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The North Carolina House just passed HB 943, which would put a $2.86 billion bond referendum before the voters this fall. This move is based on a growing consensus that investing in our schools, roads, state facilities, parks, and local infrastructure is an economic must.
Issuing new debt should be pared with a few pragmatic fiscal steps. First, we should not cut taxes again, which would undermine the flexibility we will need to repay the debt. Second, we should use regular appropriations to pay for most repairs, and keep the bond finances for transformative projects that move North Carolina's economy forward.
If we are going to issue more debt, we cannot afford another round of tax cuts. If we borrow to improve the state's infrastructure, the state will need strong future revenue growth to repay borrowers; more tax cuts or limits on revenue growth are bad fiscal policy. Moreover, reducing taxes even further could jeopardize North Carolina's AAA rating, and force us to pay higher interest rates. The bond rating agencies are very sensitive to states' long-term fiscal stability and states with lower credit scores have to pay higher interest rates. Other states that have cut taxes even more dramatically than North Carolina (eg Kansas) have been downgraded by the credit rating agencies, not an example that we should follow if we are about to purchase new debt.
Recent tax cuts are part of why the House proposal would use some bond proceeds to pay for repairs. A good chunk of the revenue that would be raised by this bond would likely go to repair projects that have been put off in recent years. Like many states, North Carolina put off repairs and deferred renovation projects when the Great Recession drastically reduced revenues. But after the economy recovered and revenues growth returned, a portion of these funds could have been used to catch up. Instead, the North Carolina General Assembly cut taxes rather than dealing with the backlog of repairs. While there's not much North Carolina could have done to escape the budget impact of the Great Recession, the choice to cut is a big part of why there are hundreds of millions of dollars in repair and renovation projects included in the House proposal.
Using bonds to pay for repairs also reduces our ability to make transformative new investments. As a general principle, bonds are best used for new investments, things like new schools, roads, and infrastructure. When you spend bonds on things that make the state more competitive, new economic activity is part of what helps to pay for the debt. For example, if we did not need to pay for the backlog of repairs out of the bond proceeds, those funds could be used to substantially extend high-speed internet across more of rural North Carolina, which would help many of the most economically challenged parts of the state connect to the global market.
Moreover, if the state had not cut taxes so significantly, funds would already be available for some of the new investments that are included in the House proposal. For example, a portion of the corporate income tax was set aside for new school construction , but that allocation was removed in Fiscal Years 2011-12 and 2012-13 when the corporate income tax was cut. Some or all of the $400 million in the House proposal for transportation infrastructure would have already been appropriated if the legislature had not capped the gas tax in recent years, or if we had built a more sustainable long-term foundation for the Highway Fund. The Clean Water Management Trust Fund was cut by $100 million in Fiscal Year 2008-09, some of which could have paid for local sewer and water projects that will instead be supported by the House proposal.
To sum up, it is good to see a consensus emerging that building a competitive economy in North Carolina will require some serious investment. Given the low cost of debt right now, and the long list of critical economic needs across North Carolina, there is a good case that issuing a bond right now makes sense. On the other hand, recent tax and spending cuts mean that the House is now planning to use some of the funds on projects that could already have been covered in the budget. Finally, if we do borrow for these projects, it would be fiscally irresponsible to further reduce taxes and limit our options for how to pay back what we would owe.
Click the link at the top of this post for the text of HB 943, including a list of the projects that would be funded. At the time of this writing, here is a very high level breakdown of how most of the funds would be allocated:
- UNC System: $890 million
- Public Instruction: $500 million
- Transportation: $400 million
- Community Colleges: $300 million
- General Capital Projects: $200 million
- Agriculture: $195 million
- State Parks and cultural attractions: $135 million
- National Guard and military: $93 million
- Water and Sewer Loans: $75 million
- Public Safety: $47 million
- Courthouses: $15 million
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What is falling harder than commodity prices? Some exchange-traded funds that seek to track the companies that dig and drill for raw materials and fuel.
It is no small feat to overshadow recent declines in industrial materials such as oil and metals. The Bloomberg Commodity Index, which tracks the prices of 22 raw materials, this week hit a...
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The Pacific Northwest innovation economy is in the midst of a substantial capital refresh cycle, with four locally based venture funds filling their coffers with upwards of $700 million through the first half of the year. And theres potential for more to come, from family foundations, a source that until now has been largely untapped.
Threshold Group, an investment advisory firm serving about 60 wealthy families and family foundations with some $3 billion under management, wants to enable its clients and others in the Pacific Northwest to make local investments that help create jobs, improve the environment, and provide capital to underserved communitiesin addition to earning a financial return.
Its a strategy called place-based investing, and proponents say its a growing niche within the broader world of "impact" investing, also known as socially responsible or mission-related investing. These investments fall somewhere pure return-driven bets and philanthropy, and represent a very Northwest flavor of capitalism.
We have a number of clients and friends of the firm who have benefited from the prosperity in the region and want to be a catalyst for its economic growth, and want to recycle some of that prosperity, some of that wealth back into the region, says Ron Albahary, chief investment officer at Threshold Group, founded and owned by the Russell family. Tacoma, WA, native George Russell established a global investment advisory firm in the 1960s that was purchased by Northwestern Mutual Life in 1999.
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While there are signs that economic growth is reviving, the concern is that investments are not as forthcoming as expected. During the last year or so, the government has put in place a comprehensive set of measures to restore investor sentiments, ranging across the tax regime, ease of doing business, Foreign Direct Investment limits, and administrative and environmental clearances. A number of large-scale initiatives have been introduced to act as magnets for investments, including Make in India, the Smart City mission, and Clean Energy. Interest rates, too, are on the downtrend with strong expectations of further rate cuts, and the macroeconomic environment has turned benign, despite moderation in global growth and trade.
According to CII’s Investment Tracker for May 2015, business confidence stands at the highest levels in the last three years, buoyed by proactive reforms and positive macroeconomic scenario. There has been visibly strong improvement in the project pipeline — new project announcements almost doubled in 2014-15 as compared to the previous year and the value of projects completed went up from Rs 3.28 lakh crore to Rs 3.56 lakh crore. At the same time, the value of stalled projects came down from Rs 3.63 lakh crore to Rs 2.44 lakh crore.
As a measure of global confidence in India, FDI inflows went up from $25.3 billion to $31.9 billion in 2014-15 and Foreign Institutional Investors (FIIs) put in $40.9 billion into Indian companies as compared to $5 billion in 2013-14. The investment data is further substantiated by definitive signs of improvement in capital goods production.
Why isn’t investment picking up?
On the other hand, it is worrying that industrial investment proposals actually filed with the Department of Industrial Policy and Promotion have come down from 2,387 worth Rs 5.30 lakh crore to 1,843 valued at Rs 4.05 lakh crore. This indicates that while intentions to invest are strong, investors are still facing challenges while implementing projects.
There are several reasons for slow investment pick-up. Before the global financial crisis, companies had built up high production capacities in anticipation of continued demand. However, demand remains muted in the country following three years of high inflation. Additionally, delays in land acquisition and environmental clearances have led to a bloated pipeline of stranded and delayed projects. In turn, this has resulted in stressed bank assets so that banks are inhibited from undertaking additional loan burden for new projects.
Further, the high interest rates have been a big deterrent to new investments as projects are rendered unviable. Low profitability of corporates also reduces available resources. The elevated level of stalled projects has meant subdued demand down the value chain. A still-vulnerable global economic environment has not contributed to the overall investment scenario in India, especially as exports are contracting.
Policy action for reviving investments, growth and employment must be continued at an accelerated pace. To begin with, there is need to drastically reduce interest rates at one go by 1.5 percentage points. This would both incentivise consumers to purchase durables and make project investments more attractive.
Infrastructure projects require continued attention and Prime Minister Narendra Modi’s monthly interaction under Pragati would help speed up infrastructure construction. Budget funds allocated for infrastructure need to be speedily implemented, including for programmes such as Smart Cities and Digital India.
A National Asset Management Company may be considered to take non-performing assets off banks’ balance sheets, which would unlock lending for investments. The financial sector should shift from a bank-dominated system to a diversified regime with multiple financing options, particularly for long-term funding.
The 4 R’s — Regulation, Risk Allocation, Renegotiation and Resourcing — need to be addressed to revive projects. Given that 101 projects worth Rs. 25,399 crore are stuck in disputes with the National Highways Authority of India, a stronger dispute resolution mechanism in the infrastructure sector would help unblock funds.
On ease of doing business, there is need to shift from a sequential to a simultaneous approval system. Low-risk industries may be exempted from certain clearances, while provision of utilities to new factories should be streamlined. Certain rules and sections of the new Companies Act impose additional burdens and need to be reviewed carefully. The NITI Aayog could be designated as the coordination centre for central ministries and States on administrative procedures.
Special attention is required for credit access for small and medium enterprises (SMEs), and we recommend that 15 per cent of priority sector lending should be earmarked for SMEs. Ease of doing business needs to be tackled for SMEs through single windows, self-certifications and e-governance.
Regarding manufacturing, certain focus industries in labour-intensive and advanced sectors should be championed, including automotives, defence, and textiles. In particular, incentives for Research and Development and Information, Communication Technology and Electronics manufacturing would help reduce imports. A ‘Make in India Technology Venture’ can be set up as a special purpose vehicle under public-private partnership to invest Rs 1 lakh crore in building a knowledge economy. The Digital India vision requires simplification of procurement process and a joint government-industry task force to address challenges. Start-ups should be supported through a suitable scheme.The government has taken many positive steps for a progressive tax policy. Dispute resolution mechanisms, arbitration and conciliation can further help in efficient and time-bound clearance of funds in dispute.
Corporate India is greatly enthused by the rapid and proactive reform initiatives underway. We have no doubt that as these gain traction, the India growth story would continue to gather pace.
(Sumit Mazumder is President, Confederation of Indian Industry.)
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Turmoil in Greece and in the Chinese stock market meant a tough month for state investments in June, resulting in state pension funds closing out the budget year June 30 with only about 1.5 to 2 percent growth, the state Investment Management Board#x2019;s executive director told the Consolidated Public Retirement Board Wednesday.
#x201c;Just a lot of negativity and, I think, fear hit the market pretty hard,#x201d; Craig Slaughter said of the debt crisis in Greece and a sharp downturn in the Chinese stock market. #x201c;Some of that has been resolved since, and we#x2019;ve started to see the market come back, but it doesn#x2019;t help the [2014-15 budget] year.#x201d;
Legislation adopted in the 1990s to keep state pension funds solvent for state and public school employees requires that state pension fund investments grow by 7.5 percent a year over the long term.
#x201c;Obviously, we#x2019;re going to be short of the target, but as you all know, it#x2019;s a long-term target, and we think we#x2019;re still in the ballpark,#x201d; Slaughter told board members.
Through April, before events in Greece and China made investors skittish, the pension funds had seen one-year growth of 8.3 percent, according to IMB records.
At the time, the five-year performance of IMB investments was 9.9 percent for the Public Employees Retirement System, and 9.8 percent for the Teachers Retirement System, those records show.
While IMB investments struggled in the 2014-15 budget year, they boomed in 2013-14, experiencing 17.9 percent growth.
Also during Wednesday#x2019;s retirement board meeting:
| Executive Director Jeff Fleck noted that West Virginia#x2019;s pension plans were favorably portrayed in a new report from the Pew Charitable Trust, published Tuesday.
In #x201c;The State Pensions Funding Gap: Challenges Persist,#x201d; West Virginia was cited for the progress made since 2003, when the state ranked last in the nation in terms of funding its pension plans.
The study notes, #x201c;Over the next decade, West Virginia improved its funding ratio from 40 percent to 67 percent and moved to the middle of the 50-state ranking.#x201d;
#x201c;Over the long run, strong contribution policies have allowed West Virginia to make substantial progress in closing its funding gap,#x201d; the study finds.
Fleck said he was #x201c;pleasantly surprised#x201d; that the study highlighted West Virginia#x2019;s efforts to fully fund its public employee pension plans.
| Board members approved a change order for up to $1.5 million in the CPRB#x2019;s ongoing contract with Deloitte Consulting to upgrade the retirement system#x2019;s computer systems.
The additional funding will be used to modify computer software to account for changes in state pension laws passed by the Legislature during the regular session in SB529.
Under the law, public school and state employees hired after July 1 will receive reduced pension benefits, and pay higher employee contributions.
Computer software will need to be reprogrammed to accommodate the two tiers of benefits for employees hired before and after July 1, board member Diana Stout said.