households and communities; and (2) 20% for wildfire prevention and suppression programs, with priority given to hiring and training firefighters.

Fiscal Impact

The Legislative Analyst’s Office estimates that Prop. 30’s additional tax would raise between $3.5 billion and $5 billion annually which would be split across the zero-emission vehicle and wildfire prevention programs. Although LAO notes that “some taxpayers probably would take steps to reduce the amount of income taxes they owe,” it does not attempt to quantify any potential revenue losses.

Arguments in Favor

Proponents argue that the state must take more vigorous action to reduce air pollution and greenhouse gas emissions while countering wildfires which have become worse in recent years. Supporters say the funds from Proposition 30 would accelerate the transition to electric vehicles by making electric vehicles more affordable and increasing the number of charging stations, thereby making charging more convenient and encouraging more people to buy EVs. Politico reports that ride-sharing company Lyft, environmental groups, and “unions that would build electric infrastructure” are among those supporting Prop. 30.

“The initiative will expand access to electric vehicle chargers for every Californian, regardless of where they live or work. In the first year alone, over 500,000 apartments and houses will be equipped with EV chargers,” claims the Yes On 30 Clean Air Coalition.

In an effort to reduce wildfire risks, Proposition 30’s proceeds would also be used to clear dry vegetation and increase protective spaces around homes and businesses. To fight fires more effectively once they start, the measure would also fund additional personnel and equipment. Proponents say reducing the number and size of fires and fighting them more effectively would improve the state’s air quality.

Arguments Against

Opponents are concerned that Prop. 30 reduces the state legislature’s ability to allocate state resources and might take funding away from schools and other priorities.

“We already have some of the highest taxes in the country,” Jon Coupal, president of the Howard Jarvis Taxpayers Association, told the Mercury News. “A lot of the air pollution in Southern California could be eliminated by spending transportation dollars on freeway improvements to reduce traffic jams. If these proposals are really priorities, they should be paid for out of the existing general fund.”

The California Teachers Association and Gov. Gavin Newsom are among others who oppose the proposition. “California’s tax revenues are famously volatile, and this measure would make our state’s finances more unstable — all so that special interests can benefit,” said Gov. Gavin Newsom. “Californians should know that just this year our state committed $10 billion for electric vehicles and their infrastructure, part of a $54 billion nation-leading package to fight climate change and build a zero-emission future. Don’t be fooled. Prop. 30 is fiscally irresponsible and puts the profits of a single corporation ahead of the welfare of the entire state.”

Opponents also contend that by hastening the conversion to electric vehicles, Proposition 30 would increase demand for electricity without funding increased power generation capacity, thereby straining the state’s electrical grid, which is facing issues in September 2022. As a result, future heat waves are more likely to result in emergency conservation measures, which can include rolling blackouts as well as restrictions on air conditioner use and electric vehicle charging.

Discussion

Although it is possible to charge electric vehicles at home, EV owners often need to use public charging stations if they run low during the day, typically due to long-distance travel. Also, apartment dwellers may not be able to charge their vehicles at home.

California has almost 38,000 EV charging ports at over 14,000 public charging stations, more than any other state both in absolute and per capita terms. But a 2021 report from the California Energy Commission concluded that public charging infrastructure was not keeping up with the state’s growing need for these facilities.

Additional public funds have been earmarked to subsidize the addition of more charging stations. The 2021 Infrastructure Investment and Jobs Act included $7.5 billion for EV charging infrastructure, of which about $383 million is expected to be spent in California. The state government also plans to spend about $2 billion on its own funds with a goal of reaching 1.2 million charging stations statewide by 2030.

With respect to wildfires, the legislature committed an additional $1.2 billion to “wildfire and forest resilience” in its 2022-2023 budget over a two-year period. But much more could be spent to minimize fire risk. For example, the cost of undergrounding all above-ground power lines statewide has been estimated to be $243 billion. That said, not all above-ground power lines are close enough to forests to present a risk of wildfires, and Pacific Gas and Electric Company (PG&E) has begun the process of undergrounding 10,000 miles of high-risk lines at an expected cost of at least $15 billion to 20 billion of ratepayer revenues, reducing the need for state spending.

The fiscal impact of Proposition 30, if approved, would be heavily dependent on the relocation decisions of a small number of the state’s high-income taxpayers. Those affected by this measure—Californians with incomes of over $2 million annually, currently face a marginal state tax rate of 13.3%. This rate is higher than maximum rates in other states: Hawaii has the second highest marginal income rate of 11%. Some New York City taxpayers face a higher combined state and local income tax rate than their California counterparts.

According to 2019 statistics published by the state’s Franchise Tax Board, only 35,000 taxpayers reported adjusted gross incomes greater than $2 million. In that year, those taxpayers had a cumulative state tax liability of $27.3 billion or 33% of the statewide total in income taxes collected.

During the COVID-19 pandemic, outmigration from California increased as remote work became more common. Four of the states that are receiving significant numbers of departing Californians— Florida, Nevada, Tennessee, and Texas—do not have state income taxes. Historically, California has been able to retain most of its high-income residents due to its weather, extensive business opportunities, lifestyle, and unparalleled social networks, especially in the entertainment and technology industries. While some of these benefits remain intact, growing technology clusters in places like Austin and Miami are now in a stronger position to compete for high-income Californians.

As noted by the Legislative Analyst’s Office, it is impossible to predict how many high-income Californians will relocate if Proposition 30 passes. On the one hand, an extra expense of 1.75% on a certain portion of an individual’s income may be seen as a relatively minor cost that would not drive the behavior of high-income individuals or families. But, for some others, it could be the last straw, pushing some families who may have already been considering moving out of California to go ahead with their plans.

Outmigration of high-income taxpayers would not only cut into the state’s marginal income from the 1.75% tax increase those individuals would have paid, but it would also cause the state to lose the rest of the income taxes they were previously paying. Consider, for example, a married taxpayer filing jointly and reporting $5,000,000 of adjusted gross income net of deductions. In 2021, that taxpayer would have incurred a state tax liability of $582,739. Had the new Prop 30 tax been in place, he or she would have paid an additional $52,500 in state taxes toward vehicle charging infrastructure and wildfire protection. But if the taxpayer leaves, the state will not only lose this additional revenue from Prop. 30 but also the opportunity to collect the existing obligation which, in this case, is $500,000 for just one taxpayer.

If many high-income taxpayers leave, this loss of base income tax revenue could offset some or even most of the expected revenue gain from Prop. 30. Further, it has distributional effects within the state budget. While extra taxes collected from the marginal tax increase would go to Proposition 30 priorities, revenue losses from relocations out of state would impact the state’s general fund, which primarily funds K-12 education and Medi-Cal. It may be for this reason, that the California Teachers Association and California Gov. Gavin Newsom oppose Proposition 30.

If Proposition 30 passes and the state loses a significant amount of base tax revenue from outmigration, the state legislature could have to divert planned general fund spending from electrical vehicle infrastructure to other priorities. That would theoretically enable the state to maintain its education spending levels but would frustrate Prop. 30 proponents’ goal of increasing overall state support for electric vehicles.

The post California Proposition 30 (2022): Tax increase on incomes above $2 million appeared first on Reason Foundation.

California’s Proposition 29 on the state’s November 2022 ballot would require physicians, nurse practitioners, or physician assistants with six months of relevant experience to be on-site during treatment at outpatient kidney dialysis clinics. It would also require increased disclosure of clinic ownership and dialysis-related infections. Proposition 29 would prohibit clinics from closing without state approval or discriminating against patients based on the type of coverage they have.

Fiscal Impact

The Legislative Analyst Office estimates that Proposition 29 would cost Californias state and local governments— taxpayers—”tens of millions of dollars annually.” Dialysis centers would incur additional costs to implement the measure some of which they would be expected to pass along in the form of higher fees and charges to California’s Medi-Cal system and to health care plans for public sector employees and retirees.

Arguments in Favor

Proponents of Prop. 29 say that because kidney dialysis services are essential to the continued survival of 80,000 Californians a month, the industry requires common-sense regulation that ensures these services are provided safely. Specifically, because dialysis is a dangerous procedure, it is essential that a trained clinician be nearby to react if something goes wrong. State approval of clinic closures would protect rural communities from losing access to needed dialysis services. Supporters also say that greater financial disclosure is required so that researchers and the public can better assess the impact of physician ownership of clinics. Dialysis companies are so profitable that they can easily afford to make the proposed changes while still covering their operating costs.

Arguments Against

Opponents claim Prop. 29 would increase the cost of providing dialysis services, and force some dialysis centers to shut down and others to reduce hours, thereby reducing access to this lifesaving treatment. Opponents assert, “Missing even a single dialysis treatment increases patients’ risk of death by 30%.” Dialysis centers are already subject to substantial state and federal oversight and are thus quite safe. Further, tying up physicians and other highly trained medical personnel at dialysis centers would worsen the shortage of healthcare workers across the state and increase waiting times at emergency rooms.

Additional Discussion

Since many dialysis patients are highly vulnerable, the requirement that a licensed medical professional is on-site during procedures appears to make sense. On the other hand, opponents question whether an on-site medical practitioner could effectively respond to a medical emergency given the lack of equipment at most dialysis centers. As Dahlia Ackerman, a longtime dialysis nurse opposing Proposition 30, told the San Francisco Chronicle, “The only thing that we, including a physician, can do in an emergency would be to call 911.”

California’s shortage of medical professionals would also pose challenges for implementing the on-site medical staffing requirement in Prop. 29. In 2020, Gov. Gavin Newsom wisely used his powers under the state’s COVID-19 state of emergency to authorize the state director of public health to waive licensing requirements on medical practitioners and restrictions on out-of-state medical professionals to help increase the number of medical practitioners in California. These waivers, intended to ensure adequate staffing at medical facilities, remained in place as of Aug. 2022, with no end in sight but Prop. 29 would increase the state’s need for more medical professionals.

Another potential issue for Prop. 29—infection data is already collected at the federal level by the Centers for Disease Control and Prevention’s (CDC’s) National Healthcare Safety Network (NHSN), so state collection would largely be redundant. If federal data is insufficiently timely or complete, health advocates’ purposes would seem better served by working with the CDC to improve that data rather than imposing a second collection system in just one state un Prop. 29

The proposition is also partially an effort by the Service Employee International Union to introduce state regulation of dialysis clinics through the ballot box. Previous SEIU-sponsored measures in 2018 and 2020 were defeated by large margins.

Finally, the dangers of dialysis could be better minimized by reducing the number of patients who require this procedure. The federal government could consider relaxing the prohibition of cash compensation for live kidney donors included in the National Organ Transplant Act (NOTA). A bipartisan bill introduced in Congress, House Resolution 3569, would amend NOTA to clarify that organ donors could be compensated for out-of-pocket expenses, lost wages, and other costs associated with donating. Further options, short of creating a market for kidney donations, could include offering tax credits for donors.

Currently, there are over 19,000 candidates in California on the kidney organ transplant waiting list. Kidney donors must take time off work, suffer discomfort, and accept the increased health risks that come with having only one kidney. If donors were properly compensated for their considerable sacrifice, more people would likely be willing to donate reducing the need for dialysis—and reducing the need for this type of ballot initiative.

The post California Proposition 29 (2022): Dialysis clinic requirements appeared first on Reason Foundation.

It is understandable for state policymakers to want to push back against an environmental governance social investment (ESG) movement that they view as threatening to Texas’ oil and gas industry, but just as some progressive states are wrongly telling their public pension funds not to invest in specific sectors, Texas Senate Bill 13 threatens the cost-effective stewardship of taxpayer funds.

Texas SB 13 instructs the Comptroller to identify financial firms that are:

“…refusing to deal with, terminating business activities with, or otherwise taking any action that is intended to penalize, inflict economic harm on, or limit commercial relations with a company because the company … engages in the exploration, production, utilization, transportation, sale, or manufacturing of fossil fuel-based energy and does not commit or pledge to meet environmental standards beyond applicable federal and state law.”

The Comptroller’s list includes nine European companies and BlackRock, the world’s largest asset management firm. Disinvesting in BlackRock could impose special challenges for Texas pension funds because it is included in the Standard & Poor’s 500 stock index. Thus, in simple terms, any exchange-traded fund (ETF) or index fund that is based on the S&P 500 holds some shares in BlackRock.

Fortunately, SB 13 appears to provide some flexibility for state agencies that have exposure to blacklisted firms through indirect means—like holding them through mutual funds or ETFs. Specifically, SB 13 states:

A state governmental entity is not required to divest from any indirect holdings in actively or passively managed investment funds or private equity funds. The state governmental entity shall submit letters to the managers of each investment fund containing listed financial companies requesting that they remove those financial companies from the fund or create a similar actively or passively managed fund with indirect holdings devoid of listed financial companies.

So, according to the law’s text, a Texas pension fund or government agency can continue to hold an S&P 500 fund—as long as it asks the fund manager to drop BlackRock from its portfolio. It is doubtful that an S&P 500 fund would follow through and eject BlackRock for various reasons, including because it would introduce a tracking error—a divergence between the index fund’s performance and its underlying index.

Among the mutual funds on the Comptroller’s blocked list are six vehicles that invest in most S&P 500 stocks. Texas is targeting them because the state claims they explicitly exclude companies in the fossil fuel industry and those with low ESG scores. These blocked funds would also diverge from the S&P 500’s performance, but it is possible that ESG-focused investors holding these funds may be more likely to accept any discrepancy. It remains to be seen whether a fund provider could attract sufficient interest in an investment product that mostly tracks the S&P 500 while excluding ESG-oriented firms such as BlackRock.

The European firms on Texas’ blacklist include three institutions—BNP Paribas, Credit Suisse, and UBS—that rank among the 50 largest banks worldwide. The Texas Employees Retirement System or the Texas Teacher Retirement System may hold securities issued by these entities, but this cannot be readily confirmed because neither system publishes a detailed list of investments on their respective websites.

Although SB 13 is relatively clear that pension funds do not need to liquidate mutual funds that include the blacklisted companies, it is less clear whether the Texas pension funds can invest additional, new money in such vehicles going forward.

Most importantly, while the law includes provisions that try to reduce its impact on the state’s pension funds, Texas Senate Bill 13 sets a dangerous precedent for inserting politics and legislating into investment decisions.

It’s also part of a troubling bipartisan trend. In 2021, Maine passed a law requiring the state’s pension system to divest from fossil fuel investments.  And similar divestment bills have been proposed in Massachusetts, New York, and New Jersey.

State policymakers and legislators should not limit the flexibility of pension fund managers to maximize risk-adjusted returns. Public pension fund managers should focus on optimizing their portfolios on a risk/return basis, so the pension systems have funding to pay for pension benefits promised to workers.

The post Texas dangerously inserts politics into pension investing appeared first on Reason Foundation.

Although this new asset class is understandably attractive to investment managers stretching to achieve high assumed rates of return, public pension systems should also consider the risk of credit defaults, high fees levied by intermediaries, and lack of liquidity before jumping in too deep.

The definition of a middle-sized, or in industry parlance, a “middle market” borrower varies. Investopedia defines the middle market in revenue terms, placing any company that earns between $10 million and $1 billion in annual revenue in this category. But since unprofitable companies are not good lending candidates, others use ranges of EBITDA (earnings before taxes, interest, depreciation, and amortization) when defining the categorization of middle-market.

Writing a sponsored post in Private Debt Investor, Tim Healy of Twin Brook Capital Partners suggests that companies producing EBITDA in the range of $5 million to $50 million annually qualify as middle market.

Firms in this category are too small to issue bonds, tap the syndicated loan market, or carry a credit rating. So, compared to large corporations, it is harder for middle-market firms to borrow. Traditionally, they have obtained debt financing from banks, but in recent decades banks have shied away from carrying corporate loans on their balance sheets. Banks are required to hold capital against their assets (to absorb defaults), and management generally regards holding loans as an inefficient use of capital.

Consequently, middle-market companies need non-traditional sources of financing, and public pension funds are a logical fit. Pension systems have the capital to invest and need to generate high investment returns, ideally in the form of regular income that can cover promised pension benefit payments. High periodic interest payments meet these needs.

These attributes have caught the attention of several public pension funds, with some investing heavily in private credit (also called private debt). For example, the Arizona State Retirement System (ASRS) has allocated 15% of its portfolio to private credit. Another 7% is devoted to related asset categories such as distressed debt and collateralized loan obligations.

The California Public Employees’ Retirement System, CalPERS, the nation’s largest pension fund, is targeting a 5% commitment to private credit in 2022, up from zero last year.

Overall, citing data from industry research firm Preqin, The Wall Street Journal reports, “Across the U.S., state and local retirement funds with private-credit portfolios are expanding them faster than any other alternative investment, from an average allocation of 3% to an average target of 5.7%, according to analytics company Preqin.”

Another attractive feature of private credit assets relative to traditional bonds is that they usually carry floating interest rates. Rather than having a fixed coupon like a corporate bond, middle market loans are normally priced in terms of spread above a benchmark interest rate, such as the London Interbank Offered Rate (LIBOR) or Secured Overnight Financing Rate (SOFR). When market interest rates rise, so do interest payments on the middle-market loan. As a result, these loans are insulated from market risk in contrast to fixed-rate bonds whose market value rises or falls inversely with interest rates.

But floating interest rates are a double-edged sword. As interest rates rise, the borrower faces higher debt service costs and becomes more vulnerable to default. Lending to borrowers with low-profit margins or relatively high amounts of debt subjects public pension funds to heightened credit risks under these circumstances. High default rates in a credit portfolio can sharply lower overall investment returns or even result in a complete loss of value.

The Wall Street Journal noted:

But while private credit offers interest rates that have largely disappeared from the public market, it is less well-suited for another role bonds have historically played in pension portfolios: providing a hedge against stock-market downturns.

That is because market turmoil raises the likelihood of default among riskier lenders, and there is no significant secondary market for private credit where pension funds in need of money to pay benefits could cash out in a pinch. In the fourth quarter of 2008, when the Bloomberg investment-grade index returned 3.98%, the Cliffwater index returned minus 6.68% and the Burgiss index returned minus 15.17%.

“When the market turns downward, private debt will not make money or protect capital,” said Stephen Nesbitt, chief executive of Cliffwater LLC, an alternative-asset manager and adviser.

The impact that the Federal Reserve’s tightening will have on private credit in 2022 is still a developing story. According to the law firm Proskauer, which maintains a Private Credit Default Index, the default rate for companies with EBITDA between $25 million and $50 million rose from 0.8% in the last quarter of 2021 to 1.8% in the second quarter of 2022, but the default rate for firms with EBITDA below $25 million actually fell from 1.6% to 1.3% over the same period. Since the Federal Reserve raised interest rates 75 basis points in both June and July, the second quarter data do not reflect the full impact of the latest Fed action.

Another concern with private credit involves fees. Pension funds do not typically lend to companies directly. Instead, they gain exposure to middle-market loans through third parties such as fund managers or private equity firms. These intermediaries expect to be remunerated for their efforts, and their charges can be high relative to traditional fixed-income investments.

For example, the South Carolina Retirement System recently reported that the fees on its private credit portfolio amounted to 2.58% of assets annually compared to just 0.10% for its investment-grade bonds.

Finally, middle-market loans are illiquid due to the lack of a secondary market. Pension funds acquiring private credit assets should expect to hold these loans to maturity. As long as private credit holdings are balanced by highly liquid assets in a pension fund’s portfolio, the inability to sell loans prior to maturity should be a manageable issue.

In summary, private credit appears to be a good fit for some pension fund portfolios. Still, given the heightened default risk in a rising interest rate environment, high fees, and low liquidity, public pension fund managers should be careful and avoid over-committing to this asset class.

The post Public pension funds should consider risks before plunging too deeply into private credit appeared first on Reason Foundation.

“Nothing epitomizes market failures more than the cost of insulin. Many Americans experience out-of-pocket costs anywhere from $300 to $500 per month for this life-saving drug,” Gov. Gavin Newsom remarked when announcing the passage of the insulin plan. “California is now taking matters into our own hands.”

While it is very unfortunate that Americans pay high prices for lifesaving insulin, high insulin prices are caused by a maze of regulation, bureaucracy, and pharmacy benefit managers that drive up the costs. While California’s efforts are well-intentioned, high insulin prices would be better addressed by regulatory reform and private initiative rather than a government-run program administered by a state with a dubious track record of competence and efficiency.

Evidence that the private sector can produce affordable insulin is available just south of the border. In Mexico, insulin prices are about one-sixth of those in the United States for a variety of reasons. Some Americans cross the border to take advantage of the lower costs. While it is illegal to import prescription drugs to the United States, the federal government generally does not enforce the prohibition for personal importation of up to a three-month supply of most medicines. But making regular trips to Mexico isn’t a sustainable solution for most California insulin users.

One problem in the United States is a lack of competition arising from patent protection for insulin delivery devices and barriers to getting approval for biosimilar products. There is some promise on the latter front as the Food and Drug Administration approved two biosimilars in 2021.

But additional reforms will likely be needed to bring US insulin prices down to international levels. Writing in Mayo Clinic Proceedings in 2020, the Mayo Clinic’s Dr. Vincent Rajkumar recommended that the United States participate in a reciprocal approval process with Canada and Western European countries. If a drug regulator in one of those nations approves a new insulin treatment, it could also be sold in the United States.

Further, Rajkumar recommended limiting the length of initial patents and preventing the use of additional patents on a single drug to extend market exclusivity. Although generous patent protection is defended as a means of encouraging innovation, incremental changes in how insulin is produced or delivered may not merit long exclusivity periods.

Costs could also be reduced if patients could obtain newer insulin formulations without a prescription. Early insulin formulations are still available on a non-prescription basis, having been grandfathered in before the Food and Drug Administration acquired the authority to classify new drugs as prescription-only. Although non-prescription insulin accounts for a small portion of the market, its availability without publicized safety incidents likely suggests that all insulin formulations could be safely dispensed without a prescription.

Some price relief might also come from disruptive new market entrants such as Civica RX, a nonprofit generic drug company that plans to sell insulin for $30 per vial. Civica was founded in 2018 with the support of major health systems, including the Mayo Clinic, and large philanthropies (one of which also supports my employer, Reason Foundation). Nonprofits that prioritize delivering social benefits over net income can reasonably be considered a market response since they address consumer needs without the coercion and top-down thinking that characterizes government interventions.

For-profit companies can also address the high price of insulin. Mark Cuban’s Cost Plus Drug Company is offering prescription drugs at steep discounts by selling direct to consumers, eliminating markups imposed by pharmacy benefit managers and other middlemen. Cuban’s company appears to be working on adding insulin to its low-cost generic drug offerings.

Meanwhile, the same state government considering entering the complex pharmaceutical industry is struggling with basics, like upgrading its own computers and information technology systems. Rather than take a state-driven insulin approach, California could more effectively bring down insulin prices by importing it or purchasing it from new entrants like Civica RX and Cuban’s company.

The post California’s misguided plan to make its own insulin appeared first on Reason Foundation.

To its credit, BART publishes hourly station entrances and exits by station pair on its website. For each hour, the data set shows how many individuals traveled between any two named stations throughout the system. By classifying stations by the side of San Francisco Bay in which they are located, it is possible to estimate the number of hourly trips passengers took beneath the bay. 

If cross-bay ridership in any given hour approaches the system’s capacity, there is a case for adding capacity by, for example, adding a second tunnel. But, if usage is well below capacity, large capital expenditures to increase capacity are not warranted. 

While ridership varies widely across days and times, it is best to focus on the busiest travel times, which have historically been the morning and evening rush hours. Suppose the existing tunnel is reaching maximum capacity. In that case, a new tunnel may be needed irrespective of usage during less busy periods (although authorities might also consider negotiating arrangements with large employers to stagger employee hours, implement variable fares to deter peak travel, or use other techniques to lower utilization during peak periods). 

Today, the theoretical capacity of the single BART San Francisco Bay tunnel is 48,000 passengers per direction per hour based on a maximum of 24 trains per hour, 10 cars per train, and 200 passengers per car (representing what BART officials call “crush capacity” with standees packed into each car like sardines). For various reasons, not the least of which is passenger comfort, planners should try to avoid approaching this theoretical maximum.  

BART is already investing in a capacity increase. By upgrading its train control system and purchasing more rolling stock, the system should be able to run 28 cars in each direction under the Bay by 2030, raising the theoretical maximum to 56,000. This upgrade project, known as the Transbay Corridor Core Capacity Program, has an estimated cost of $2.7 billion, including $1.2 billion in federal funding. 

I examined BART ridership data for the last eight years to determine whether a second tunnel is needed. For each month between January 2015 and July 2022, I found the highest single hour of cross-bay ridership, as shown in the accompanying chart. Between 2015 and the pandemic’s beginning, peak hour usage hovered around 30,000—comfortably below today’s theoretical maximum.

However, the data shows a slight upward trend, even though BART’s total ridership declined during this period. Further, the all-time peak of 33,794 was reached recently in May 2019. This evidence supports the need for the Core Capacity Program, and possibly, during the pre-pandemic period, may have made the case for the second tunnel.

However, as one would expect as the COVID-19 pandemic really hit the United States in March 2020, BART's peak hour ridership declined sharply in March and April 2020.

Over the past two years, ridership has been recovering slowly. There was a significant bump in June 2022, but that was the result of East Bay residents traveling to San Francisco to join in on the Golden State Warriors NBA championship parade and not indicative of any regional commuting trend. 

In July 2022, BART's peak hourly cross-bay ridership was just 27% of the level reached in July 2019. This percentage is considerably below the 34% to 35% levels BART reported for all-day ridership on most Tuesdays, Wednesdays, and Thursdays in July.

BART computes its ratios by comparing overall daily ridership in July 2022 to pre-pandemic levels. The difference between the ratio I calculated and those reported by BART is consistent with the intuition that, in the current pandemic era, work and travel patterns are more varied, with the share of riders using mass transit for their traditional morning and evening commutes falling as a percentage of total trips. 

To determine whether building a second transbay tunnel is a wise investment of public funds in the coming decade, one must answer two questions: Will overall system usage return to and then exceed BART's pre-pandemic levels? And will BART's ridership once again become more concentrated at rush hour peaks?

Mounting evidence suggests that the answer, at least to the first question, is no. 

In the early months of COVID-19, most urban planners worked on the assumption that there would be a discrete end to the pandemic, after which offices would reopen, workers would return, and BART would rapidly recapture most of its lost ridership.

That discrete ending may have appeared to be in sight during the COVID-19 vaccine rollout early in 2021. But, instead, the pandemic has been prolonged as new COVID-19 variants emerged, Bay Area case levels experienced multiple spikes, and many workers have resisted returning to offices.

Now, it looks like there will not be a clear or sudden end to the pandemic, but rather a gradual transition to endemicity, with COVID-19 remaining a background threat to many, including those with underlying health risks and conditions, for the foreseeable future. 

Given the combination of COVID and new technologies, remote work has become the norm rather than the exception for many types of employees, especially in the Bay Area. According to a survey of mid-size and large public firms conducted by the San Francisco Standard, "More than half of the 73 mid-size and large public firms with headquarters in San Francisco said their office workers can work remotely full-time for the foreseeable future, according to publicly available company information, employee interviews and job postings." Most other companies intend to use a hybrid model where employees work on-site fewer than five days per week. 

Another factor limiting commuting is the slowdown in technology industry employment growth. We may be reaching the end of the megatrend toward increased use of online technologies leading into the pandemic and then accelerated by it as people avoided in-person contact. Now that most people have become willing to return to physical stores and restaurants, technology utilization is flattening along with the demand for software engineers.

The Mercury News recently reported, "In an unsettling trend, some tech companies such as Apple, Google, Facebook app owner Meta Platforms and Tesla have revealed plans to pause or scale back hiring amid ongoing economic uncertainties."

"The rebound from the pandemic appears to be losing steam, and hiring is clearly slowing in the tech sector,” Mark Vitner, senior economist with Wells Fargo Bank, told the Mercury News.

It is possible that local technology hiring could rebound in the coming years, and it is also possible that San Francisco’s economy could experience a rotation in which another growing industry sparks a new round of employment growth. But current evidence suggests that the number of individuals commuting to work in downtown San Francisco may not return to 2019 levels for decades, if ever. 

As to the second factor that determines needed BART capacity under the Bay—whether commute times will once again become concentrated during the typical rush hours of 8-10 am and 4-6 pm— less evidence is available. However, we know from surveys conducted by Adobe Corporation and others that many employers have adopted flexible work schedules since the onset of the pandemic and that employees would like to see them go further in this direction.

So, the traditional 9-to-5 workday and its concentrated commuting pattern may become a thing of the past. Other research suggests that inbound commuting times are becoming more variable post-pandemic than outbound commutes, but, in the case of BART, inbound passenger volumes were more concentrated than outbound volumes, so this trend will most likely lead to the two commute peaks balancing out at much lower levels. 

While we should not completely rule out the need for a second Bay tunnel someday, the $29 billion required to build it could undoubtedly be reprogrammed to support other infrastructure projects that have a far greater chance of benefiting the Bay Area in the near-to-intermediate future.

The post Ridership data and work trends continue to undermine the case for a second BART tunnel  appeared first on Reason Foundation.

The state budget also authorizes “a pilot program for associations representing local units of government and government finance officers to do both of the following:

(i) Review the feasibility of local units of government using XBRL software to file required financial reporting with the Department of Treasury.

(ii) Assist the department in developing the information technology strategy.

Finally, the legislation states that “the department shall determine the feasibility and cost of implementing the ability to accept XBRL (extensible business reporting language) files on the department’s website as a substitute for annual financial reports, form F-65, and form 5572.”

Form F-65 is a state-specific financial report and Form 5572 contains information on pensions and other post-employment liabilities. Because these two forms contain redundant data with the annual comprehensive financial report that local governments currently report, they are being included in the Treasury program.

Michigan is now the second state to adopt machine-readable local government financial reporting legislation after Florida did so in 2018. Shortly before the COVID-19 pandemic struck, the California legislature also passed an XBRL bill, but it was vetoed by Gov. Gavin Newsom on the grounds that it created unbudgeted expenditures.

Michigan’s new law comes just weeks after the University of Michigan released a taxonomy for machine-readable local government financial statements. While Florida has been focusing on a state-mandated financial reporting form, the University of Michigan project targeted the annual comprehensive financial report (ACFR), whose format is primarily determined by the Government Accounting Standards Board (GASB), a national accounting standards body. This means the Michigan taxonomy could be easily adapted to most other states.

By building upon a project that targets GASB disclosure, Michigan may also be well positioned to impact national machine-readable disclosures. On July 14, U.S. Representatives Carolyn Maloney (D-NY) and Patrick McHenry (R-NC) announced that financial transparency legislation had been attached to the must-pass National Defense Authorization Act (NDAA), the bill that sets the Pentagon’s budget.

One provision of the Maloney-McHenry legislation would require the Municipal Securities Rulemaking Board (MSRB) to adopt data standards for submitted information that:

(i) render data fully searchable and machine-readable;

(ii) enable high-quality data through schemas…;

…(iv) be nonproprietary or made available under an open license;

(v) incorporate standards developed and maintained by voluntary consensus standards bodies; and

(vi) use, be consistent with, and implement applicable accounting and reporting principles.

The XBRL standard and the XBRL taxonomy released by the University of Michigan conform to the definition in the Maloney-McHenry proposal. As the self-regulatory body overseeing the municipal bond market, MSRB collects and publishes financial statements produced by all state and local governments that issue debt securities nationally.

If MSRB adopts the University of Michigan taxonomy or a modified version of it, it will enable tens of thousands of governments across the country to file machine-readable XBRL financial statements.

Although we do not know whether machine-readability language attached to the NDAA will ultimately survive a House or Senate, it appears that MSRB is already preparing to implement this technological advance. The board’s agenda for its July 27-28 meeting included a discussion of “potential new opportunities to collaborate with market participants in EMMA Labs, the MSRB’s innovation sandbox, to advance transparency and the quality and comparability of data in the municipal securities market.”

The Michigan Department of Treasury should work to implement its XBRL budget for the benefit of Michiganders and potentially for taxpayers and municipal bondholders nationwide.

The post Michigan takes step toward local government transparency appeared first on Reason Foundation.

My recent Reason Foundation analysis showed that the federal government had run budget deficits in 52 of the last 57 years, so any discussion about fiscal responsibility should be viewed in that context. But from the mid-1980s to the early 2010s, the perception of bipartisan policymaking frequently centered around reducing deficits through spending reductions and revenue enhancements.

This approach started with the Gramm-Rudman-Hollings Deficit Reduction Act of 1985 (GRH), which was intended to rein in deficits that blossomed during the Reagan era in the 1980s. The law, which passed with large bipartisan majorities, set steadily declining maximum budget deficits for each of the next fiscal years with a balanced budget mandated for 1991. If the congressionally-adopted budget was projected to be above the deficit target for any given year, the excess would be eliminated through an across-the-board spending cut equally impacting all federal departments and agencies, a process known as sequestration.

Because the executive branch implemented GRH’s sequestration process, courts declared it unconstitutional. Its budget projections also often proved to be too rosy. As a result, deficits continued rising, although perhaps at a slower rate than in the absence of any deficit control legislation.

In 1990, a much narrower bipartisan majority replaced GRH with an omnibus budget bill that increased taxes—famously in violation of President George H.W. Bush’s 1988 campaign promise not to raise taxes— and introduced the pay-as-you-go (PAYGO) rule under which new congressional spending measures had to be offset by new revenues or spending cuts.

Later in the 1990s, deficits briefly gave way to surpluses after Democrats unilaterally passed a set of tax increases and spending reductions in 1993 and a growing economy produced a spike in federal revenues.

Although the 1990s were a time of heightened partisanship, culminating with President Bill Clinton’s impeachment, some Democrats and Republicans continued to collaborate on the issue of fiscal discipline. In 1992, former Sen. Paul Tsongas (D-MA), former Sen. Warren Rudman (R-NH), and philanthropist Peter G. Peterson founded The Concord Coalition to advocate “generationally responsible fiscal policy.”

In the early 2000s, red ink returned with the wars in Iraq and Afghanistan, plus Medicare Part D—and there were more bipartisan efforts to right America’s fiscal ship. In 2010, the Bipartisan Policy Center launched a Debt Reduction Task Force “to develop a comprehensive, bipartisan plan to reduce projected federal debt” co-chaired by former Sen. Pete Domenici (R-N.M.) and Dr. Alice Rivlin, a centrist Democratic economist.

Also in 2010, President Barack Obama formed the bipartisan National Commission on Fiscal Responsibility, chaired by former Sen. Alan Simpson (R-WY) and Erskine Bowles, a former chief of staff in the Clinton administration. The commission’s report proposed entitlement reform and eliminated most income tax exemptions and deductions while lowering marginal tax rates. But the report did not receive the supermajority support of its own commission members that were required to put the package to a vote in Congress.

When Republicans took control of the House of Representatives after the 2010 election, we saw one last effort at bipartisan deficit reduction. Large majorities voted in favor of the Budget Control Act of 2011, which imposed annual discretionary spending caps for fiscal years 2013 through 2021, and provided for a constitutionally-valid sequestration process if the limits were breached. Unlike the Simpson-Bowles Commission, the BCA did not address revenues. Subsequent bipartisan legislation extended and raised the sequestration caps but did not make substantive reforms.

While the momentum toward budget reform stalled, the COVID-19 pandemic ushered in an era of bipartisan support for massive deficit spending. In 2020, Democrats and Republicans enacted over $3 trillion of COVID-19 stimulus and relief without any offsets. This series of spending bills signed by President Donald Trump and President Joe Biden led to record-setting, multi-trillion-dollar deficits in 2020 and 2021 and contributed to the inflation the country is now experiencing.

The current Congress, although highly contentious, has seen some bipartisan action, but the most consequential measures attracting support from both parties have increased budget deficits. The Infrastructure Investment and Jobs Act added the most red ink. The Congressional Budget Office estimates the bill will add $256 billion in deficit spending over the 10-year budget window.

Two other bipartisan measures — the Consolidated Appropriations Act of 2022 and the Additional Ukraine Supplemental Appropriations Act — are expected to add another $54 billion of deficit spending.

This summer, Congress is debating the bipartisan Creating Helpful Incentives to Produce Semiconductors (CHIPS) legislation which would provide $52 billion of subsidies to encourage domestic production of computer chips. Once again, this bipartisan legislation does not include any revenue or expenditure offsets.

Admittedly, the deficit impact of these bipartisan bills is dwarfed by the $2.2 trillion Coronavirus Aid, Relief, and Economic Security Act signed by President Donald Trump and the $1.9 trillion American Rescue Plan Act signed by President Joe Biden, but they illustrate the concerning move toward bipartisan spending rather than bipartisan fiscal responsibility.

Today’s bipartisan action makes the debt challenges we’re imposing on our children and grandchildren even worse.

Fixing the nation’s infrastructure, helping Ukraine, or encouraging domestic semiconductor production may be valid policies deserving of bipartisan support. But in a previous era, Democratic and Republican negotiators may have at least tried to find some new revenues or spending reductions to offset the fiscal impact of these bipartisan spending initiatives. Unfortunately, today’s bipartisan priorities completely lack any interest in fiscal discipline.

With inflation rising and a growing number of Americans blaming government policies and stimulus spending for some of the price increases they’re experiencing, perhaps political momentum can eventually shift back toward a bipartisan righting of America’s financial ship.

For now, since neither political party is showing serious interest in meaningful entitlement and federal budget reforms, maybe they can take bipartisan baby steps toward fiscal responsibility by requiring spending offsets or revenue increases for all new spending.

A version of this column was first published in The Hill.

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CalPERS reported a -6.1% return for its fiscal year ending June 30, 2022. Even though it lost billions, the -6% loss compares favorably to the change in broad stock market indices. For example, the S&P 500 index experienced a total return, including dividends, of -10.6% during the 12 months ending June 30. Because CalPERS invests in other asset classes that outperformed stocks, it did not face the full impact of the stock market decline.

But at least some of the outperformance may be illusory. CalPERS’ two best-performing asset classes—private equity and real assets— are reported on a one-quarter lag. So, CalPERS’ reported results do not reflect valuation changes from April through June when the values of many types of risky assets were falling. While CalPERS investment policies led to outperformance in the most recent fiscal year, they resulted in serious underperformance during the prior year. In its 2021 fiscal year, CalPERS reported returns of 21.3%—typically great news, but well below the S&P 500 return of 40.8% for the same period and lower than all other major US pension funds with the same fiscal year-end date.

Going forward, there is some concern that CalPERS management could lose focus on maximizing risk-adjusted returns for retirees as its investment team potentially becomes preoccupied with environmental, social, and governance (ESG) issues. The CalPERS board has received presentations on Sustainable Investing, the organization’s “Diversity, Equity, and Inclusion Framework,” and the “Racial Impacts of Financial Market Operations.” Although we might wish this was not the case, there can be tension between optimizing investments and prioritizing social goals in investment strategies.

To CalPERS’ credit, it used some of its good investment performance last year to lower its discount rate and assumed rate of return from 7% to 6.8%, which is more conservative than most other large public employee pension funds. This change slightly cushions the impact of 2022’s -6% results.

Ultimately, the impact of this year’s negative returns and unfunded public pension liabilities affect contributions required to be made by the state government and any local government that participates in CalPERS, including most Southern California cities.

Employer contribution rates—ultimately paid by taxpayers— are determined on a roughly 14-month lag from the end of the fiscal year. So, this summer, government employers will be receiving good news about lower contribution requirements arising from 2021’s results. But these benefits will be almost fully reversed when governments receive their updated actuarial reports from CalPERS next summer.

Over the longer term, there may be some good news for these government employers, and taxpayers as the benefits from Brown-era pension reforms begin to take hold. These reforms lower the amount that governments need to contribute on behalf of public employees hired after Jan. 1, 2013. As these newer employees replace more senior staffers eligible for CalPERS “classic” benefit plans, the overall cost of public pensions will begin to drop for many employers. Actuaries at consulting firm GovInvest expect these savings to start kicking in for most government employers after the 2028-29 fiscal year, at which point employer contributions as a percentage of payroll will begin falling.

California’s local governments can expect to face continuing budgetary pressure from public employee pension benefits for the next several years. But thanks to more conservative investment assumptions and prior reforms, the impacts will not be as severe as those faced by governments in Illinois, New Jersey, and some other states. And, over the longer term, there may be light at the end of the tunnel as long as state and local tax bases hold up, market conditions improve, and CalPERS invests wisely.

This column originally ran in The Orange County Register.

The post California’s unfunded pension liabilities will burden state and local governments appeared first on Reason Foundation.

Newsom has employed powers given to the governor under the 1970 California Emergency Services Act—a bipartisan measure signed by then-Gov. Ronald Reagan. As amended, the law contains an expansive definition of emergency, which includes “air pollution, fire, flood, storm, epidemic, riot, drought, cyberterrorism, sudden and severe energy shortage, plant or animal infestation or disease, the Governor’s warning of an earthquake or volcanic prediction, or an earthquake, or other conditions.”

Under the law, the state of emergency continues as long as the governor thinks it is appropriate. Or, it can be terminated by a resolution of both houses of the state legislature. According to a March 2022 legislative analysis, 48 states of emergency declarations are currently in force. The oldest, relating to drought and statewide tree mortality, was established by then-Gov. Jerry Brown in Oct. 2015.

Although the COVID-19 state of emergency persists, most of the emergency measures Newsom has taken have expired or terminated, with more declarations sunsetting at the end of this month. While striking down the remaining COVID-19 state of emergency would not immediately free the public from onerous restrictions, it would help protect citizens from further arbitrary use of state authority if the governor decides that the disease spread has become unacceptable.

Some of the public health measures have been arbitrary or even harmful. For example, Gov. Newsom ordered the closure of all state beaches and parks in May 2020, which was highly counterproductive because COVID-19 spreads more readily indoors than outdoors, forcing people to get together indoors rather than at the beach could’ve exacerbated the spread of COVID.

Some emergency orders have been beneficial by relaxing the impact of overly restrictive state laws. For example, one proclamation enables “medical providers to conduct routine and non-emergency medical appointments through telehealth without the risk of being penalized” by “relaxing certain state privacy and security laws for medical providers.” Easing telehealth restrictions has given patients more access to convenient and affordable health care, and the state legislature should make these changes permanent.

Fortunately, the excessive exercise of government power in California has not reached the extremes we have seen in China. As The New York Times admiringly observed in Feb. 2021, “In the year since the coronavirus began its march around the world, China has done what many other countries would not or could not do. With equal measures of coercion and persuasion, it has mobilized its vast Communist Party apparatus to reach deep into the private sector and the broader population in what the country’s leader, Xi Jinping, has called a ‘people’s war; against the pandemic — and won.”

China would eventually experience significant outbreaks, and its oppressive zero-COVID strategy is now an international embarrassment. In Shanghai, the regime of lockdowns, stay-at-home orders, and forced quarantine became a glaring example of tyrannical government overreach.

Thankfully, in the U.S., free expression, democratic procedures, and the Constitution act as a bulwark against China-like abuses of executive power. California’s robust anti-lockdown movement drove a recall election, forcing Gov. Newsom to make his case to voters and modulate some executive actions before being re-elected.

But it’s time for California to learn from this pandemic, further protect individual rights and increase government accountability by altering the Emergency Services Act to automatically sunset states of emergency after a short period, say, 15 or 30 days, unless the legislature votes to extend them. Obliging elected lawmakers to debate and vote on gubernatorial emergency declarations regularly would reinvigorate the state’s tradition of citizen engagement and help prevent future abuses of power.

A version of this column appeared in the Los Angeles Daily News.

The post It’s time to end the COVID emergency and limit Newsom’s state of emergency powers appeared first on Reason Foundation.

If assets acquired with public obligation bond (POB) proceeds yield more than the bonds’ interest and issuance costs, the government will have additional resources to meet its pension obligations over the life of the bond. For POB deals to work out, asset returns must exceed debt servicing costs. While servicing costs are predictable, asset returns vary from year to year. For example, most public pension systems achieved very large positive investment returns in the 2021 fiscal year, but this year most pension systems will post negative investment returns.  

Given the unpredictability of investment returns, it is advisable to issue public obligation bonds only when there is a large margin between expected returns and servicing costs to provide a cushion for prediction errors. In late 2021, a big difference between POB interest rates and assumed returns on assets arguably existed for many issuers, offering a healthy margin. Now, however, with borrowing costs rising, this cushion has eroded. 

A popular measure of municipal borrowing rates is the Bond Buyer 20 Index. Because this index relates to tax-exempt general obligation bonds with an average rating of AA (just two notches below the highest bond rating) and a maturity of 20 years. It is not necessarily representative of rates paid by issuers of taxable pension obligation bonds with varying ratings and maturities. But movements in the Bond Buyer index should roughly parallel the rates that will be paid on POBs. 

The Bond Buyer 20 Index reached its most recent trough of 2.05% last December compared to its post-pandemic low of 2.03% set in August 2020. But in early 2022, the index spiked, reaching 3.57% in mid-June. 

A couple of recent pension obligation bond issuances illustrate the trend in POB debt service costs. 

Among the most economical pension obligation bonds were those issued by the town of Andover, Massachusetts, in Dec. 2021. The deal includes 15 different maturities with interest rates ranging from 0.649% for one-year bonds to 2.793% for the longest-dated bonds maturing in 2039. When considering both the range of maturities and the costs of issuance (fees paid to underwriters and other service providers), the true interest cost of the bond issue was 2.367%. Andover benefited by issuing at a time of low interest rates and from receiving a top AAA rating for its bonds. AAA-rated pension obligation bonds are relatively rare because most POB issuers have some degree of financial stress. 

More typical of what most prospective POB issuers can expect in today’s environment was the recent experience of Barstow, California. In April, the city issued pension obligation bonds rated A+ with interest rates ranging from 3.109% for one-year money to 5.060% for bonds maturing in 2036. The true interest cost of the deal was 4.639%. Although Barstow’s rate was still below the 6.8% assumed rate of return currently used by CalPERS, the difference is relatively small, placing the city at substantial risk if CalPERS underperforms. 

Another large pension obligation bond appears to be in the pipeline. Providence, Rhode Island, voters approved up to $515 million of pension bond issuance in an advisory referendum on June 7, 2022. Although the initiative won by a wide margin, turnout was only 4%, according to WJAR TV. Given deteriorating market conditions and the city’s low BBB+ general obligation bond rating, Providence officials should expect borrowing costs significantly higher than those recently encountered by Barstow. It is also worth noting that rating agencies often assign lower ratings to POBs than general obligations. 

Average Investment Returns Can Be Misleading 

Pension return volatility raises another issue for pension obligation bonds. If POB proceeds are invested into declining financial markets and lose value in the first year, those assets will have to work extra hard to make up the loss to meet long-term return expectations. 

Let’s consider an 11-year timeline. If a system invests $1 million of pension obligation bond proceeds at the beginning of this period and then earns a consistent 7% return, the assets will be worth $2,104,852 at the end of year 11. If, however, the pension system loses 20% in the first year (which is 27 percentage points below the assumed rate of return), the system will have to earn an additional 2.7% each year to average a 7% return annually.  

But this average of annual returns is misleading because if the pension fund loses 20% in year one and then earns 9.7% for the next 10 years, it would end up with fewer assets than if it had earned a consistent 7% for all 11 years. The value would be $2,019,093, representing a constant annual growth rate of only 6.6%. To fully make up the loss, the pension system would have to earn an additional 46 basis points each year for an annual return of 10.16%. 

The more volatile the series of asset returns, the higher the average annual return has to be to achieve a 7% constant annual growth rate (CAGR). For example, if the pension fund sustained 20% losses twice over the 11 years, it would have to return 14.14% in the other nine years to break even. The unintuitive math behind all of this is well explained by Prosperity Thinkers.  

It is worth noting that the timing of the investment losses does not matter in this analysis. A 10% loss in year one, offset by 10.16% gains in each of the following years produces the same result as annual 10.16% gains in the first 10 years followed by a 10% loss in year 11. 

Conclusion 

Higher interest rates and deteriorating equity market conditions should raise concerns in local governments considering pension obligation bond issuance. While pension obligation bonds may no longer make sense for most issuers in the current context, the future may bring new windows of opportunity. Whatever the general economic conditions, governments considering pension obligation bonds should carefully evaluate the costs, risks, and potential rewards before issuing these securities. 

The post The risks of issuing pension obligation bonds are rising with inflation, interest rates appeared first on Reason Foundation.

In Mohammad Abdolmohammadi, Jonathan Harris, and Kenneth Smith’s The Journal of Government Financial Management article, entitled “Government financial reporting on the Internet: The potential revolutionary effects of XBRL,” the authors observed:

The difficulty in obtaining financial, budgetary and economic data about municipal governments has created possible inefficiencies in the municipal bond market… Despite the enormous size of [municipal] debt, pertinent information on particular bond issues is difficult and costly to obtain.

That difficulty has remained for two decades. After an exhaustive data collection process, the Reason Foundation has determined that over 30,000 U.S. state and local governments filing audited financial statements reported a total of $4 trillion of revenue and $7 trillion of liabilities in the fiscal year 2020. If governments utilized XBRL, financial statistics like these could be instantly available to anyone performing a simple Google search.

While governments have made little progress toward XBRL adoption since the turn of the century, the technology has been fully rolled out at the country’s publicly-listed companies and among U.S. banks. It is also widely used abroad, both in the private and public sectors.

In the United States, the failure to adopt modern financial reporting might be attributed to inertia as well as the lack of unified oversight at the national level. Further, interest rates were very low for the last 14 years. With most state and local governments paying low financing costs relative to pre-2008 levels, the need to find efficiencies in municipal finance seemed less pressing.

But now that interest rates are rising sharply in 2022, the time for market efficiencies like those offered by XBRL financial reporting may be at hand. If so, the new effort from the University of Michigan will prove timely.

The CLOSUP/XBRL US taxonomy for state and local governments is built upon standards published by the Government Accounting Standards Board (GASB). These standards are used by all state governments as well as local governments in most states. The taxonomy covers seven face financial statements and four footnotes, including those for pension and other post-employment benefit liabilities.

Later in the summer, the research team, working in conjunction with Workiva Corporation and city financial staff at Flint, Michigan, will release an XBRL financial report for that city. This pilot is being supported by a grant from the Charles Stewart Mott Foundation.

CLOSUP’s executive director, Tom Ivacko stated:

“This project ultimately is about improving a community’s quality of life, because as local fiscal information becomes more available, a greater number of stakeholders will have eyes on the data and be able to act on potential problems long before they turn into crises.”

The state of Michigan will have the opportunity to make XBRL the permanent mode of operation moving forward. The state Senate’s draft budget for the 2022-23 fiscal year includes funding for the Michigan Department of Treasury to continue the project in conjunction with a public university. But it remains to be seen whether the Senate’s XBRL provision will make it into Michigan’s adopted budget for the fiscal year that starts October 1, 2022.

The release of Michigan’s project comes four years after Florida passed legislation mandating XBRL reporting, which is expected to be implemented next year. But the Florida bill only pertains to a state-specific annual financial report and is not directly applicable in other states.

Hopefully, progress on municipal financial transparency and reporting at the state level will overcome inertia at the national level. Although the Grant Reporting Efficiency and Agreements Transparency (GREAT) Act of 2019 (P.L. 116-103) required the adoption of machine-readable data standards for financial statements submitted by local government grantees to the federal government, executive branch officials have yet to implement this legislation.

Similarly, the Municipal Securities Rulemaking Board (MSRB), which oversees the municipal bond market, persists in requiring disclosures filed in PDF rather than XBRL format. This self-regulatory body may face pressure to begin an XBRL migration if states begin using XBRL and the Financial Data Transparency Act (S.4295) passes in the U.S. Senate. The House of Representatives passed a similar bill (HR 2989) last year. These federal bills would require MSRB to adopt standardized, machine-readable disclosure.

Should the Municipal Securities Rulemaking Board or the federal grants community decide to implement XBRL, the newly released University of Michigan taxonomy will give them a very strong starting point.

The post The University of Michigan moves to modernize government financial reporting appeared first on Reason Foundation.