Tag Archives: Public Sector Inc

Monday morning links

Demographic shifts in American metropolitan areas since 1950 via Demographia

Public Sector Inc post: The consequences of investment risk in public sector plans

Woonsocket, Rhode Island and talks of bankruptcy 

New federal school lunch rules: students must buy fruit and vegetables (even if they throw it in the trash)

Harrisburg’s new attitude towards GO debt

Nicole Gelinas writes at Public Sector Inc that Harrisburg, PA may simply choose to writedown some of the city’s incinerator debt to bondholders. The reasoning to paraphrase one city councilwoman, “they took an investment risk”. If this is the way the city intends to go, there are implications. Creditors now no longer should only consider whether the issuing authority is likely to have the money to pay back the bond, but whether or not they are willing to pay it back.

Rhode Island’s ongoing troubles

Over at Public Sector Inc, I discuss Rhode Island’s state-wide pension meltdown. While Central Falls is nearing bankrtupcy, Cranston’s mayor warns that within a year the city must come up with $14 million and will face reduced services across the board. The state is discussing dramatic pension reform but time is not on the side of many municipalities which must fund both the state plan and in many cases their own individual plans.

New Jersey’s pension reforms

I posted yesterday at Public Sector Inc on what New Jersey’s pension reforms are likely to accomplish. Steve Malanga expands on the reforms today and rightly notes that it’s not enough to fix the system. While these reforms were politically difficult to accomplish they are also modest relative to the magnitude of the problem. The legislation includes a provision that allows contribution rates to be lowered by a pension oversight committee when the fund hits 80 percent funded. The problem is what they calculate to be 80 percent funded is closer to 40 percent funded. The Wall Street Journal reports that these pension reforms are calculated by the Trenton to save local governments $120 billion over 30 years, and thus relieves some fiscal pressure in municipal governments.

My forthcoming analysis of local budgets shows one of the problems that worries me: what localities contribute to pensions on their books varies according to state policies that modify contributions based on flawed accounting and actuarial assumptions.

This legislation buys governments a little more time. And the bills shows a willingness by both parties to cooperate on a very politically contentious issue. Unfortunately, the liability still looms large.

New Jersey gets closer to a deal on health care with unions

I have a new post at Public Sector Inc on the negotiations underway between the Governor, the legislature and the Communications Workers of America over how health care benefits should be structured. But there’s another level to this conversation: where should this policy be decided? In collective bargaining negotiations with the union and two branches of the New Jersey government? Or should this be in the realm of state legislation, as is pensions policy?

 

Public Sector Pension Accounting: is time on their side?

The debate over Dean Baker’s paper which concludes that public pensions aren’t in crisis continues. Josh Barro provides a very thorough reply at Public Sector Inc. Baker’s central claim is that governments can take on investment risk because they have all the time in the world to ride out market fluctuations. The “government is infinitely-lived” defense of current public sector pension practice may sound comforting on the surface.

But it violates several economic theories, including The Arrow-Lind theorem, which discusses whether public investments should be discounted differently than private investments. As their seminal 1970 article, “Uncertainty and the Evaluation of Public Investment Decisions,” mentions there are different views. One view holds that risk should be treated the same in these two sectors, otherwise the public sector will overinvest. Another view held by Paul Samuelson and W. Vickery is that government can better cope with uncertainty, and in fact should ignore uncertainty and “behave as if it is indifferent to risk.” Arrow and Lind show that government can only ignore investment risk if the investments are small relative to the economy (there are alot of taxpayers over which to spread the risk) and the investments are uncorrelated with the economy.

As Josh notes public sector pension obligations don’t meet this description. Pension obligations are large relative to state economies and poor investment returns are linked to economic downturns, which contribute to weak tax revenues. The bill to pay out benefits does come due even when the market doesn’t deliver the returns government-as-investor was banking on to pay it.

New Jersey’s debt downgraded – some thoughts

Steven Malanga at Public Sector Inc. makes several good points on the downgrading of New Jersey’s debt.With credit ratings agencies now looking at pension obligations (based on what the states are reporting), New Jersey, Illinois and California’s outlook are far more serious than when that information was excluded. The result is the market has sent a message that these states can’t temporize on reform.

There is no disagreement in NJ as to whether there’s a problem. The disagreements are over size and approach. It will be interesting to see how Governor Christie’s proposed reforms are treated in the Legislature. Senate Leader Sweeney proposes more modest reforms.

I think the least exciting explanation for why pension plans reached this point is actually the most accurate one – clouded economic thinking convinced everyone involved that it is possible to earn high returns without risk  simply because the government is somehow different when it invests.