Financial Innovations LabTM report
Betsy Zeidman and Rick Palacios Jr.
Milken Institute
Robert E. Litan
Ewing Marion Kauffman Foundation
Introduction
As the recession drags on, states and municipalities find themselves in a deep hole. For the first time since the
Great Depression, income, sales and property taxes have declined in unison. The cyclical challenges are clear:
falling tax receipts, high unemployment, tepid investment returns, and overall economic uncertainty.
But even more daunting are the long-term structural issues that are simultaneously coming to a head: trillions of
dollars in unfunded pension obligations, the escalating costs of other post-employment benefits (OPEB), record
numbers of retirees poised to tap pensions and benefits, increasing longevity, and significant revenue/expenditure
mismatches.
Against this urgent backdrop, the Milken Institute and the Kauffman Foundation hosted a Financial Innovations
Lab in July 2010. Unlike any previous meeting addressing current conditions in state and municipal finance, the
Lab brought together a diverse group of state and local officials, union representatives, experts from the capital
markets, money managers, academics, public-sector attorneys, and representatives from bond rating agencies.
Together they explored both immediate fixes and broader strategies that could help prevent future crises.
It's clear that achieving long-term solvency for states and municipalities will require painful paradigm shifts.
There is no simple approach that will work for all 91,000 local governmental units in the U.S. But the sooner
governments address their long-term structural challenges, the better o1 they and their residents will be. The
short-term expediency of simply laying off workers to meet hard budget constraints is not sustainable in the long run and will deprive citizens of services (safety, sanitation, education) they want and deserve. The Lab produced some noteworthy options, including:
- adopting standardized actuarial assumptions, perhaps similar to corporate-sector accounting standards
- implementing multi-year budgeting plans/rainy-day funds
- reassessing possible economies of scale from shared services/consolidation bondholders, and citizen-taxpayers—in jurisdictions facing the most immediate problems to find ways of sharing the burden of fiscal adjustment to ensure long-run solvency
- establishing control boards as a last resort for states and municipalities in extreme distress
- possibly providing short-term federal aid to states and municipalities that actively implement steps to restructure their finances
The Lab sparked a critical conversation, and this report summarizes the information and perspectives shared
during the day's proceedings.
