Author Archives: Aaron Merrill

“A Very Smart Person”

Mercatus Senior Fellow and Neighborhood Effects leading lady Eileen Norcross appeared on Fox Business this afternoon, discussing her recent article in Reason. She discussed the fiscal situation in New Jersey, and how it got so bad. From the Abbot court cases to public sector unions, she covers a lot of ground. Watch the interview here.

In the Reason article she dives into the union stranglehold on state finance in more depth:

Since 1990 local governments have added 45,500 new jobs. Nearly all of them are represented by one of a dozen unions, which have helped secure some of the plushest public sector jobs in the nation. It’s easy to see how property taxes have grown at twice the rate of inflation over the past decade. A government worker in New Jersey earns an average of $58,963, a police officer averages $84,223 (the second highest in the nation), and six-figure public sector salaries are commonplace. Compare this to neighboring Philadelphia, where the average police salary is $49,000. According to one estimate, of the $23 billion New Jersey raised in property taxes in 2008, $18 billion was spent on police, municipal, and teacher salaries.The tab for public workers doesn’t end there. Factor in the state’s pension plan, currently under-funded by $34 billion. The New Jersey Taxpayers’ Association calculates pension payouts for the average teacher range from $1.6 million to $2.5 million, per retiree. For the average police officer, that range totals between $3.2 million and $6 million, per retiree.

I Will Gladly Pay You Tuesday…

…for a hamburger statehouse today. In all seriousness, this sounds like an excellent plan. Arizona is going to sell public buildings in exchange for a twenty year lease.

It’s a bit unusual to sell a state capital, state hospital, prisons and park visitor centers, but when you have a billion and a half dollar deficit to make up between now and July, Arizona Department of Administration spokesman Alan Ecker says you do unusual things.

Mr. ALAN ECKER (Spokesman, Arizona Department of Administration): The proceeds will be going to – straight into the Arizona state general fund to offset the budget crisis that we’re dealing with.

ROBBINS [NPR reporter]: The total – $735 million, Arizona would then lease back the buildings over 20 years. Investors would buy $5,000 certificates of participation and get an estimated four to five percent interest a year. The question is, how safe is an investment in the state of Arizona? Its credit rating was downgraded just last month because of its budget crisis. But Alan Ecker says, in this case, we’re talking about buildings which have to operate if Arizona remains a state.

Mr. ECKER: So the state would be very, very unlikely to ever default on payments and walk away from those facilities. So investors should have a strong piece of mind.

NPR doesn’t attempt any analysis of the proposal. Why bother, when the state’s own spokesman assures us “investors should have a strong piece of mind?” Turns out this is old news, which we covered. Arizona Central reports:

Under the most recent legislative proposal, the state would seek a series of lease arrangements spanning as much as 20 years. Deals that would generate the targeted $735 million in revenue would mean state lease payments totaling $60 million to $70 million a year, according to budget analysts.

Over two decades, that would equate to at least $1.2 billion in lease payments. Once the leases had expired, the state would again take ownership of the properties.

House Majority Leader John McComish called the payments preferable to a tax increase, as proposed by Brewer, or alternative fiscal schemes such as selling future income from state Lottery sales in exchange for a lump-sum payment.

“What are our choices?” asked McComish, a Phoenix Republican. “We could cut more, or we could raise taxes more. Borrowing over the long term, we think, is better for the people, better for the economy.”

Arizona can’t afford the current level of spending, but instead of cutting spending McComish thinks it’s wise to engage in budgetary games that will cost the state an extra 63%. That’s politically easier than being responsible and cutting spending. Maybe the state should sell endorsements, like professional ballparks. I would love to take a tour of the Arizona State Capitol, brought to you by the good people at Pampers.

Eileen previously gave a tentative thumbs up to these kinds of deals as examples of privatization, but as the comments to her post pointed out, selling state offices is akin to selling off state-owned railways. Instead, this is just a gimmick at the expense of future taxpayers. Eileen has a forthcoming issue of Mercatus On Policy on budgetary gimmicks.

Risky Bets: Prepaid College Tuition

My Money Blog noticed a disturbing trend in some state-run prepaid college tuition funds. These plans initially sound like a great investment, but perhaps deserve a second look:

Lock-in tuition now, and don’t worry about future hikes. However, it appears that even though 18 states have pre-paid tuition plans, only seven of them actually guarantee them – Florida, Maryland, Massachusetts, Mississippi, Texas, Virginia and Washington. (The image below says six, but the article was corrected later to add Virginia.)

Currently, the plan hurting the most publicly is from Alabama, called the Prepaid Affordable College Tuition Plan (PACT). The plan’s asset value dropped from $899 million in September 2007 to $463 million at the end of January, nearly a 50% drop. Why? Because they invested over 70% of their assets in stocks, and also assumed a consistently high rate of return.

The coverage from ABC News wildly misses the mark. Their headline “Market Endangers State-Run Tuition Plans” operates on the same theory as blaming Ford for drunk driving accidents.

The Birmingham news does some actual journalism to get to the real heart of the problem. It seems that these plans fall prey to the same mistakes as many other publicly administered funds. Most egregiously, public fund managers are usually forced to fall back on unrealistic expectations to justify irresponsible investments that are “too aggressive,” i.e., too risky.

Haines said Alabama’s as­sumed rate of return is unrea­listic, and requires too much risk. Fund managers also haven’t incorporated enough hedging investments to lessen the impact of a downturn in the market, he said.

“We just felt that (the fund) was too aggressive,” he said.

According to an actuarial report on the fund filed by the state in January 2008, the fund’s managers then as­sumed a rate of return of about 8 percent until 2013, and 8.5 percent after that. That report also found that the fund’s liabilities exceeded its assets by about $20 mil­lion.

Bottom line: don’t invest in your state’s 529 plan without reading the fine print VERY closely.

(Hat tip to Tony Woodlief.)

Not In My Back Yard?

Richard Epstein has a great new article in Forbes detailing his New Year’s resolutions for public policy. Despite the scuttlebutt on a second stimulus, health care, and all the other looming federal issues, he takes time to examine the local and regional policy problems that have proliferated recently; a sort of death-by-a-thousand-cuts:

On real estate, change the culture so that getting permits for yourself and blocking them for everyone else is no longer the preeminent developer’s skill. The government can still prevent buildings from falling down and fund infrastructure through general taxation. But don’t let entrenched landowners and businesses raise NIMBY politics to a fine art. Today our dysfunctional land-use processes too often build thousands of dollars and years of delay into the price of every square foot of new construction. The instructive requirements on aesthetics and handicap access should be junked, along with the crazy-quilt system of real estate exactions that asks new developments to fund improvements whose benefit largely belongs to incumbent landowners. And for heaven’s sake, learn the lesson of Kelo and stop using the state’s power of condemnation for the benefit or private developers.

On labor, state and local governments have to junk the progressive mindset in both the public and the private sector. State and local governments should never, repeat never, be forced to negotiate with local unions. The huge pensions garnered by prison guards in California or transportation workers in New York present the intolerable spectacle of requiring ordinary citizens to pay huge subsidies to union workers far richer than themselves. On the private side, don’t force developers to hire union workers on construction sites or to block the construction of new facilities that hire nonunion labor. If unions are really efficient–and they aren’t–let them compete like everyone else.

(H/T Matt Welch at Reason)

We’ve recently covered the real estate problem. Eileen and I have a forthcoming paper paper on just how monumentally screwed up public pension systems are.

Empire State of Mind

New York’s highest court recently decided two separate cases that centered around eminent domain abuse and the Fifth Amendment. In late November, the court allowed basketball tycoon Bruce Ratner to appropriate a good sized section of a Brooklyn, furthering his plan to move the New Jersey Nets franchise to a new arena. Last week, the intermediate appeals court stopped Columbia University’s attempt to gobble up much of the Manhattanville neighborhood north of Midtown. [Corrected 12/08.]

These cases highlight just how much of a mess eminent domain proceedings are in the wake of 2005’s U.S. Supreme Court decision Kelo v. City of New London. Supreme Court decisions are no stranger to controversy, but the outrage surrounding Kelo transcended party or ideology, and led to forty-three states adopting restrictions on their own eminent domain powers.

In the Brooklyn case, the issue is identical to Kelo. Bruce Ratner wants to tear down a significant portion of a vibrant neighborhood, and replace it with private economic developments including office towers, a shopping complex, and a basketball arena, which will likely be financed with a significant public subsidy.

Reason Magazine‘s Damon Root has an excellent analysis of the private property rights that Ratner and the Empire State Development Corporation trampled over: Continue reading

Maine Votes on TABOR

maineIn 2008, Maine set a shameful record. This past year we sent more money to Augusta, as a percentage of income, than ever before. Unfortunately, it gets even worse. According to the U.S. Department of Commerce, Maine is on pace to send almost forty cents of each dollar to the capitol in 2009.

For over a decade now, Augusta has been getting bigger. As a result, we have lost jobs, tax revenue, businesses, teachers and public services. Despite all this evidence, unions, legislators and bureaucrats want us to think that they can spend our money responsibly. There has to be a way to make the state both effective and affordable. Question four, the Taxpayer Bill of Rights, while not perfect, is the best solution for our cancerous growth of government.

Mainers trust each other; it’s one of the best things about life here. We know that if we ask for directions, get a flat, or need a hand, our neighbors will be right along to help. We take pride in our communities, and it makes living here special. TABOR allows Mainers to take responsibility for their choices, and use our famous common sense. The only alternative, the way things are now, is letting Augusta arbitrarily decide whether our communities thrive or die.
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