Tag Archives: Eileen Norcross

Will We Learn From Greece?

A few weeks ago Thomas Hoenig, the president of the Federal Reserve Bank of Kansas City, warned, “Greece is a lesson for us…. We shouldn’t be so arrogant to think that that couldn’t happen to us.” Mr. Hoenig was talking about our “very, very significant deficit” at the federal level.

Mr. Hoenig is right to worry about the Federal Government’s financial footing, but as a growing number of commentators have argued, the comparison between Greece and the U.S. states may be more apt than that between Greece and the U.S. Federal Government.

Like Greece, nearly every state in the union faces a major budget gap. The National Governors Association and the National Association of State Budget Officers estimate that these gaps total $127.4 billion for the remainder of 2010, 2011 and 2012. Like Greece, these gaps manifested themselves during the recession but their underlying cause is unsustainable levels of government spending. Like Greece, the states have made unrealistic promises to their public employees in the form of unfunded pensions and health benefits. Like Greece, these promises loom as the single largest threat to fiscal solvency in the coming years. And like Greece, the states have a limited number of ways to deal with the situation: they may not declare bankruptcy and they may not inflate their way out of the mess.

In both situations, however, the governments can appeal to the next level of government for aid. In the US, the states received some $135 billion from the Federal Government in the stimulus package passed last spring. And in Europe, the EU has promised to bail out Greece to the tune of $146 billion. These actions send the signal that the US and the EU apparently think that some governments are too big to fail. They also establish a strong incentive for US state and EU member nations to live beyond their means.

The Economist recently noted another similarity between Greece and the US states: as in Greece, many leaders at the state government level are reluctant to make the tough choices necessary to deal with the problem.

This last comparison, however, may prove false. That is because the Greeks may finally be on the verge of addressing their problem. This week, the ruling Socialist Party, PASOK, unveiled their reform proposals and on Friday, the government agreed to the bill. According to Reuters, “The reform cuts benefits, curbs widespread early retirement, increases the number of contribution years from 35-37 to 40 and raises women’s retirement age from 60 to match men on 65.”

My colleague Eileen Norcross has just written a paper with AEI’s Andrew Biggs which reveals the scope of the pension problem in the state of New Jersey. They found that the pension system there is underfunded by as much as $170 billion. Note that this one state’s pension problem dwarfs the $127.4 billion sum total of all state budget gaps over the next two and a half years.

Worse, these unfunded liabilities will come due soon. A series of studies by Joshua Rauh (Northwestern) and Robert Novy-Marx (University of Chicago) find that seven states will run out of pension money by 2020. And when they do, the costs will be enormous. When Illinois’s pension system goes broke in 2018, for example, the state’s pensions costs will be nearly half the size of the entire 2008 state budget.

If Mr. Hoenig is right and Greece is a lesson, let’s hope that policy makers in the US learn it before the pension crisis hits.

Budget Gimmicks Exposed

Megan McArdle writes:

There’s a saying I’ve heard from accountants:  recessions uncover what auditors can’t…. I supect that this is also the case with the emerging epidemic of governments who cooked the books.  Hungary is the latest culprit, and its official pronouncements are starting to sound, well, worryingly Greek.

Stay tuned. Veronique de Rugy and Eileen Norcross have taken on the brave task of trying to codify the respective ways in which federal and state legislators play tricks with their budgets and evade fiscal responsibility. Look for their papers soon.

Unintended Consequences, Cul-de-sac Edition

Via Seth Goldin’s Twitter Feed, the unintended consequences of cul-de-sacs:

Though suburban cul-de-sacs have long been attractive as quiet, safe places for families, their disadvantages are becoming clear. One of the biggest problems is interference with motor- and foot-traffic flow. Research by Lawrence Frank, Bombardier Chair in Sustainable Transportation at the University of British Columbia, looks at neighborhoods in King County, Washington: Residents in areas with the most interconnected streets travel 26% fewer vehicle miles than those in areas with many cul-de-sacs. Recent studies by Frank and others show that as a neighborhood’s overall walkability increases, so does the amount of walking and biking—while, per capita, air pollution and body mass index decrease.

Last year, Eileen Norcross wrote about Virginia’s ban on future cul-de-sacs, arguing for internalizing the externalities associated with them rather than banning them outright.

A Strange Tale of Education Budgets

Maine’s legislature recently engaged in a strange exercise. A representative introduced a bill to eliminate local referenda on educational budgets. The bill read in part:

A regional school unit’s budget must be approved at a regional school unit budget meeting and by a budget validation referendum as provided in section 1486.

The very next day, the bill’s sponsor disavowed the measure, after he was inundated by constituent mail opposing the proposal. After hearing Representative Howard McFadden’s mea culpa, the education committee unanimously voted the bill down, allowing localities to retain control of local education spending.

The issue was far from dead, however. The education committee was also considering a separate bill which contained a referendum-killing provision, ostensibly to enable easier school-consolidation measures.

Ultimately, a “tidal wave” of constituent input convinced the education committee to unanimously abandon the measure. For now Mainers retain the right to control local education spending, and judging by the hue-and-cry voters raised, by a significantly popular margin.

School consolidation in Maine is problematic. The state is divided into two radically different polities. Southern/Coastal Maine is relatively affluent and densely populated, while Northern and Central Maine are sparsely populated and less affluent.

Consolidation makes sense in many respects, but the economics are questionable. Some towns, like Fayette, have no higher education facilities, but have a voucher-style tuition system to send students to any of the surrounding high-schools, including a local private high school.

This kind of school choice introduces a modicum of competition into local systems, and allows families to choose the school that is best suited to their particular needs.

Instead of removing local control via consolidation measures, Maine’s education committee should consider measures introducing more personal and local choice.

Previously on Neighborhood Effects, Emily Washington wrote about education competition and Eileen Norcross detailed the struggles of D.C.’s controversial voucher system. Eileen also recently co-authored an issue of Mercatus On Policy on educational competition.

(H/T Maine Heritage Policy Center.)

“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.

The “Right Size” for Local Governments

On NPR today, Morning Edition featured a story about peace officers in Texas, which number one per 330 state residents. The reporter tosses out this fact and then goes on to report on something basically unrelated: the number of police forces in the state.

The story begins skeptically:

Texas has so many police officers, some lawmakers are worried there are too many.

Among the many entities in Texas that have their own peace officers is the State Board of Dental Examiners. But you won’t generally hear these officers saying “Stop, put your hands up! Dental police!”

[…]

It turns out Texas is just full of small, specialized police forces: the State Insurance Department has one, as do the Lottery and Racing commissions, the Pharmacy Board, and a handful of water districts.

But the story ends on a very different note, profiling Gary Patterson, the police chief (and only officer) in the Blooming Grove Independent School District:

Patterson patrols the halls of Blooming Grove High School — home of the Fighting Lions — a benign figure in his blue police shirt with a tonsure of white hair and a shambling gait. After a long career as a dispatcher for the state troopers, Patterson came back to the town where he grew up.

“You’re kind of like a father or grandfather figure to a lot of them,” Patterson says. “Cause you’ve known them since they were in elementary and you’ve kind of grown up with them.”

It would be easy to criticize his position as one more example of superfluous Texas peace officers — until you follow him around the school. He knows the kids by name. He knows their parents. He knows what’s going on in their lives. He knows why they’re in trouble.

This story reflects a point made by Eileen Norcross and Frederic Sautet here, and by Robert Nelson here: in the public sector, where there are no prices to convey information, hence making benefits and costs hard to weigh, there is no universally correct number or size of local government entities.

It’s easy to scoff at the idea of a single-person police force for a three-campus school district. We likely assume that there are non-trivial fixed costs associated with running a school district police department, so economies of scale could be achieved by just having, say, a county sheriff’s deputy police the school. But we don’t really have the information necessary to make that call, and certainly not from the vantage point of a state capitol or the ivory tower.

So the bottom line: be skeptical when you hear “common sense” pleas to eliminate small local government entities like one-man police forces. There may well be a case for eliminating them, but proponents of elimination cannot just assume that economies of scale are achievable — and they cannot discount local knowledge as worthless.

California Also Selling State Buildings

California has joined Arizona in selling state buildings to the private sector which they then lease back in order to inject cash into the state’s treasury today. The state believes the move will raise some $2 billion in cash:

As the California economy roared in the 1990s and tax revenues poured into a treasury overseen by Gov. Pete Wilson, the state laid plans for a series of new office buildings in Sacramento to spare itself from paying rent to other landlords.

Barely a decade later, the Schwarzenegger administration is launching a process to sell many of the same buildings that were originally touted as long-term money savers for taxpayers. The goal today is more immediate: pay off debt and steer cash into the state’s depleted general fund. It’s among a variety of short-term crisis solutions that include selling surplus state property, moves also being undertaken in cash-strapped Arizona.

In California, 11 state-owned sites with an estimated value of almost $2 billion will be listed for sale in early 2010 to pay off about $1.4 billion in bonds and net another $600 million “to support other critical state government programs,” said state Department of General Services spokesman Eric Lamoureux.

The state wouldn’t move out of the buildings; it would continue to lease them from the new owners.

Eileen Norcross previously wrote about Arizona’s plan to sell and lease back their state capitol. The Daily Show also covered it.

New Orleans Blight Update

The Greater New Orleans Community Data Center released a new data brief comparing blight in New Orleans to that of other cities around the country:

Nearly 66,000 residential addresses across New Orleans are unoccupied. A relatively small portion of these (7,000) are “vacant” according to the post office, indicating that they are likely habitable residences that have not been purchased or rented. Post office data suggests that the remainder – approximately 59,000 residential addresses – are blighted or represent empty lots. With less than 12,000 permits issued by City Hall for demolitions, the high number of abandoned or blighted residential buildings, can suppress home values and burden the city’s overall redevelopment efforts.

They include this graphic comparing New Orleans with other major cities:

Blight_700

Eileen Norcross has argued that to fight blight, it’s important that property in the New Orleans area being held by the city and state be moved into private hands as quickly as possible.

In other New Orleans land use news, recovery czar Ed Blakely has announced he’s quitting his job and moving back to Australia; Stephanie Grace assesses his tenure.

Federal Transfers Top State and Local Revenues

USA Today reports that the federal government has overtaken sales, property, and income taxes to be the largest source of revenue for state and local governments:

The shift shows how deeply the recession is cutting. Federal stimulus money aimed at reviving the economy and a sharp drop in tax collections have altered, at least temporarily, the traditional balance of how states, cities, counties and schools pay for their operations.

The sales tax had been the No. 1 source of state and local revenue since the mid-1970s, according to the Bureau of Economic Analysis. Before that, property taxes were the primary source. That changed in the first three months of 2009.

Federal grants — early stimulus money plus conventional federal aid — soared 15% in the first quarter to a seasonally adjusted annual rate of $437 billion, eclipsing sales taxes, which fell 2%.

Here’s Len Gilroy on this story. Here are data from the Tax Policy Center on state revenues by category (albeit from 2006). Here are Eileen Norcross and Frederic Sautet on the longer-term ramifications of increasing intergovernmental transfers.

State budgets and the stimulus

As the American Recovery and Reinvestment Act (aka the Stimulus Bill) moved out of the House of Representatives yesterday, Eileen Norcross and Frederic Sautet released a new paper questioning the long-term ramifications of this package on states’ budgets.

While federal grants may provide temporary relief for state budgets, the size and scope of the proposed spending will worsen already-distorted state and local fiscal practices while creating perverse incentives inducing greater public spending with scarce state funds. By fracturing the link between those who benefit (local constituencies) and those who pay (federal taxpayers), ARRA reduces government accountability on all levels and ultimately erodes local control over policy by imposing federal solutions on local problems.

Instead of attempting a short-term fix of amplifying the grant system through an emergency stimulus package, the federal government should work to make state and local governments accountable for their own spending decisions. This means reducing states’ and localities’ reliance on federal funding for local priorities and allowing local activities to be addressed by the appropriate mechanisms: state and local governments and the private and philanthropic sectors.

Also of interest, the Wall Street Journal has a breakdown by state on each of four proposed spending categories: aid to states, school and college modernization, job training, and transportation and infrastructure.

Finally, Nicole Gelinas has some analysis of last-minute changes to the House-approved package as they relate to state and local infrastructure investment.