Tag Archives: Connecticut

Do pensions affect state borrowing costs?

The Center for Retirement Research at Boston College has published a new brief that looks at the relationship between pension funding and the cost of government borrowing. Recently Moody’s announced it would look at states’ unfunded pension liabilities along with outstanding debt in its evaluations. (When they did so, Moody’s found Connecticut, Hawaii, Illinois, Kentucky, Massachusetts, Mississippi, New Jersey, and Rhode Island topped the list of state indebtedness).

Authors Alicia Munnell, Jean-Pierre Aubry and Laura Quinby have taken a look at Moody’s ratings process and find that the agency puts more emphasis on the state’s management and finances, than on its economy and debt when assigning ratings, thus pension funding is “underweighted.”

A regression analysis tests the extent to which pension funding (percent of the Annual Required Contribution paid) affects the spread between yields on state-issued bonds and Treasury bonds. They find that it does, and that increasing the percent of the annual contribution paid (by one standard deviation) reduces the required interest rate on state-bonds by 3 basis points – a small impact relative to other factors.

The authors conduct another regression to see what effect Moody’s ratings have. They find that Moody’s incorporation of pensions into their analyses hasn’t had a significant impact on bond ratings.

They caution that as pensions become a larger part of state budgets the magnitude of the ARC’s effect on the spread could increase.

Rating State Business Tax Climates

Today the Tax Foundation released its annual State Business Tax Climate Index.

Good tax policy is not just about low rates. The Index’s author, Kail Padgitt, writes:

State lawmakers are always mindful of their states’ business tax climates but they are often tempted to lure business with lucrative tax incentives and subsidies instead of broad-based tax reform. This can be a dangerous proposition.

The public choice pressures that Dr. Padgitt is talking about encourage state policy makers to cut special tax deals for politically-important businesses and to keep rates high for those who are aren’t so well-connected. The Business Tax Climate report is a nice antidote to such thinking:

The goal of the index is to focus lawmakers’ attention on the importance of good tax fundamentals: enacting low tax rates and granting as few deductions, exemptions and credits as possible. This “broad base, low rate” approach is the antithesis of most efforts by state economic development departments who specialize in designing “packages” of short-term tax abatements, exemptions, and other give-aways for prospective employers who have announced that they would consider relocating. Those packages routinely include such large state and local exemptions that resident businesses must pay higher taxes to make up for the lost revenue.

The best climates: South Dakota, Alaska, Wyoming, Nevada, Florida, Montana, New Hampshire, Delaware, Utah and Indiana.

And the worst: New York, California, New Jersey, Connecticut, Ohio, Iowa, Maryland, Minnesota, Rhode Island and North Carolina.

Gimmicks, Fiscal Evasion and Fiscal Illusion in State Budgets

Most states know they have big problems and that today’s budget gaps were created over a long period by policy and budgeting choices.

In my latest Mercatus Center Working Paper “Fiscal Evasion in State Budgeting” I discuss how states got into this situation, in part, by (legally) concealing and avoiding the full costs of policies. Some of these tactics, such as deferring pension payments, have gotten alot of attention. And others are harder to tease out.

For example, see this video at the Yankee Institute for Public Policy on how Connecticut used state university tuition to balance its budget.

Union Pensions: Next Stop on the Bailout Train?

Senator Bob Casey (D-PA) has a proposal in the works. The “Create Jobs and Save Benefits Act” will bail out private sector union pension plans. The idea is to allow the Pension Benefit Guaranty Corporation, the federal guarantor of private sector pensions, to take over the pension liabilities of companies and dedicate tax dollars to paying them off.

The PBGC was established in 1974 to protect workers from the loss of their pensions. It was supposed to be self-financing through a combination of insurance premiums paid by plan sponsors and returns on pension investments. The PBGC itself is currently insolvent.

The plan being discussed would rescue multi-employer plans jointly run by companies and unions. Moody’s estimates such plans face long-term deficits of $165 billion. Senator Casey’s proposal would cover the most troubled plans including the Teamsters Central State fund.

A pension bailout would be unprecedented. And it opens the door for the bailout of state and local government pension plans, with unfunded liabilities estimated at $3 trillion. When will states begin to run out of assets to meet their obligations? Joshua Rauh estimates Illinois will be the first to run of out pension fund assets in 2018, followed by Indiana, Connecticut and New Jersey in 2019. And that’s assuming an 8% return on investments and 3% revenue growth. In other words, it could be sooner.