Tag Archives: Mayor Michael Bloomberg

Credit Warnings, Debt Financing and Dipping into Cash Reserves

As 2013 comes to an end recent news brings attention to the structural budgetary problems and worsening fiscal picture facing several governments: New Jersey, New York City, Puerto Rico and Maryland.

First there was a warning from Moody’s for the Garden State. On Monday New Jersey’s credit outlook was changed to negative. The ratings agency cited rising public employee benefit costs and insufficient revenues. New Jersey is alongside Illinois for the state with the shortest time horizon until the system is Pay-As-You-Go. On a risk-free basis the gap between pension assets and liabilities is roughly $171 billion according to State Budget Solutions, leaving the system only 33 percent funded. This year the New Jersey contributed $1.7 billion to the system. But previous analysis suggests New Jersey will need to pay out $10 billion annually in a few years representing one-third of the current budget.

New Jersey isn’t alone. The biggest structural threat to government budgets is the unrecognized risk in employee pension plans and the purely unfunded status of health care benefits. Mayor Michael Bloomberg, in his final speech as New York City’s Mayor, pointed to the “labor-electoral complex” which prevents employee benefit reform as the single greatest threat to the city’s financial health. In 12 years the cost of employee benefits has increased 500 percent from $1.5 billion to $8.2 billion. Those costs are certain to grow presenting the next generation with a massive debt that will siphon money away from city services.

Public employee pensions and debt are also crippling Puerto Rico which has dipped into cash reserves to repay a $400 million short-term loan. The Wall Street Journal reports that the government planned to sell bonds, but retreated since the island’s bond values have, “plunged in value,” due to investor fears over economic malaise and the territory’s existing large debt load which stands at $87 billion, or $23,000 per resident.

This should serve as a warning to other states that continue to finance budget growth with debt while understating employee benefit costs. Maryland’s Spending Affordability Committee is recommending a 4 percent budget increase and a hike in the state’s debt limit from $75 million to 1.16 billion in 2014. Early estimates by the legislative fiscal office anticipate structural deficits of $300 million over the next two years – a situation that has plagued Maryland for well over a decade. The fiscal office has advised against increased debt, noting that over the last five years, GO bonds have been, “used as a source of replacement funding for transfers of cash” from dedicated funds projects such as the Chesapeake Bay Restoration Fund.

 

Is It Time to Privatize the Occupy Protests?

The aims of the “occupy” protesters are not always clear. But I think it is safe to say that a large number of them favor public policy solutions to our problems. If the top 1% is making too much money, they’d like politicians to raise the top marginal tax rate. If banks are taking on too much risk, they’d like politicians to regulate them. In essence, if the status quo is broken—and you don’t have to be an “occupier” to agree that it is—the occupy movement would like public policy to fix it.

In Zuccotti Park, public policy has just turned against the protesters: Mayor Michael Bloomberg has ordered the park cleared. The problem for the protestors is that they are on “privately owned public space” which means that public policy makers can decide what happens there (HT, @JoelWWood and @Cobrown).

This is a useful reminder that if you don’t like some outcome—be it the compensation package of a CEO, or the risk profile of a bank, or the way a piece of property is being used—then making it the purview of public policy doesn’t always guarantee your preferred outcome. In fact, as public choice teaches us, public policy often favors the entrenched special interests, not the little guy.

How might the occupiers keep their protest alive? I’d recommend that they privatize it. Take it to a private piece of property. I’m sure that there is some sympathetic property owner (maybe even someone in the top 1 percent?) who would be willing to donate their land. Better yet, they could pool together and buy some land themselves? A few thousand dollars would buy a few acres in many rural parts of the country.