Tag Archives: New York Times

Central Falls, R.I. “staring down bankrtupcy”

In October Central Falls, Rhode Island’s pension system will run dry. It’s the second town in the U.S. to face this scenario since Prichard, Alabama. The small town has a $80 million pension bill. Currently payouts represent one-quarter of the town’s budget. That will increase quickly once the fund runs out. As The New York Times reports Rhode Island’s municipal bankruptcy/pension dilemmas is unique. Rhode Island is a small state with 39 small municipalities.

Thirty-six of these cities operate their own pension funds and 23 of these are considered “in distress.” The question now is: what is Rhode Island’s responsibility should these cities ask the state for help? Some place the blame on Rhode Island’s collective bargaining laws – set in state statute- that put everything on the table for negotiation. But then there is the problem of the pension plan itself, instituted by the local government in 1972. Consider also the role that accounting standards  have played in underestimating liabilities. To date, Rhode Island has taken measures to reassure bondholders giving GO bonds priority over other forms of debt.

It is unclear how this will play out and the extent to which Central Falls’ deep fiscal problems could trigger problems throughout the state. In addition to multiple independent local plans. The state operates its own Municipal Employee Retirement System in which several towns participate. The state-run plan is less than 36 percent funded with an unfunded liability of over $12 billion.

Room for Debate, Governors Edition

Budgeting is not easy. While some Republicans claim budget cuts are a way to boost short-term growth, the data (see p. 5) suggest that spending cuts are no more stimulative than spending increases (which is to say they aren’t stimulative). But that isn’t why budgets need to be reined-in. They need to be reined-in because it is mathematically impossible for state budgets to continue to grow faster than the private sector on which they depend. And if they aren’t reined-in, future cuts will be far larger and far more painful than those being proposed today.

That is me, writing in today’s New York Times Room for Debate. It also features pieces by Joe Henchman of the Tax Foundation and Elizabeth McNichol of the Center on Budget and Policy Priorities.

Me on CNBC

I was on CNBC yesterday morning debating Professor Harley Shaiken on the Wisconsin situation. Here is the video:

Here is a link to Professor Shaiken’s website.

Here is a link to the GAO report I referenced. If you think the budget gaps of the last few years have been bad, you ain’t seen nothing yet: States face a $9.9 trillion shortfall over the next several decades.

In order to close these long-term gaps, the GAO estimates that states need to immediately cut 12.3 percent (or increase taxes by the same amount) and maintain these changes each and every year for the next 50 years. To put that in perspective, last year states cut 5.9 percent out of their General Funds (total spending, which includes borrowed funds, other state funds and federal funds actually increased!). So, as painful as the last few years have been, states are nowhere close to doing what they need to do in order to address their long-term problems. 

Professor Shaiken mentioned studies that find public-sector employee pay is comparable to private sector pay. Here is one such study. And here is another.

Here is Andrew Biggs and Jason Richwine from yesterday’s Wall Street Journal on why these studies are flawed. To wit: a) they typically don’t account for health benefits, b) they fail to accurately compare the value of guaranteed 8 percent returns in public pensions with 4 percent guaranteed returns in private 401(k)s, and c) they do not take account of greater job security among public sector workers. Here is a link to Biggs and Richwine’s analysis. Here is Veronique de Rugy on the matter. Here is Megan McArdle. Here is a New York Times graphic that focuses just on Wisconsin employees (counting only cash compensation, the median Wisconsin public employee–who is typically more-educated–earns 22 percent more than the median Wisconsin private employee).

Here is a paper that assesses the empirical link between public sector unionism and government spending.

CAP Act: Baby Steps Towards Fiscal Responsibility – Tentative and Toothless

This afternoon Senators Bob Corker (R-Tenn.) and Claire McCaskill (D-Mo) will introduce legislation to “force Congress to dramatically cut spending over 10 years”. From the Senator’s website:

At a time when many families have been forced to tighten their pocketbooks, Congress must also learn to do the same. This bill isn’t just about cutting back this year or next year; it’s about instilling permanent discipline to keep spending at a responsible level,” McCaskill said.

The Commitment to American Prosperity Act, the “CAP Act,” would:

(1) Put in place a 10-year glide path to cap all spending – discretionary and mandatory – to a declining percentage of the country’s gross domestic product, eventually bringing spending down from the current level, 24.7 percent of GDP, to the 40-year historical level of 20.6 percent, and

(2) If Congress fails to meet the annual cap, authorize the Office of Management and Budget to make evenly distributed, simultaneous cuts throughout the federal budget to bring spending down to the pre-determined level. Only a two-thirds vote in both houses of Congress could override the binding cap …

I’m very pessimistic about this, for many reasons. Procedurally, the Act only institutes a new budgetary point of order, which can be overridden with super-majority votes in both houses. That is, the Act doesn’t compel anyone to act fiscally responsibly unless they’re inclined to do so. If we had such restrained legislators, a cap wouldn’t be necessary to begin with. Currently the House can override budgetary points of order with a simple majority vote, so this is an improvement, but not one I expect to have serious results.

The technical aspects of the Cap Act are similarly merit-less. First, the baselines are all skewed; why should we accept 20.6% of GDP spending as the new ‘normal’? Historically, Federal receipts average right around 18% of GDP, so locking in 20% would still put us on a trajectory towards systemic deficits. Given that we’re starting from a baseline where Federal debt rapidly approaches 100% of GDP, this isn’t a responsible plan to reign in spending. Similarly, the “lookback GDP” guidelines will count 2009, 2010, and 2011 spending, which has already exploded far beyond what is fiscally sustainable, or historically precedented. The “glide path” isn’t a serious measure of fiscal sustainability; it places us, in just five years, at the same debt-to-gdp ratio that trigged an economic meltdown in Greece last year. So the bill doesn’t set reasonable baselines, it doesn’t do anything to address the deficit, and if Matt’s work with similar TELs in the states holds, high-income economies like ours tend to use spending caps as excuses to grow spending beyond the levels they otherwise would.

There are some technical merits, but they’re merely cosmetic. Bringing Social Security back ‘on-budget’ is a good start, but this bill still leaves massive loopholes for ’emergency spending’, which the New York Times called a new way of political life six years ago. That trend hasn’t changed one iota since; if anything it’s gotten worse. A unified Democratic Congress couldn’t pass any budget last year. It’s one of the few constitutional powers actually entrusted to the Congress, and they failed. Which leads to my separation-of-powers concerns with this legislation. It’s unclear from a first reading, but where is the authority for Congress to entrust sequestration power with OMB, an executive branch agency?

Finally, there are massive political concerns with the legislation. It seems poised as a cover for fiscally irresponsible co-sponsors like McCaskill and John McCain (who both supported TARP and the GM Bailout; McCaskill also voted for Obamacare while McCain has his own big government medical plan to push) to claim the mantle of fiscal responsibility. We’ve already seen that movie, and it was terrible the first time.

In sum, I don’t see any reason the bill would restrain spending to a responsible or sustainable level. The bill has some good ideas, but they’re wandering in a wilderness of bad ones. The impulse is good, the execution is terrible.

Note: Sorry a rough draft went up on the RSS feed earlier, WordPress is a cruel mistress sometimes.

Medicaid: Are Costs Up or Are We Buying More?

Writing in the New York Times, Peter Orszag notes that a quarter century ago, states spent 50 percent more on higher education than on Medicaid, while today states spend 50 percent more on Medicaid than they do on higher education. The former Office of Management and Budget director is absolutely right that Medicaid costs have grown far faster than every other major category in state spending. He is at least partially wrong, however, on the diagnosis. He writes:

These Medicaid cost increases have closely tracked cost increases in the rest of the health care system over the past three decades. So the problem is not Medicaid per se; the fundamental problem is rising health care costs as a whole.

The graph below, taken from my recent working paper, examines this issue:

The left column shows 2009 Medicaid spending as a percent of 1987 Medicaid spending. Over this period, spending increased 813%. There are three factors that might explain this increase:

  • The general population has increased,
  • The cost of medical care services has increased (which is what Orszag sees as the problem), and/or
  • The Medicaid program is buying more medical services.   

The chart helps disentangle these three factors. The right column is the sum of population growth and medical care inflation. Note that, together, these two factors explain little more than half of the increase in Medicaid spending.

This suggests that much more weight should be placed on the third option. In other words: Yes, medical prices have gone up and yes, the overall population has grown. But more importantly, the program is simply buying more medical services. In what ways? This paper by Holahan and Yemane offers some insight. They find that the real reason we are spending more on Medicaid is that more people are enrolled in the program.

In addition to increased federal support for the program, Orszag believes that the “fundamental response” is to “get a better handle on rising health care costs.”

The data suggest that the more appropriate response is to get a handle on enrollment growth.

My thanks to Tyler Cowen for directing me to Orszag’s piece.

Pension Reforms on the Horizon in New Jersey

Governor Chris Christie has announced his plan to tackle New Jersey’s pension shortfall. Officially estimated at $46 billion, Andrew Biggs and I estimate the figure is closer to $174 billion (using the risk-free discount rate to assess the size of the liabilities).

Today’s Philadelphia Inquirer reports Christie will ask for a  rollback the 9 percent benefit enhancement enacted in 2001 for current workers. This is a good step to putting  New Jersey’s pension plan on more stable footing.

In addition to this announcement, Orin Kramer writes in the New York Times about the  role investment assumptions played in the pension crisis. He points to government standards that allow pension systems to measure their asset values looking back over a period of years which ultimately gives the plan the appearance of a higher level of funding.

Both articles emphasize the impact of decades of pension deferrals and also raise the issue of the role of government accounting standards in creating the pension crisis. As these issues are hammered out states will continue to face increasing fiscal pressures as benefit payouts increase making public employee benefits, in Governor Christie’s words, “the public issue of this decade.”

Stadium Debt and Monopoly Power

The old Giants Stadium was demolished this spring. The New York Times reports all that remains is a parking lot carrying $110 million in debt. This Sunday, the New York Giants will play their first game of the season in the new stadium, while New Jersey taxpayers will continue to pay the remaining principal and interest on $266 million in bonds issued to finance the original (1976) Meadowlands Sports Complex.

What went wrong? As the NYT notes, in the beginning the Meadowlands was successful. But by the 1980s, interest in horse racing started to decline. The NJ Devils and the Nets went to Newark. Revenues fell. Instead of responding to these signals the New Jersey Sports and Exposition Authority expanded operations.

The hypnotic fascination that sporting and entertainment facilities hold over local politicians dates to the 1960s and is a universal phenomenon. (The Olympic Games are a prime example, as is The World Cup). During this period, the definition of infrastructure changed to include not just roads and bridges but also stadiums and convention centers. Keynesian economic theories held sway. The idea that publicly financed sporting facilities would reap economic benefits for host cities continues to be the leading rationale for public investment in what should be privately financed ventures.

Economist Stefan Szymanski writes in his book, Playbooks and Checkbooks, “in recent years [major league sports franchises in the U.S.] have found a way to exploit their monopoly power.”During the early years of professional sports, team owners would build their own stadiums. With a shortage of major league teams, owners discovered they didn’t have to foot the bill, cities would gladly bid for the privilege. He estimates that over the last 20 years more than 60 publicly financed stadiums and arenas have been built in the U.S. totaling $20 billion. All a team must do is hint at leaving town to “extort a subsidy from the incumbent city.”

The problem is once the thrill is gone and attendance drops off the taxpayer is stuck with decades of debt. This “honeymoon effect” is well-understood. But even when put on ballot referendums in many cases voters still O.K. stadium debt. That may change in the near term with cities and states desperate to close budget deficits.  Another good sign: the Jets and the Giants financed the new stadium, one of the most expensive ever built at $1.6 billion. It’s probably not enough to convince politicians that they should stop committing the public purse to subsidizing ventures that are purely private goods.

To Lessen Pension Troubles Maine Looks to Social Security

In addition to collecting a pension, most public employees also participate in Social Security. A few states, such as Maine, never integrated with the program, which means their public sector workers don’t collect Social Security, nor are they subject to the 6.2% payroll tax.

Mary Williams Walsh reports that in an effort to solve their pension underfunding Maine is considering changing its Social Security holdout status. Maine’s state employees would begin paying into and collecting Social Security without having contributed to the system over their working lives. While reducing Maine’s risk of paying for large losses, the move doesn’t address the $4.1 billion hole in Maine’s pension plan (a hole already underestimated since assumes a 7.75% return on assets). And there is the instability of the Social Security program which is projected to begin running a deficit in 2017.

However, integrating with Social Security could be part of a transition to an improved state retirement system. Joshua Rauh explains at the New York Times‘ Room for Debate how the federal government might step in to head off the state pension crisis.

Tough Love

Last week, Michael Powell over at New York Times’s Economix blog characterized my position as one of “tough-love.” That is probably a fair way to put it. 

In an example of un-tough-love, yesterday’s Grey Lady featured an article by Christopher Edley Jr. (dean of the University of California, Berkeley, School of Law). In it, Dean Edley argues that states ought to be allowed to borrow directly from the Treasury:   

[S]tates are managing huge budget crises with the only tools they have, cutting spending and raising taxes — both of which undermine the federal stimulus.

That’s why the best booster shot for this recovery and the next would be to allow states to borrow from the Treasury during recessions. We did this for Wall Street and Detroit, fending off disaster. It’s even more important for states.

From my view, such a policy would permanently enshrine the notion that states are too big to fail. We know that states have a spending problem. According to data from the Bureau of Economic Analysis, for the last 9 years, the inflation-adjusted average annual growth rate of state and local government spending was 2.6%. At the same time, the private economy—on which state and local governments depend for their tax revenue—only grew at an average annual growth rate of 1.4%. In other words, states are already spending at a faster rate than the economy can create wealth. Furthermore, they are doing this without the power to deficit spend (for general operating expenses) or the power of the printing press. 

Allowing states the permanent ability to rely on the Federal Treasury would, of course, change all of that. How might we expect them to behave under those circumstances? Important research by the University of Rochester’s David Primo gives us some idea. It turns out that while all states save Vermont have balanced budget requirements, these requirements vary considerably from state to state. Some are allowed to carry deficits over from one year to the next while others are not. Furthermore, others are required to balance their planned spending, while others must balance their actual budgets at the end of the year. Lastly, some states are checked by independent courts, while others are not. In sum, some states face strict balanced budget requirements while others face weak balanced budget requirements. In his analysis, Professor Primo found that state and local spending in states with strict balanced budget requirements averaged $3,336 per citizen. In contrast, in states with weak requirements, the average was $3,756 per citizen.

The Federal Government’s balanced budget requirement isn’t weak; it is nonexistent (you might say they are on the honor system). So what might we expect spending to look like if every state in the union could borrow from the Federal Government whenever it was expedient?  I prefer tough love.

New York to Shut Down?

The budget crisis in New York is getting worse. The state has remained in operation thanks to a series of emergency bills that have included dramatic reductions in some areas of spending. But Republicans, worried that the cuts do not go far enough, have opposed the last three emergency bills.

In the latest development, the New York Times reports that two Democratic Senators have said they will not vote for any more emergency bills if they entail further cuts. That’s a problem because Democrats enjoy a razor-thin 2-vote majority. This prompted Governor Paterson to state that he will not give into “thug-activity,” presumably referring to his fellow Democrats. At least one Democrat in question, Senator Díaz, took it that way: “The Governor called me a thug. When I pick a fight, I don’t go back. Let’s see what a thug can do.”

If the politicians fail to play nice, the Times reports that the state government may shut down. This crisis was brought on by out-of-control-government spending. But a government shutdown is not likely to be a win for those who wish to reign in that spending. In his recent analysis of budget rules, University of Rochester Professor David Primo finds that states with automatic shutdown provisions spend $64 more per-capita compared to states that do not have automatic shutdown provisions.

Primo explains:

This finding relies on a result, first shown by Romer and Rosenthal (1978), that the more extreme a status quo or reversion point, the more advantaged is the proposer in bargaining settings with take-it-or-leave-it offers. By making the reversion point, in effect, zero, states that do not allow for some reasonable level of spending in the absence of budgetary agreement advantage the proposer in the process (in this case, the legislature). This result demonstrates the sometimes surprising effects of budget rules.