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Tax Revenue Forecasts Are Lowered as States Enter Budget Negotiations

GFOA Newsletter: March 30, 2017

Based on recent tax revenue data, many forecasts could be revised downward further, creating uncertainty and potentially difficult choices for states, according to an analysis for state income and sales tax forecasts for fiscal years 2017 and 2018 from the Rockefeller Institute. In the face of uncertainties in the global economy, growing political risks in Europe, potential federal policy changes from the new administration, Federal Reserve Board actions, and changing demographics, many states have lowered their forecasts, expecting tax revenue to grow more slowly than they had projected in previous forecasts.

The report found:

The median state income tax forecast for fiscal 2017 was reduced from prior forecasts from 4% to 3.6%, and the median sales tax forecast for the same period has been adjusted downward from prior forecasts from 4.2% to 3.1%. Median income tax growth for 2018 is expected to accelerate slightly to 4.1%, up from 3.6% in 2017. Median sales tax growth for the same period is expected to accelerate slightly as well, to 3.5 percent, up from anticipated growth of 3.1 percent in 2017.

Although these state forecasts generally call for faster growth in 2018 than in 2017, the forecasted increase is small and expected growth is slow compared to longer-term trends: From 1981 to 2007, before the start of the Great Recession, state tax revenue growth averaged approximately 7% annually.


House Introduces Legislation to Classify Municipal Securities as High Quality Liquid Assets

GFOA News Letter  March 23, 2017

This week HQLA Champion Congressman Luke Messer (R-IN-6) has introduced bipartisan legislation (HR 1624) in response to a rule approved by the Federal Reserve Board, Federal Depository Insurance Commission, and the Comptroller of Currency in September 2014, which established new liquidity standards for banks. The new standards, which went into effect in January 2015, require financial institutions with at least $250 billion in total assets to maintain prescribed levels of liquid assets that can quickly be converted into cash in times of national economic stress. These asset classes included foreign sovereign debt, but failed to classify municipal securities as high quality liquid assets (HQLA).

In the last Congress, the House voted by unanimous consent to approve bipartisan legislation identical to this legislation that would require federal regulators to classify all investment-grade, liquid, and readily marketable municipal securities as HQLA. However, the legislation stalled in the Senate.

Not classifying municipal securities as HQLA will increase borrowing costs for state and local governments to finance public infrastructure projects, as banks will likely demand higher interest rates on yields on the purchase of municipal bonds during times of national economic stress or even forgo the purchase of municipal securities. Congressman Messer’s legislation would protect municipal securities issuers from such cost increases by directing the Federal Reserve, FDIC, and OCC to admit municipal securities into accepted HQLA classes outlined under last September’s rule.

GFOA appreciates Messer’s leadership on this important issue and will engage GFOA members in the coming weeks in the advocacy effort to advance consideration of this legislation in the House this summer.

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