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Fitch: Recent Swing State Policies Provide Election Insight

NEW YORK--(BUSINESS WIRE)-- Fitch believes recent policy changes in some swing states and their impact on local governments provide an interesting backdrop as voters head to the polls in this election year. Actions in some states to balance their budgets by reigning in funding to local governments have triggered an increased focus on labor expenditures, by far the largest spending item in local government budgets. The more austere state funding environments have had a clear impact on labor negotiations and enacted changes have included reduced pension and benefit liabilities.

Florida is one state where funding to local governments suffered as the state's budget tightened. The state's main source of revenue is the sales tax, which dropped significantly during the region's deep residential real estate recession. Subsequent reductions in local government funding helped close the gap. Last year, the legislature sought to provide budget relief to both the state and local governments by introducing an employee contribution requirement for the state-sponsored employee pension plan. How successful this effort will be remains uncertain, as a legal challenge is being heard by the state Supreme Court. If the court sides with labor, we would expect school districts to be particularly vulnerable due to their less flexible budgets and fairly modest balance sheets, in the absence of state action to soften the blow.

Pennsylvania similarly has taken steps to manage the state's budget through scaled-back funding to local governments. In response, in the past year agreements were reached with public employees in Philadelphia and Pittsburgh that continue to reduce budgets through layoffs and furloughs. The state also cut higher education budgets. The biggest credit challenge for Pennsylvania now is rapidly rising pension costs. This long-term challenge for the state and many local governments is likely to shape future policies.

Ohio has also moved to shrink the state government and made cuts to localities in a different setting than many other swing states. Last year, newly enacted legislation limiting collective bargaining for state employees went to a popular vote, which sided with labor. Although the legislation was presented as a tool for local governments to use in addressing state funding reductions, the state did not moderate the reductions following the vote. However, this month the legislature passed an extensive pension reform bill. In our view, the state's maintenance of fiscal balance is being supported by an economy with a large manufacturing sector that has led the state out of the recession at a faster pace than many others.

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Source: Fitch Ratings