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Eight years after the financial crisis: lessons from the most fiscally distressed cities

You’d think that eight years after the financial crisis, cities would have recovered. Instead, declining tax revenues following the economic downturn paired with growing liabilities have slowed recovery. Some cities exacerbated their situations with poor policy choices. Much could be learned by studying how city officials manage their finances in response to fiscal crises.

Detroit made history in 2013 when it became the largest city to declare bankruptcy after decades of financial struggle. Other cities like Stockton and San Bernardino in California had their own financial battles that also resulted in bankruptcy. Their policy decisions reflect the most extreme responses to fiscal crises.

You could probably count on both hands how many cities file for bankruptcy each year, but this is not an extremely telling statistic as cities often take many other steps to alleviate budget problems and view bankruptcy as a last resort. When times get tough, city officials often reduce payments into their pension systems, raise taxes – or when that doesn’t seem adequate – find themselves cutting services or laying off public workers.

It turns out that many municipalities weathered the 2008 recession without needing to take such extreme actions. Studying how these cities managed to recover more quickly than cities like Stockton provides interesting insight on what courses of action can help city officials better respond to fiscal distress.

A new Mercatus study examines the types of actions that public officials have taken under fiscal distress and then concludes with recommendations that could help future crises from occurring. Their empirical model finds that increased reserves, lower debt, and better tax structures all significantly improve a city’s fiscal health.

The authors, researchers Evgenia Gorina and Craig Maher, define fiscal distress as:

“the condition of local finances that does not permit the government to provide public services and meet its own operating needs to the extent to which these have been provided and met previously.”

In order to determine whether a city or county government is under fiscal distress, the authors study the actual actions taken by city officials between 2007 and 2012. Their approach is unique because it stands in contrast with previous literature that primarily looks to poorly performing financial indicators to measure fiscal distress. An example of such an indicator would be how much cash a government has on hand relative to its liabilities.

Although financial indicators can tell someone a lot about the fiscal condition of their locality, they are only a snapshot of financial resources on hand and don’t provide information on how previous policy choices got them to their current state. A robust analysis of a city’s financial health would require a deeper look. Looking at policy decisions as well as financial indicators can paint a more complete picture of just how financial resources are being managed.

The figure here displays the types of actions, or “fiscal distress episodes”, that the authors of the study found were the most common among cities in California, Michigan, and Pennsylvania. As expected, you’ll see that bankruptcy occurs much less frequently than other courses of action. The top three most common attempts to meet fundamental operating needs and service requirements during times of fiscal distress include (1) large across-the-board budget cuts or cuts in services, (2) blanket reduction in employee salaries, and (3) unusual tax rate or fee increases.

fiscal-distress-episodes

Another thing that becomes clear from this figure is that public workers and taxpayers appear to be adversely affected by the most common fiscal episodes. Cuts in services, reductions in employee salaries, large tax increases, and layoffs all place much of the distress on these groups. By contrast, actions like fund transfers, deferring capital projects, or late budget enactment don’t directly affect public workers or taxpayers (at least in the short term).

I decided to break down how episodes affected public workers and taxpayers for each state examined in the sample. 91% of California’s municipal fiscal distress episodes directly affected public employees or the provision of public services, while the remaining 9% indirectly affected them. Michigan and Pennsylvania followed with 85% and 66% of episodes, respectively, directly affecting public workers or taxpayers through cuts in services, tax increases, or layoffs.

Many of these actions surely happen in tandem with each other in more distressed cities, but it seems that more often than not, the burden falls heavily on public workers and taxpayers.

The city officials who had to make these hard decisions obviously did so under financially and politically intense circumstances; what many, including researchers like Gorina and Maher, consider to be a fiscal crisis. In fact, 32 percent of the communities across the three states in their sample experienced fiscal distress which, on its own, sheds light on the magnitude of the 2007-2009 recession. A large motivator of Gorina and Maher’s research is to understand what characteristics of the cities who more quickly rebounded from the Great Recession allowed them to prevent hitting fiscal crisis stage in the first place.

They do so by testing the effect of a city’s pre-existing fiscal condition on their likelihood to undergo fiscal distress. After controlling for things like government type, size, and local economic factors, they found that cities that had larger reserves and lower debt tended to weather the recession better relative to other cities. More specifically, declining general revenue balance as a percent of general expenditures and increases in debt as a share of total revenue both increase the odds of fiscal distress for a city.

Additionally, the authors found that cities with a greater reliance on property taxes managed to weather the recession better than governments reliant on other revenue sources. This suggests that revenue structure, not just the amount of revenue raised, is an important determinant of fiscal health.

No city wants to end up like Detroit or Scranton. Policymakers in these cities were forced to make hard choices that were politically unpopular; often harming public employees and taxpayers. Officials can look to Gorina and Maher’s research to understand how they can prevent ending up in such dire situations.

When approaching municipal finances, each city’s unique situation should of course be taken into consideration. This requires looking at each city’s economic history and financial practices, similar to what my colleagues have done for Scranton. Combining each city’s financial context with principles of sound financial management can surely help more cities find and maintain a healthy fiscal path.

Puerto Rico’s labor market woes

Puerto Rico – a U.S. territory – has $72 billion dollars in outstanding debt, which is dangerously high in a country with a Gross Domestic Product (GDP) of only $103.1 billion. The Puerto Rican government failed to pay creditors in August and this was viewed as a default by the credit rating agency Moody’s, which had already downgraded Puerto Rico’s bonds to junk status earlier this year. The Obama administration has proposed allowing Puerto Rico to declare bankruptcy, which would allow it to negotiate with creditors and eliminate some of its debt. Currently only municipalities – not states or territories – are allowed to declare bankruptcy under U.S. law. Several former Obama administration officials have come out in favor of the plan, including former Budget Director Peter Orszag and former Director of the National Economic Council Larry Summers. Others are warning that bankruptcy is not a cure-all and that more structural reforms need to take place. Many of these pundits have pointed out that Puerto Rico’s labor market is a mess and that people are leaving the country in droves. Since 2010 over 200,000 people have migrated from Puerto Rico, decreasing its population to just over 3.5 million. This steady loss of the tax base has increased the debt burden on those remaining and has made it harder for Puerto Rico to get out of debt.

To get a sense of Puerto Rico’s situation, the figure below shows the poverty rate of Puerto Rico along with that of three US states that will be used throughout this post as a means of comparison: California (wealthy state), Ohio (medium-wealth state), and Mississippi (low-wealth state). All the data are 1-year ACS data from American FactFinder.

puerto rico poverty

The poverty rate in Puerto Rico is very high compared to these states. Mississippi’s poverty rate is high by US standards and was approximately 22% in 2014, but Puerto Rico’s dwarfed it at over 45%. Assisting Puerto Rico with their immediate debt problem will do little to fix this issue.

A government requires taxes in order to provide services, and taxes are primarily collected from people who work in the regular economy via income taxes. A small labor force with relatively few employed workers makes it difficult for a county to raises taxes to provide services and pay off debt. Puerto Rico has a very low labor force participation (LFP) rate relative to mainland US states and a very low employment rate. The graphs below plot Puerto Rico’s LFP rate and employment rate along with the rates of California, Mississippi, and Ohio.

puerto rico labor force

puerto rico employ rate

As shown in the figures, Puerto Rico’s employment rate and LFP rate are far below the rates of the US states including one of the poorest states, Mississippi. In 2014 less than 45% of Puerto Rico’s 16 and over population was in the labor force and only about 35% of the 16 and over population was employed. In Mississippi the LFP rate was 58% while the employment rate was 52%. Additionally, the employment rate fell in Puerto Rico from 2010-14 while it rose in each of the other three states. So at a time when the labor market was improving on the mainland things were getting worse in Puerto Rico.

An educated labor force is an important input in the production process and it is especially important for generating innovation and entrepreneurship. The figure below shows the percent of people 25 and over in each area that have a bachelor’s degree or higher.

puerto rico gt 24 education attain

Puerto Rico has a relatively educated labor force compared to Mississippi, though it trails Ohio and California. The percentage also increased over this time period, though it appears to have stabilized after 2012 while continuing to grow in the other states.

Puerto Rico has nice beaches and weather, so a high percentage of educated people over the age of 25 may simply be due to a high percentage of educated retirees residing in Puerto Rico to take advantage of its geographic amenities. The next figure shows the percentage of 25 to 44 year olds with a bachelor’s degree or higher. I examined this age group to see if the somewhat surprising percentage of people with a bachelor’s degree or higher in Puerto Rico is being driven by educated older workers and retirees who are less likely to help reinvigorate the Puerto Rican economy going forward.

puerto rico 25to44 educ attain

As shown in the graph, Puerto Rico actually fares better when looking at the 25 – 44 age group, especially from 2010-12. In 2012 Puerto Rico had a higher percentage of educated people in this age group than Ohio.

Since then, however, Puerto Rico’s percentage declined slightly while Ohio’s rose, along with Mississippi’s and California’s. The decline in Puerto Rico was driven by a decline in the percentage of people 35 to 44 with a bachelor’s or higher as shown in the next figure below.

puerto rico 35to44 educ attain

The percentage of 35 to 44 year olds with a bachelor’s or advanced degree fell from 32% in 2012 to 29.4% in 2014 while it rose in the other three states. This is evidence that educated people in their prime earning years left the territory during this period, most likely to work in the US where there are more opportunities and wages are higher. This “bright flight” is a bad sign for Puerto Rico’s economy.

One of the reforms that many believe will help Puerto Rico is an exemption from compliance with federal minimum wage laws. Workers in Puerto Rico are far less productive than in the US, and thus a $7.25 minimum wage has a large effect on employment. Businesses cannot afford to pay low-skill workers in Puerto Rico such a high wage because the workers simply do not produce enough value to justify it. The graph below shows the median individual yearly income in each area divided by the full time federal minimum wage income of $15,080.

puerto rico min wage ratio

As shown in the graph, Puerto Rico’s ratio was the highest by a substantial amount. The yearly income from earning the minimum wage was about 80% of the yearly median income in Puerto Rico over this period, while it was only about 40% in Mississippi and less in Ohio and California. By this measure, California’s minimum wage would need to be $23.82 – which is equal to $49,546 per year – to equal the ratio in Puerto Rico. California’s actual minimum wage is $9 and it’s scheduled to increase to $10 in 2016. I don’t think there’s a single economist who would argue that more than doubling the minimum wage in California would have no effect on employment.

The preceding figures do not paint a rosy picture of Puerto Rico: Its poverty rate is high and trending up, less than half of the people over 16 are in the labor force and only about a third are actually employed, educated people appear to be leaving the country, and the minimum wage is a severe hindrance on hiring. Any effort by the federal government to help Puerto Rico needs to take these problems into account. Ultimately the Puerto Rican government needs to be enabled and encouraged to institute reforms that will help grow Puerto Rico’s economy. Without fundamental reforms that increase economic opportunity in Puerto Rico people will continue to leave, further weakening the commonwealth’s economy and making additional defaults more likely.

 

 

Are you ready for some (subsidized) football?

This weekend marks the start of the NFL season, and with it comes the fanfare and attention that being the most lucrative professional sport in America has come to demand.  However, this success has fueled the lucrative stadium financing deals that have been secured by these teams over the past 20 years, often at the expense of taxpayers.

Olympic Stadium London - Anniversary (Blended)Take, for example, the stadium deal given to the Cincinnati Bengals by Hamilton County in Ohio. Still the most lucrative subsidy in the history of professional football, taxpayers were left paying 94 percent of the $449.8 million tab. This amount doesn’t include other costs in the generous lease, such as the agreement by the county to cover all of the costs of operation and capital improvements. The lease also leaves taxpayers on the hook to fund projects that have not even been invented yet, such things as “ticketless entry systems,” “stadium self-cleaning machines,” and even “holographic replay machines.”

The Cincinnati Bengals are certainly not alone in getting these sorts of publicly-funded gifts. The Buffalo Bills recently obtained $95 million in subsidies for stadium upgrades.  In return, the state of New York will be given a luxury suite to promote the sorts of corporate handouts that the state can give to other businesses.  Meanwhile, the Atlanta Falcons will receive $200 million from the city of Atlanta toward a new stadium, funded through bonds backed by the city’s hotel-motel tax.  The Kansas City Chiefs and the Carolina Panthers have also recently received generous taxpayer-funded stadium deals.  The list goes on.  Nearly every NFL stadium built since 1997 has received some public funding.

And what do these deals really do to promote economic development?  Almost nothing.  According to economists Robert Baade and Victor Matheson, researchers looking into the economic impact of new sports facilities “have almost invariably found little or no economic benefits.”  This should come as no surprise to economists and policymakers.  Dennis Coates and Brad Humphreys have surveyed the literature and found “a great deal of consistency among economists doing research in this area. That . . . sports subsidies cannot be justified on the grounds of local economic development, income growth or job creation.”

Why, then, do politicians continue to hand out these privileges at the taxpayers’ expense? One answer is that these sports teams are well-connected and well-organized, giving them an inherent lobbying advantage over a multitude of unorganized taxpayers.  For example, the owner of the Miami Dolphins has created an active political group to attack lawmakers he blames for a failed measure to provide taxpayer support for a $350 million upgrade to Sun Life Stadium.

Another possible explanation is that people love their hometown teams, and most politicians are eager to associate themselves with anything that appears popular.  Even if that means giving these teams handouts at the taxpayers’ expense.

So as the football season begins and continues to play out over the next 6 months, you ought to take some time to enjoy your hometown team.  Odds are, you are already paying for it.

Fiscal Tactics and the Columbia Pike Trolley

The Columbia Pike Trolley does not have a reputation for popularity among some local residents of Arlington County, VA. In a previous post, I noted the concerns voiced on local blogs and community boards that the $261 million trolley is several times more expensive than the alternatives. In addition, it is feared the trolley will not relieve congestion but will interrupt spontaneous economic development. The Green Party calls it, “the urban renewal trolley for the rich.” Part of the economic development plan involves demolishing older apartment buildings, raising rents.

How will officials try to finance the streetcar?  The plan requires the majority of funds come from local sources (seed money is being provided by a federal program). One possibility is they will dodge voter approval by raising revenue bonds instead of general obligation bonds (GO bonds). The reason is that in order to issue GO debt (which is backed by the full faith and credit of the government), the County would need to put the bond issue on the ballot. But they are worried about voters rejecting it. Revenue bonds don’t require voter approval since they are backed by an independent revenue stream; in this case, future revenues from the government’s surcharge on commercial real estate.

Locals may not have their chance to approve or reject the project, however. The Arlington Sun Gazettte reports that according to Virginia law Arlington as a county – not a city – government, “does not have the power to have a referendum on a topic or subject matter, like cities [do].” The decision to move forward or stop the project thus rests with the County Board.

Map of proposed Columbia Pike streetcar system

The plan is an example of what I define as “fiscal evasion.” These are maneuvers governments employ to defer or obscure the full costs of spending by evading rules or constructing loopholes. Not to be confused with venal gimmicks, fiscal evasion is often built into the rules. It is undertaken by, “circumventing statutory or constitutional budget rules, or through the weak design of such rules.”  In other words this approach is perfectly legal. Since revenue bonds don’t need voter approval revenue bonds present the “funding path of least resistance,” from the viewpoint of trolley advocates.

 

 

The True Cost of the Columbia Pike Trolley: Priceless

A proposal to build a trolley car system on Columbia Pike in Arlington, Virginia continues to provoke strong reactions from residents. The County Board estimates it will cost between $214 million and $261 million to build and between $19.5 million and $25 million to operate and maintain.

As the PikeSpotter calculates, that’s $200 million more to build than the next best option: an enhanced bus line. Why the County Board’s push for a $50 million per mile streetcar system?

According to advocates, the Pike Transit proposal will relieve area congestion, spur economic activity and promote environmental sustainability.

However, residents from all sides of the political spectrum appear to disagree with the County Board. Arlington Yupette says the Pike Transit plans are “elitist” and intended to drive out middle class and working class residents by driving up rents. The end result: the “Clarendonization” of South Arlington. Some point to the need for resources to be directed to the overcrowding in county schools. And still others highlight the high likelihood of such projects becoming boondoggles.

Given the anecdotal lack of popular support expressed by area residents, why are officials persisting? Public finance holds a key. Should the county go ahead and commit to build a rail line here is how it will be financed. Thirty percent of funds will come from the  New Starts/Small Starts federal grant program and 14 percent from the state of Virginia. The remainder is to be provided by Arlington and Fairfax Counties.

Is this fiscal illusion at play? The Small Starts Program will provide up to $75 million if the local government provides a match. County Board officials are confident that Arlington and Fairfax can foot $140 million (Arlington will pay 80 percent of that) with the state of Virginia kicking in a further $35 million. Because a chunk of the cost of building the rail line can be externalized, that is, passed on to state and federal taxpayers, it looks like a bargain…at least for a fleeting moment. It’s still about $170 million dollars more than what it would cost to add more buses.

And there are more complications that arise from mingling federal, state and local dollars as noted by the Sun-Gazette. Virginia is a right to work state. Are union employees required to work on the rail line since the project will receive federal dollars? If yes then the increased labor costs will make the project even more costly to the county. (Lieutenant Governor Bolling believes Virginia state law trumps federal law in the matter.)

While new estimates continue to push the costs higher, at least one Arlington County Board member is undeterred by fiscal considerations, “This is a project that has the most potential to help us achieve our environmental goals and livability goals. We think it will have a very high return.”

That is, the costs of building the streetcar line are concrete, and the returns are mired in the counterfactual.

 

 

 

Why Are Cell Phone Taxes So High?

Nationwide, combined federal, state, and local taxes on cell phone services average more than 16 percent. That makes a cell phone one of the highest taxed goods around. Cell phone taxes are even higher than beer taxes.

Why?

Image by Carlos Porto

My colleague, Thomas Stratmann, and I attempt to answer that question in our latest working paper. Most of the conventional rationales for above-average taxation just don’t apply: cell phones don’t have obvious negative externality characteristics, they are no longer luxury goods, and consumers are not particularly insensitive to price changes.

So why would policy makers choose to tax them so much? Part of the answer is that no single politician does choose to tax them that much. Instead, the high taxes that we pay on our cell phones are the sum of lots of little taxes imposed by several different political entities. Consider, for example, the tax bill of a typical New Yorker. It includes a federal USF fee, four state taxes, five city taxes, and a local 9-1-1 fee. Each of these is relatively small, but when you add it all up, the combined rate is over 22 percent.

We believe that this pattern of taxation is characteristic of what Columbia Law School Professor Michael Heller has called a “tragedy of the anticommons.”

In the better-known tragedy of the commons multiple parties have the right to use one resource and tend to over-use it since they fail to account for the way that their use harms others (think of the ocean; it’s owned by everyone and is over-fished). In a tragedy of the anticommons, however, multiple parties have the right to exclude others from using a resource by taxing or somehow regulating its use.

Heller points to the Rhine river as a classic example. Under the Holy Roman Empire only one party–the Empire–had the right to tax trade on the river. The government was careful, then, not to over-tax (over-exclude) trade. But once the Empire fell, multiple barons gained the right to tax trade (p. 3):

The growing gauntlet of “robber baron” tollbooths made shipping impracticable. The river continued to flow, but boatmen would no longer bother making the journey. . . . For hundreds of years, everyone suffered—even the barons. The European economic pie shrank. Wealth disappeared. Too many tolls meant too little trade.

Like the barons on the Rhine, multiple parties have the power to tax cell phones: Federal, state, county, city, and special district coffers all tax the base. In many cases, multiple taxes apply even at one level of government (e.g. five taxes levied by the city of New York).

We test the anticommons theory using variation in tax rates and taxing entities across the states. We write:

The anticommons problem has two dimensions. First, the mobile-service tax base funds numerous distinct projects at each level of government. Second, the base is taxed by numerous overlapping levels of government. We use state-level data from three years to examine the possible economic, demographic, and political factors that might explain the variation in these rates. We find that wireless tax rates increase with the number of overlapping tax bases.

Pension costs rising in local governments

Long Island villages are contending with increasing contributions to the state pension system. They expect to be billed $1.2 billion this fiscal year for school district employees, public workers, police and firefighters. Maryland counties can expect to begin footing part of the pension tab for teachers in a cost-sharing plan put forth by Governor O’Malley. And Rhode Island municipalities are asking the governor for increased state aid to fill their pension shortfalls and budget deficits.

What is worth noting in all of these cases is how this funding crisis highlights both the importance of accurate accounting, and the fiscal relationship between the state and local governments. Where localities participate in the state plan but do no make annual contributions (as in Maryland), there is a tendency for fiscal illusion to take over. The plans seem inexpensive and thus counties may end up expanding other parts of the county budget. Billing local governments for their portion of the pension tab makes for good fiscal discipline and transparency.

In the case of Long Island, the costs are already shared between the state and local governments. Rhode Island municipalities participate in the state run plan and in many cases operate their own local plans. Here the problem is the same as it is across the country – pension promises have been undervalued and thus underfunded. Costs are rising fast. State and local governments are going to be sharing in the growing burden in the form of higher taxes, service cuts and/or increased debt. Pension plans will be reformed and restructured. But the first step must be an accurate accounting as we found in our recent research on New Jersey.

In New Jersey pension costs are shared between the local and state governments. As with all plans the costs are obscured for the purposes of accounting leaving a good portion of the mounting expense off the books. Accounting choices that push costs forward or hide them altogether have turned pension funding into a looming nightmare for city governments, public sector workers and taxpayers across the country.

Maryland’s New Budget Proposal

Maryland’s fiscal challenges did not occur over night and, in fact, the state has been running structural deficits for the past several years. The Governor’s recent proposal to balance the state’s budget consists of two major components: (1) having the state share the costs of the teachers’ pension system with county level governments and (2) modifying the state’s tax code.

Cost Sharing:

As the system currently stands, local governments in Maryland determine teacher salaries but the state, however, picks up the entire cost of teacher pensions. The Governor’s proposal would essentially split these costs – the state would continue to pay for a portion of the teachers’ pension costs but county governments would also pick up a portion of the cost. Although some consider this to be an extreme reform, the principle behind the reform is really not that severe.

When the average family in the U.S. makes their budget for the week or the month they must include everything they spend money on – groceries, gas, health insurance, and etc. Governor O’Malley is essentially asking county governments to do the same. He is asking units of local government to budget for what they spend money on, which includes teacher pensions.

This proposal is definitely a step in the right direction. Splitting the cost of pensions with the county governments introduces more transparency and accountability into the teachers’ pension system. More importantly, cost-sharing introduces a better sense of fiscal discipline for county level budgeting.

Tax Code:

The second component of the Governor’s proposal consists of modifying the state’s tax code – increasing the tobacco tax, getting rid of tax loopholes in the mining industry, implementing a tax on internet sales, and changing the tax structure for high income earners. There seems to be some confusion on this final point. To be clear, as I understand it, this is not an increase in the tax rate but rather it’s a decrease in the number of tax exemptions for high income earners.

Some of these ideas are certainly better than others, but what’s important about these tax reforms is that Governor O’Malley is seemingly trying to introduce neutrality into the tax code. If this is in fact what he is trying to do, then it’s a step in the right direction. State’s that introduce neutrality and generality in their tax code by getting rid of tax loopholes, reducing the number of exemptions, and broadening their tax base have been able to lower tax rates while increasing revenues.

Taking Reform a Step Further:

The Governor is taking Maryland in the right direction by introducing structural reform into the state’s budgeting process. This budget proposal, however, is only one of many steps that need to be taken. If Maryland really wants to get its fiscal house in order it needs to continue focusing on institutional reform. One reform, for example, that the Governor should consider is implementing an effective spending limit – specifically, one that ties spending growth to the sum of population growth and inflation.

For more on this topic, watch my recent interview with Fox-5 news:

Gov. O’Malley Outlines $311 Million in New Revenue for Maryland: MyFoxDC.com

Daycare unionization debate in Minnesota

A debate has been taking place in Minnesota over whether in-home day care providers should be able to unionize. Unionization of self-employed individuals raises a few questions. With whom do they negotiate? In other words, “How can you be the employer [the business owner] and a union employee?” According to the pro-unionization providers their complaint is not with the parent-client but with the state (and county) and its regulations. A provider may be cited for any number of small infractions such as not having a cover on a trash cash. When cited, in the case of Minnesota, such a blemish doesn’t just stay on the provider’s record, it must be posted on the owner’s front door for two years.

But is unionization the answer?

Daycare providers already have a state association to represent their interests. Few owners have actually been cited under these regulations. And unionization will result in dues that will raise prices for parents, as well as more state involvement in the owner’s business. An effort to stop unionization is also underway.

Since 2005, 15 states have organized childcare providers. The main fiscal outcome of daycare unionization is higher state-provided subsidies.

Washington state child care providers are represented by the SEIU which negotiates with Olympia over subsidy rates for providers as well as health insurance plans.

In 2009, providers in Washington received a state subsidy between $18 and $40 a day, per child, depending on the county. According to the SEIU’s 2009-2011 agreement with the state, both parents and providers are affected. Daycare providers who refuse to join the union for religious reasons must still pay dues. Rates are set for different age groups of children, (e.g. Infants are 15% higher than the Toddler/Preschool rate). After ten hours of childcare any additional hour is equal to one half day of child care.

The agreement also affects all taxpayers in the state. The state pays monthly contributions to provider’s health care plan ($588.8 per month per provider in 2010) for a total of $366,894 per month for all daycare providers. A further $175,000 is set aside by the state for training classes for providers. The result of unionization is not what advocates suggest. Instead flexibility is decreased for owners and clients to come to terms over hours, rates and arrangements while the ever-increasing costs are passed to everyone.

NYC Taxi Reform Doesn’t Go Far Enough

Next week, New York Governor Cuomo is likely to sign a bill that will marginally increase competition in the NYC cab market. The new rule will allow passengers to hail some livery cars in outer boroughs and add 2,000 additional medallions for yellow cabs with wheelchair access.

Via Flickr user Ian Caldwell

The auction of these medallions  is projected to raise $1 billion. This figure might seem outlandish, but last month two medallions sold at auction for over $1 million. That’s right, it costs $1 million for the right to drive a cab in NYC, not accounting for any of the costs associated with owning and operating the vehicle.

The price tag of these medallions that are sold to the highest bidder demonstrates that in a free market, many more drivers would enter the cab industry. Artificially constraining the supply hurts both consumers and those who are not able to drive a cab because they are unable to purchase a medallion.

Unsurprisingly, the Metropolitan Taxicab Board of Trade remains strongly opposed to this bill. The increase in the supply of medallions will lower the value of the medallions that cab drivers and larger medallion companies already own. Their lobbying efforts reflect their desire to profit through the political system.

While this increase in the number of medallions available for yellow cabs and allowing some livery cars to be hailed represents a small improvement for New Yorkers, the reform does not go nearly far enough. For real reform, Mayor Bloomberg should look to Indianapolis.

Before Stephen Goldsmith was elected as the city’s mayor in 1991, the number of cabs permitted in Indianapolis was limited to 392. Goldsmith created a Regulatory Study Council whose first project was to reform taxi regulations. The RSC recommended eliminating regulatory barriers to entry and allowing cab drivers and companies to determine their own prices. In a case study of regulatory reform in Indianapolis, Adrian Moore writes:

The main resistance came from existing taxi companies, and initially much of the city and county council sided with them in the name of the “public interest.” However, the support for reform by seniors, the inner city poor, minorities, the Urban League, and the disabled soon brought many of them over to the RSC’s side. The RSC expected little support from Democrats on the council, but the strong support for deregulation from that party’s traditional constituents turned the tide.

Some price controls remain in the Indianapolis taxi market, but the city has seen an increase in supply, a decrease in fares, and an improvement in service. Indianapolis and New York City are of course very different, but the laws of supply, demand, and rent-seeking are the same everywhere. By phasing out the medallion system, New York City would benefit consumers and allow many more people to make a living driving cabs. Medallion owners who have invested in some cases over $1 million in the current system would need to be compensated in some way, but not by continuing to profit at the public’s expense.