Category Archives: State Policy

Job creation or job protection in California?

The Mercury Sun News editorial provides a strong critique of several pieces of new Sacramento legislation, claiming the bills are simply jobs protection measures for unionized employees.

The bills include Senate Bill 469 which requires cities to conduct an economic impact analysis before approving big-box stores that sell groceries. Unions are for it. Grocers and land developers are against it.

AB 646 and AB 455 involve labor negotiations with unions. SB 931 forbids local government from using taxpayer funds on lawyers or consultants advising on how to get around union rules – which could be interpreted in one of two ways – does it limit local spending or does it favor unions?

And AB 438 requires public notice before a city can withdraw from a public library and contract with a private provider while “barring lower pay rates and layoffs in a new system.”

If the editors’ analysis is correct, the bills show how public sector unions as a special interest can acheive their goals outside of the collective bargaining process. At least one California legislator has introduced a bill aimed at collective bargaining reform. It could be that these bills aimed at local government may be part of unions’  pro-active strategy to prevent layoffs or firings of public employees should local governments introduce competition to city services.

The “Pac-Man” of New Haven’s budget

Steven Malanga of The Manhattan Institute has an article tracking the impact of compensation in municipal budgets.  New Haven’s Mayor John DeStefano, long a public sector union ally, now finds himself in the position of trying to reduce the fast-rising costs associated with employee compensation. In the city’s $475 million budget, pension and health care benefits are projected to rise by $12 million this year. Other cities facing out of control employee costs include Costa Mesa, California, Pittsburg, PA, New York City, Chicago and Newark, N.J.

But so far attempts at money-saving by city officials has mainly been met with union protests.  A self-defeating stance.

As Malanga notes, the local level is where these costs are most strongly felt. Municipal managers are increasingly being forced to choose between offering basic services and keeping up with fast-rising benefits costs – in some cases the result of state-level statutes that enhanced benefits and failed to consider the costs.

In a forthcoming paper we find that one culprit is decades of budgeting in the dark. These costs appear to be a surprise because budgets don’t indicate in a meaningful way to the public how  much a municipal government is carrying in pension and health care costs. Budgets reflect what the municipality chose to pay in a given year and not how much is needed to keep the system funded. In fact, in the case of New Jersey, these numbers aren’t always made clear to the local governments due to state reporting conventions.

For more on the pressures in local budgets, read the original article here.

Governor Christie’s pared down budget

The Star Ledger reports that Governor Christie, “took an axe” to the state’s budget and “slashed $900 million in a budget he blasted as ‘unconstitutional.'” Cuts were made to state aid to municipalities, college tuition aid, Medicaid and aid to suburban schools leaving $640 million in surplus. He also vetoed bills to tax millionaires for more school funding aid.

In an analysis of New Jersey‘s fiscal problems we found that these areas are some of the primary weaknesses in New Jersey’s budget. The school aid formula, guarded by the court since 1976, effectively prevents the legislature and Governor from making appropriations decisions. This result of the court’s involvement in school funding has been a fiscal and educational disaster for the state. Since the 1970s many changes in tax rates have been to the income tax in order to fund schools and provide aid to municipalities. Over thirty years later and there are few to no improvements in urban school districts. The price for New Jerseyans is one of the most progressive income taxes in the nation and a property tax crisis.

As for Aid to Distressed Cities this program highlights another long-running problem in New Jersey’s fiscal landscape. Several of its cities rely on state aid in lieu of property tax revenues because they have not recovered from long-running economic problems. The problem with state aid is that it masks the cost of spending to local residents,  subsidizing local inefficiencies and the continuance of failed approaches to local economic development.

Inefficiencies and poor performance are rampant in areas that have relied heavily on aid, notably the education system. What is needed is the kind of reform being discussed by some leaders in the state – both Republican and Democrat. Cities like Camden need to be able to try new approaches to schools. A new pragmatism among Democratic city leaders in other parts of the country shows a willingness to confront fiscal reality and ask: how much of our budget is being consumed by unsustainable benefits packages and how much is left over to  run the city? Atlanta, Georgia, Montgomery County, Maryland are two such recent examples.

Reforming disability retirement in Montgomery County, MD

On the heels of Atlanta, Georgia’s sweeping pension reforms, and the cooperation of New Jersey Republicans and Democrats to reform pension and health care benefits, comes the news that City Council President (and former private sector labor leader) Valerie Ervin lead the Montgomory County Council to vote to reform disability retirement for public workers. Unions opposed the measure saying it was an issue for collective bargaining. Ervin’s reply: the council has stayed out of disability retirement for 21 and half years waiting for the unions to budge to no avail.

The political shakeup resulting from public union intransigence is noteworthy as  Robert McCartney writes in The Washington Post. Public unions wield political power. Last year a city council member was voted off the board due to union opposition for backing pension reform. In Montgomery County, “unions have played an out-sized role in politics…partly because they’re open-handed with campaign contributions and campaign workers.” Ironically perhaps union support and “boots on the street” were instrumental to Ervin’s election in 2006.

What has changed in a year? State and local budgets haven’t improved. Revenues are tight and the costs associated with benefits, often negotiated with unrealistic and erroneous accounting assumptions, are beginning to eat up larger portions of the funds used to operate services. Unions’ strategy of refusing to face numerical reality has led to budgetary gridlock and the emergence of a newly pragmatic tenor in labor-government negotiations.


Do Revenues Need to be Part of the Debt Solution?

“You can’t reduce the deficit to the levels that it needs to be reduced without having some revenues in the mix.”

So said President Obama in his press conference yesterday. Is the President correct?

We are not the first nation to wrestle with unsustainable debts. And fortunately for us, we can learn from the measures that others have taken. That is why the work of Harvard’s Alberto Alesina and Silvia Ardagna is so important. Examining 37 years of data from 21 similarly-situated nations (fellow members of the OECD) they identified 107 episodes of “fiscal adjustment” (basically efforts to get debt levels under control).  They then broke these down according to how successful they were (did they manage to rein in the debt?) and how they impacted the economy (did they cause the economy to expand or to contract?). 

Let’s first look at the instances in which austerity worked. As shown by the two left bars in the graph below, in cases where austerity actually succeeded in reducing debts, spending as a share of GDP fell by about 2 percentage points while revenue also fell by half a percentage point. In other words, contrary to the President’s assertion, successful austerity does not seem to require a revenue increase. Contrast this with the instances in which austerity failed to reduce debts. This is shown by the two right bars below. Among the instances in which austerity didn’t work, the spending reductions were more modest (only .8 percentage point reduction) and revenue increased—rather substantially (1.41 percent of GDP). 

Alesina and Ardagna also looked at what happened to the economy after austerity. Sometimes it expanded rapidly; sometimes it didn’t. The results of their analysis is below. Among the instances in which austerity was followed by significant economic growth, spending had been reduced by about 2.19 percentage points as a share of GDP while revenue had only been raised 0.34 percentage points. Meanwhile, among the instances in which austerity was not followed by significant growth, spending was reduced much less (0.7 percent of GDP) and revenue was increased much more (1.2 percent of GDP). 


 I should make one more point. Republicans sometimes use the phrase “cut and grow” to imply that spending reductions will give the economy a lift. I think this overstates the case. As Alesina put it in his Mercatus Working Paper (p. 5):

Fiscal adjustments (reductions) on the spending side are almost as likely to be associated with high growth (i.e. a successful episode) as fiscal expansions on the spending side.

In other words, spending cuts are about as likely as spending increases to lead to rapid growth. Readers of this blog probably know that spending increases typically don’t lead to large and sustainable growth spurts. So we shouldn’t cut spending because we think it will make the economy grow. We should cut spending because it is mathematically impossible for government to constantly outpace the growth of the private sector on which it depends. And as Herbert Stein famously remarked, something that can’t go on forever, won’t.

Illinois’ “Goldilocks” budget

This year Illinois’ budget is larger than last year even though the state anticipates a shortfall of  over $9 billion. The Civic Federation notes this is made possible due to overinflated revenue estimates.

The strategy to achieve balance includes a variety of one-shots, including delaying payments to vendors, reports Benjamin Stout of the Illinois Statehouse News.  To cover its huge pension liability the state is making a $4 billion payment into the system. For the past three years that payment was made with bonds. Other strategies: the state will take longer to pay Medicaid, and is banking on higher revenues from newly hiked income taxes. Kurt Erickson at the The Quad-City Times calls it, “The Goldilocks Budget.”

One representative is asking that AFSCME re-open its contracts to find cost-savings. The union is opposed to any contract re-negotiations.

Lawmakers sent Governor Quinn a $33.4 billion budget to sign, but the Governor wants to spend $36 billion. He is constrained as Governor. At this stage in the budget process, he can only line-item veto not add to the legislature’s approved budget. One representative suggests the Governor come back in the fall and ask for more money.

I’ve been having a look at Illnois’ 2012 budget and it is remarkable. Of note are the five strategies the Governor outlined to fix Illinois’ long-running structural deficits. This includes  the “Illinois Now!” initiative, a “jobs-creation program” financed by bonds which claims credit for creating 135,000 jobs. The rest of the strategy includes “strategic borrowing”, federal assitance, higher taxes, and small programmatic reductions.  Structural changes are nowhere apparent, in a state that will run out of assets to pay for pensions in a few short years.

Abusing disability pensions in Montgomery County?

The Washington Examiner takes a look at  disability pensions in two counties: Montgomery County, Maryland and Fairfax County, Virginia. Each county has a similar-sized police force. Between 2000 and 2008, no Fairfax County police offers received a disability pension. Between 2004 and 2009, a total of 91 police officers and 49 firefighters and sheriffs deputies received disability pensions. A further 34 Montgomery County firefighters either received disability payments or have an application pending in 2010.

Councilman Phil Andrews (D-Gaithersberg) is investigating the practice, “What is suggests is that disability retirement here is used as an alternate retirement system.”

Why? It’s a good deal, a retiree receives two-thirds of their annual salary in a tax-free pension. Secondly, according to one anonymous police officer, “Do you have any idea how easy it is to claim disability?”

Debt in Cook County, Illinois

The Cook County Treasurer estimates that the average Chicago household owes $62,525 largely to cover pension liabilities for public workers. The treasurer herself was surprised noting, until recent debt disclosure documents were required, they weren’t fully aware of the cost. In reading Illnois’ budget I am struck by one passage concerning the pension system which the state admits is in bad shape, “significant long-term improvements will come from additional pension reforms, refinancing the liability and seeking a federal guarantee of the debt, or increasing the annual required state contribution.”

It seems an explicit strategy of Illinois at this point is federal intervention of some sort.



The Times They Are A Changin’

In which national newspaper did the following appear (not on the opinion pages):

But public workers have a unique relationship with elected officials, because government employees are effectively negotiating with bosses whom they can campaign to vote out of office if they don’t get what they want. Private unions, in contrast, don’t usually have the power to fire their members’ employers.

The answer is here.

In her review of the literature on public sector unions, Eileen reaches much the same conclusion. She writes:

In addition, however, public sector unions are also able to increase demand for their labor through the political, legislative, or regulatory process, thus increasing wages further than private sector unions are able to.


New Jersey’s pension reforms

I posted yesterday at Public Sector Inc on what New Jersey’s pension reforms are likely to accomplish. Steve Malanga expands on the reforms today and rightly notes that it’s not enough to fix the system. While these reforms were politically difficult to accomplish they are also modest relative to the magnitude of the problem. The legislation includes a provision that allows contribution rates to be lowered by a pension oversight committee when the fund hits 80 percent funded. The problem is what they calculate to be 80 percent funded is closer to 40 percent funded. The Wall Street Journal reports that these pension reforms are calculated by the Trenton to save local governments $120 billion over 30 years, and thus relieves some fiscal pressure in municipal governments.

My forthcoming analysis of local budgets shows one of the problems that worries me: what localities contribute to pensions on their books varies according to state policies that modify contributions based on flawed accounting and actuarial assumptions.

This legislation buys governments a little more time. And the bills shows a willingness by both parties to cooperate on a very politically contentious issue. Unfortunately, the liability still looms large.