Tag Archives: beneficiaries

California’s $500 billion pension shortfall

A new study estimates California’s pension shortfall at $500 billion. Employing a risk-free discount rate, this estimate is far higher than the $142.6 billion estimated by the state. Currently California assume a 7.75 percent discount rate for two plans: CalPERS and CalSTRS, and a 7.5 percent discount rate for UCRP. It’s an amount that is too large to be addressed solely by future benefit cuts. These findings haven’t been received very warmly by State Treasurer Bill Lockyear who says the estimate relies on an overly-low discount rate. Contrary to the Treasurer’s assessment, estimating pension liabilities isn’t about cherry-picking numbers but instead about how to accurately value pension liabilities which are guaranteed by the state of California, and thus should be considered safe and risk-free by beneficiaries.

Such a massive shortfall means bad news for California’s budget and fiscal outlook. The share of pensions in California’s budget will have to triple. Stanford professor, Joe Nation, author of the study and a former Democratic Assemblyman warns that each day the state does nothing it costs $3.4 million.

The study  finds that CalPERS under assumed rate of return of 7.75 percent has an 82 percent chance of its assets falling short of obligations. To meet the problem Nation proposes higher employee contributions, taxes, and reducing plan costs by increasing the retirement age, reducing benefit formulas, and moving to a hybrid Defined Benefit/Defined Contribution system. In addition, he critiques Governor Brown’s proposal. For more, read the study, which contains some very interesting data and analysis.


The Next Layer in the Pension Crisis: Local Governments Also Face Shortfalls

States together face unfunded pension obligations that, when using the risk-free discount rate,total $3 trillion. But, what happens when local pension plans are factored in? That number gets larger by an estimated $574 billion.

Robert Novy-Marx and Joshua Rauh apply the approach they took to valuing state pensions to two-thirds of all municipal plans in a newly-released paper. In doing so, they find that as of June 2009 the unfunded obligations in municipal plans rises from $190 billion to $383 billion. Extrapolating this finding to the other one-third of plans not included in their sample lead the authors to the $574 billion estimate.

Several cities will run out of assets to pay beneficiaries over the next ten years. These include Philadelphia, Boston, Chicago, Cincinnati, Jacksonville, St. Paul and New York City. The trade-offs for policymakers on this level are stark. Meeting obligations means compromising basic city services.

And just as municipalities are increasingly seeking state aid to cover local debt payments, local pension debt will also flow upward to the states. Rauh notes in an interview with Bloomberg that political pressure will push pensions debts on to already stressed states. States will likely turn to the federal government leading to “a debt crisis of some kind for a subset of U.S. state and local governments” in the next five to ten years.

The Washington Post reports that Philadelphia Mayor Michael Nutter is advocating for pension reforms including switching workers to defined contribution plans.

Is a Municipal Debt Crisis Imminent?

Veronique de Rugy has a great post at NRO about the potential for a muni debt crisis in the near term. The basic problem: state and local governments are facing a new budgetary reality. Benefits to public employees and Medicaid obligations are growing, while revenues are only starting to show signs of recovery. Is there a tradeoff imminent for governments between paying bondholders, pensioners, or for current services?

Meredith Whitney joined Warren Buffett among those warning of widespread defaults in the $2.8 trillion muni debt market necessitating a federal bailout. However other experts disagree, arguing that taxpayers, municipal workers, and service beneficiaries will feel the coming cuts to local and state governments, thus cushioning debt holders.

Much also depends on the extent to which state and local governments have an accurate picture of their true financial condition. The past few years have revealed sometimes an extreme disconnect between fiscal reality and official accounting, something I would argue the stimulus helped to augment.

Public Transit 2010: Higher Fares and Less Service

The Wall Street Journal reports higher fares and less frequent service will hit public transit systems nationwide this year. About $8.4 billion of the $787 billion stimulus  meant to boost state and local budgets and prevent transit cuts has only pushed forward tough decisions by 11 months. Chicago will furlough some transit workers. San Francisco is raising fares to close a $129 million budget gap. And New York is cutting service. Transit riders may well be frustrated in 2010, but ultimately that’s because riders aren’t customers, they are beneficiaries of a subsidized service. As Sam Staley writes at Planetizen, only one-third of transit’s revenues come from fares, the bulk comes from tax revenues and federal grants. Urban transit systems have evolved as a product of political lobbying not in response to rider needs.

The crisis in budgets has a silver lining. More cities and states may be forced to pursue fundamental reform. Leonard Gilroy writes in the Reason Foundation’s  23rd Annual Privatization Report, Chicago leased its parking meters and Dunwoody, Georgia is contracting out non-safety-related services. Given the revenue outlook for local and state governments 2010 may be the year that cities finally try and fix what ails public transit.

Unallotment in Minnesota

An unusual executive power is being put into practice in Minnesota.  Governor Tim Pawlenty is “unalloting” funds. That is, taking away $2.7 billion in proposed spending from the budget in order to balance it.  Unallotment has been used four times since 1939.  The governor has refused to raise more taxes to cover proposed spending putting him at odds with legislators, unions, and program beneficiaries.

The Minnesotan response to its $4.6 billion shortfall differs markedly from the Californian, as Kimberly Strassel at The Wall Street Journal notes, “a refreshing break from the financial-crisis norm.”

The  governor is asking cities and counties, “how much should I cut?,” from their piece of state aid, while 201 state legislators got letters asking for their budget cut recommendations.   Something to watch in the coming days – what will local governments suggest?

Minnesota operates under a two-year budget with the new budget beginning July 1 leaving a few weeks for cuts to be identified.

If you’re curious about unallotment in Minnesota law, you can read  more here.

The Super Bowl as Economic Remedy

It seems obvious that when a city is chosen to host a major event — political convention, Super Bowl, Olympics — this provides a natural economic boost to the city’s economy. If any city is deserving of such a boost it is New Orleans, which will be hosting the 2013 Super Bowl for the first time since Hurricane Katrina. (It will be the 10th time the city has been the site of the championship.)

And like many governments that find themselves chosen for a major sporting event, the Louisiana legislature is deciding if it should spend $85 million in Superdome upgrades. However, the boost is largely symbolic: while New Orleanians may feel a sense of pride over the selection, and the stadium will get another make over, economic gains are very likely to be fleeting and possibly negative.

Much academic work has been done assessing the impact of sporting events on regional economies. The findings generally show little lasting impact on host cities. Robert Baade finds the primary beneficiaries of taxpayer subsidies for stadiums are team owners, and players, not local residents.

That has not stopped cities from competing for the honor. 

University of Maryland economist Dennis Coates, writing in The American, finds since 1990 Major League Baseball has opened 19 new stadiums, the NFL opened 17, and the NBA over 20. These projects are highly subsidized on the federal, state and local levels, with the public bearing as much as 63 percent of the cost.  Coates and fellow economist Brad Humphreys find in an analysis of  of wages between 1969 and the 1990s in metro areas where these stadiums reside is that incomes actually decreased.

Why? Consumer spending on sports replaces consumption of other kinds of entertainment, and the spending patrons undertake has a relatively small multiplier effect in real the local economy. Athletes get the income boost. And to top it off, increased local subsidies to the franchise redirect tax revenues from other use, making the local economy less efficient.

While local and state governments might like to think otherwise, being chosen as a host city may be as much an economic drain as a publicity boon.

Furloughs v. Bankruptcy: The New Unionism

New Jersey continues to stare straight at bankruptcy.  Revenue projections indicate that this is not an ordinary crisis . A shortfall of $2 million is projected.  Income tax revenues have fallen 40 percent. It is going to be painfully tough for Governor Corzine to balance the budget by June 30th. His latest proposals to cut spending include a furlough for union employees, a request for a $2 billion line of credit, less aid for colleges, and a $125,000 cut in aid to 12 independent living centers for the disabled. But program beneficiaries are not happy. There is a protest against the latter today at the Trenton statehouse.  Union workers are threatening to take the governor to court over his proposed furloughs.

Part of the driving force behind New Jersey’s imminent bankruptcy is the growth in salaries, pensions, and health benefits for unionized workers, including teachers. The state’s income tax is 100 percent Constitutionally dedicated to providing “Property Tax Relief.” This is a misnomer. It actually goes mainly (70 percent) to supplementing school budgets, and most of that take goes to 31 Abbott districts. Administrative  costs for teachers have skyrocketed in these districts over the decades.

Another source of trouble – the state’s pension system – negotiated by unions, agreed to by the state, with the costs passed through to municipalities, which are responsible for paying for fire and police benefits.  Result – the second highest property taxes per capita in the nation.

The mark of  public sector unions in directing New Jersey’s state and municipal budgets has been strong and devastating. And New Jersey is by no means alone. Steven Malanga of the Manhattan Institute,  writes in today’s Wall Street Journal about a very important distinction that bears repeating:   these are public sector unions – not private sector,  heavy industry unions

This phenomenon – the decline of the private sector union and the rise of the public sector union was identified and developed by my  economics professor, Dr. Leo Troy of Rutgers.  See his book, The Twilight of the Old Unionism.  His work on this subject is worth reading.

The Stimulus Package is Coming to Town – But Where?

Recovery.gov, hosted by the Office of Management and Budget, is supposed to let Americans see how stimulus dollars are being spent. But it turns out the most comprehensive, clear glimpse of how funds are likely to be spent is still the U.S. Conference of Mayor’s Wish List, which I and some colleagues put into a searchable format at StimulusWatch.org.

The USCM decided back in November that by publishing its list, it could show Congress how many worthy local projects could be funded with federal dollars. The list is a great resource: it breaks down federal spending in terms of actual projects, instead of budget accounts.

But this may be the last bit of meaningful detail we see for the forseeable future.

The stimulus legislation only requires that States and immediate beneficiaries report how funds are spent. Spending data isn’t likely to be deep, or detailed. We do not yet know if we will we get project level information (who got the contract?, what did they build?, how many people did they hire?) or in what format it will come.

Last week my colleague Jerry Brito and I testified at separate hearings in Congress on how the Administration should provide data to the public to enable them to monitor the stimulus. My testimony is here; Jerry’s is here.

Unfortunately we learned that the data aren’t going to be on Recovery.gov for a year, and even then they may not be useful: The act doesn’t require data be put in structured format.

The stimulus package is terribly significant for the future fiscal health of local governments. Federal money comes with strings. It locks into place federal programs, leaving a fiscal imprint; it also creates a future demand for spending that the locality might not be able to support. It weakens the the control of local government, and stimulates the growth of the public sector.

That makes paying attention to City Hall all the more important. How is your city spending its stimulus money?