Tag Archives: Hawaii

Third Edition of Freedom in the 50 States

Today the Mercatus Center released the third edition of Freedom in the 50 States by Will Ruger and Jason Sorens. In this new edition, the authors score states on over 200 policy variables. Additionally, they have collected data from 2001 to measure how states’ freedom rankings have changed over the past decade. While several organizations publish state freedom rankingsFreedom in the 50 States is the only one that measures both economic and personal freedoms.

Ruger and Sorens have implemented a new methodology for measuring freedom. While previously the authors developed a subjective weighting system in which they sought to determine how significantly policies limited the freedom of how many people, in this edition they have use a victim-cost method, assigning a dollar value to each variable that restricts freedom measuring the cost of restricting freedom for potential victims. The authors’ cost calculations are designed to measure the value of the states’ freedom for the average resident. Since individuals measure the cost of policies differently, readers can put their own price on each freedom variable on the website to find the states that best match their subjective policy preference.

In addition to an overall freedom ranking, Freedom in the 50 States includes a breakdown of states’ Fiscal Policy Ranking, Regulatory Ranking, and Personal Freedom Ranking. On the overall freedom ranking, North Dakota comes in first followed by South Dakota, Tennessee, New Hampshire, and Oklahoma.  At the bottom of the ranking, New York ranks worst by a significant margin, with rent control and burdensome insurance regulations dragging down its regulatory freedom score. New York is behind California at 49th, then New Jersey, Hawaii, and Rhode Island.

The authors note that residents respond to the costs of freedom-reducing policies by voting with their feet. Between 2000 and 2011, New York lost 9% of its population to out-migration. In addition to all types of freedom being associated with domestic migration, the authors find that regulatory freedom in particular is associated with states’ growth in personal income. They conclude:

Freedom is not the only determinant of personal satisfaction and fulfillment, but as our analysis of migration patterns shows, it makes a tangible difference for people’s decisions about where to live. Moreover, we fully expect people in the freer states to develop and benefit from the kinds of institutions (such as symphonies and museums) and amenities (such as better restaurants and cultural attractions) seen in some of the older cities on the coasts.

[…]

These things take time, but the same kind of dynamic freedom enjoyed in Chicago or New York in the 19th century — that led to their rise — might propel places in the middle of the country to be a bit more hip to those with urbane tastes.

New Edition of Rich States, Poor States out this Week

The fifth edition of Rich States, Poor States  from the American Legislative Exchange Council is now available. Utah took the top spot in the ranking of states’ economic competitiveness, as it has every year the study has been produced. Utah excels in the ranking system because it is a right-to-work state, it has a flat personal income tax, and no estate tax, among other factors considered in the study.

The other states that round out the top ten for Economic Outlook include South Dakota, Virginia, Wyoming, North Dakota, Idaho, Missouri, Colorado, Arizona, and Georgia. On the bottom end of the ranking, the states with the worst Economic Outlook are Hawaii, Maine, Illinois, Vermont, and New York at number 50 for the fourth year in a row.

Several measures of economic competitiveness offer supporting evidence that these states have some of the worst policies for business including Mercatus’ Freedom in the 50 States and the Tax Foundation’s State Business Tax Climate Index.

The authors of Rich States, Poor States, Arthur Laffer, Stephen Moore, and Jonathan Williams demonstrate Tiebout Competition in action. They find a strong correlation between the states that have high Economic Outlook rankings with the states that are experiencing the highest population growth through domestic migration. Likewise, the states that experienced the largest losses due to out-migration include Ohio and New York, ranking 37th and 50th respectively.

The study draws attention to the role that unfunded pension liabilities play for states’ future competitiveness, as this debt will require difficult and unpopular policy decisions as current tax dollars have to be used to fund past promises. Laffer, Moore, and Williams draw a comparison between Wisconsin’s recent reforms that put it on a more sustainable path compared to its neighbor Illinois:

In stark contrast to Wisconsin’s successes, the story in Illinois is not so uplifting. Over the last 10 years, Illinois legislators have continuously ignored the pension burden in their state—so much so that Illinois has one of the worst pension systems in the nation, with an estimated unfunded liability ranging from $54 billion to $192 billion, depending on your actuarial assumptions. Furthermore, the official state estimates do not include the $17.8 billion in pension obligation bond payments that are owed. In addition, Illinois policymakers have spent beyond their means, borrowed money they don’t have, and made promises to public employee unions that they cannot fulfill. Not only did Illinois face significant unfunded pension liabilities, but also lawmakers had to confront large deficits and potential cuts to state programs.

While the policies that improve state economic competitiveness are clear, the path to achieving them is difficult after voters grow accustomed to programs that their states cannot afford. However the bitter medicine of reform is worthwhile, as we know that economic freedom is not only better for business, but evidence shows it also improves individuals’ well-being.

Local Governments in the United States

From an article in Stateline:

There are 89,476 local governments in the United States. They include counties, cities, villages, towns and townships, as well as special districts that handle utilities, fire, police and library services.

The authors of this article look at the number of local governments in each state relative to its population, finding that the average for the United States is 3,451 people per unit of local government. North Dakota (249), South Dakota (411), and Nebraska (687) were on low end of the spectrum whereas Hawaii (71,595), Maryland (22,553) and Virginia (15,658) where on the high end.

Illinois, in particular, finds itself in an interesting situation in this data. Although the state has only 1,835 people per unit of local government, its total number of local governments (6,944) is far greater than any other state. To put this into perspective, Pennsylvania (4,871) and Texas (4,835) rank second and third, respectively, for states with the highest number of local governments.

So what explains the proliferation of local governments in Illinois? One likely cause is a debt loophole in the state’s constitution. Specifically, the 1870 Illinois Constitution limited the amount of debt that a unit of local government could issue but allowed localities a dodge: the special district. In other words, each unit of local government was allowed to get around its legal debt limit via the creation of a special district. Since that time, the state has created 3,249 special districts. This phenomenon of special district creation as tool for expanded fiscal reach is investigated by Bennett and DiLorenzo in their book, Underground Government.

Does Illinois’s situation suggest the need for consolidation? If so, what is the optimal number of governments for a state to have and how is this determined? It’s not necessarily obvious at first glance: what are these governments, how did they arise, what do they do, and how do they finance their operations?

The concept of consolidating governments to increase efficiency has been the root of much debate in public policy. However, as Ostrom, Tiebout, and Warren argue,

It would be a mistake to conclude that public organizations are of an inappropriate size until the informal mechanisms, which might permit larger or smaller political communities, are investigated.

Thus, when debating over whether or not consolidation will increase efficiency, it’s necessary to understand the institutional environment in which the units of local government were created as well as the underlying informal mechanisms connecting them.

Olivia Mitchell on the future of defined benefit pensions

Steve Forbes’ interview with Dr. Olivia Mitchell of Wharton on the health and future of defined benefit pension plans raises a few points worth considering for policymakers and beneficiaries:

  • Public pension liabilities are undervalued and thus underfunded.
  • In general, future retirees including Baby Boomers, face a “much more fragile retirement” than the previous generation.
  • Be concerned as public plans try to make up for losses with riskier asset portfolios.
  • The fiscal burden of public plans will put immense pressure on several major cities and states including Philadelphia, Chicago, Illinois and Hawaii.
  • Public sector transitioning to a 401(k) doesn’t solve the problem of the expense of past negotiated benefits.

Dr. Mitchell also speaks on the topic of Social Security reform, longevity, 401(K) plans and annuities. You can watch the interview here:

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.

States Move to Revoke Tax Exemptions for Charities

Hawaii, Indiana, and Pennsylvania are a few of the states thinking about getting rid of the tax exemptions for non-profits. Steep declines in revenues have prompted states and counties to reconsider breaks for charities. States argue non-profits partake of government services but get a free ride on taxes, while charities claim that they are helping governments by providing services for the needy. Hawaii State Representative Calvin Say believes revoking exemptions for non-profits (as well as other tax-favored groups) could result in $500 to $750 million to help close the state’s $1.2 billion shortfall.

Revoking tax breaks is never popular. As the New York Times reports, the Payment-in-lieu-of-Taxes (PILOT) program used by many local governments evolved as a compromise. In 2005, Harvard and MIT brokered a deal with the city of Cambridge to pay $60 million over 20 years for city services in lieu of making property tax payments. (For more on PILOT programs see this 2006 Mercatus Center study by Frederic Sautet and John Shoaf).

Through tax policy, governments influence charitable activities and giving. The way exemptions are awarded or taken away can cause great controversy. For example, as states go on the hunt for revenues, some organizations, like churches, will remain exempt.

For a discussion of “The Politics of Giving”, see this month’s Reason for an interview with Adam Meyerson, President of The Philanthropy Roundtable.