Tag Archives: Texas

Red ink flows in state-run prepaid tuition programs

In three years the Prepaid Alabama College Tuition Program (PACT) will run dry. The State Treasurer reports PACT which pays $100 million in tuition a year, has $347 million in investments remaining. To fulfill its obligations to all 40,000 participants over the next 20 years, PACT needs an additional $843.9 million. The state Supreme Court recently struck down a potential solution put forth by the legislature: cap payouts to 2010 tuition levels and have beneficiaries make up the difference. The remedy didn’t pass scrutiny due to a 2010 law that promises PACT be 100 percent funded.

PACT worked for about 20 years until hit with the combination of unrelenting tuition inflation and a bear market which halved the plan’s investments.

Unfortunately, Alabama isn’t the only state with a prepaid program in the red. The Wall Street Journal reports South Carolina’s plan expects to run out of funds in 2017. Tennessee’s budget seeks an infusion of $15 million into its program. And West Virginia recently transferred funds from an unclaimed-property program to shore up its struggling prepaid plan.

In remarkably bad shape is IllinoisCrain’s Chicago Business finds that Illinois’ 12-year old $1.1 billion prepaid plan has the largest shortfall in the entire nation. Worse still, plan managers are making up for losses by embracing a huge amount of risk. In 2011, 47 percent of Illinois’ prepaid tuition plan was shifted into alternatives and investment expectations set at 8.75 percent. An expectation that far outstrips any other prepaid plan by a long-shot. (Florida has the country’s largest prepaid tuition plan and operates with an expected return of 4.3 percent on plan investments).

This year the agency that runs the prepaid program, the Illinois Student Assistance Commission ,has dropped that return assumption to 7.5 percent.  According to its actuarial report College Illinois! has enough money to pay out tuition for a few more years.

Prepaid plans are a type of 529 plan (the other is the college savings program) that allow parents to purchase contracts (or credits) for their children’s education.  The prepaid tuition plan locks-in tuition for the current year for eligible in-state colleges. Contributions are invested and benefits paid from those funds. To remain well-funded asset performance must track or exceed tuition increases. Given the rapid increase in college tuition which on average has increased 5.6 percent per year over the rate of inflation in just the past decade, it’s easy to see why so many plans have gone bust.

PACT participants who may not recoup their initial investments are understandably upset, “everything about the way the plan was promoted implied it was backed by the state.”

But, just how good is the state’s guarantee?

That is often in the fine-print. The WSJ finds three levels of guarantee in operation. 1) Full Faith and Credit – the state promises to pay for shortfalls if the fund goes dry. (Washington, Texas, Ohio, Mississippi and Florida)  2) Legislative appropriation – the legislature must consider an appropriation to cover shortfalls. (Illinois, Maryland, Virginia, South Carolina and West Virginia)  and 3) Fund Assets – the plan is solely backed by the assets in the plan. (Alabama, Michigan, Nevada, Pennsylvania, and Tennessee.)

Alabama’s PACT participants found they had little recourse in 2009.  Since the state doesn’t guarantee payment of tuition,they were technically out of luck. However, after a series of demonstrations and hearings in 2010 the Alabama legislature granted a $548 million bailout, tiding the plan over for the next three years. And then what? The state legislature filed a bill last week to tweak the previous solution to the court’s liking. It is again proposing to cap tuition payouts at 2010 levels.

Strangely, in spite of the risk present in pre-paid tuition plans they continue to provide a “flight to safety” for some investors. Last year growth in pre-paid plans outstripped growth in 529 college savings plans. The lure of higher returns attracts some who are banking on the ability of governments to keep their promise to pay it out regardless of market performance or the fine-print.

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.

Why Do Some Cities Grow and Others Not?

In 1980, Austin, Texas, and Syracuse, New York, were roughly the same size. The Austin metro area had a population of about 590,000, and the Syracuse metro area had about 643,000 residents. By 2007, Austin’s population had increased by more than 1 million while Syracuse’s population had been stagnant. That same disparity exists when one examines the growth of employment and real personal income. Another disparity between the two areas is the tax burden. State and local taxes accounted for nearly 13 percent of personal income in Syracuse but only about 9 percent in Austin.

That is Professor Dean Stansel of Florida Gulf Coast University. He compares the growth outcomes in the 100 largest metropolitan areas in the United States, examining the ways in which taxes impact growth prospects. I have reproduced his Figure 1 below:

Dr. Stansel is careful not to over-state his case, writing:

There are clearly numerous other important factors that influence economic growth, and the correlation between taxes and growth found herein do[es] not prove that lower taxes cause higher growth.

But he cites a number of studies that do account for other factors and notes that his research is consistent with those papers.

In this older post, Harvard’s Edward Glaeser cites research making the case that cities with sunshine and little regulation tend to grow the fastest.

Fastest growing cities in America

Joel Kotkin and Wendell Cox have an analysis in Forbes of new Census data about where Americans are living. They look at metro regions not only central cities. Las Vegas and Raleigh, N.C. were two of the fastest growing regions this decade due in part to job growth. Several regions in Texas are growing and are attracting people from California. Housing prices help to explain the migration of people from the northeast (Boston and New York) to Raleigh.

And Washington D.C. has “defied all market logic” as a relatively expensive area with growth. The authors suggest this is due to the “ever-expanding scope of federal government and its…growing legions of parasitic private corporations.”

For more on why other areas have lost population check out the article.

Build America Bonds: Eliminated or in Suspended Animation?

On December 31 state and local governments will no longer be able to issue Build America Bonds (BABs), federally-subsidized, taxable bonds created as part of the American Recovery and Reinvestment Act (ARRA) to fund infrastructure projects. The idea, in addition to creating construction jobs, was BABs would stimulate the municipal debt market which had contracted after the housing bubble/financial market crash in 2008. At that time investors moved away from tax-free municipal bonds since bond insurers stopped insuring debt.

The attraction of BABs is that the program allowed cash-strapped governments to continue issuing debt. The federal government picked up 35 percent of the interest cost. As taxable bonds BABs were marketed largely to overseas investors, who typically don’t buy tax-free municipal debt.

Who’s been issuing the bonds? The most cash-strapped and fiscally profligate states: California, New Jersey, Ohio and New York. Steven Malanga reported in The Wall Street Journal, that in addition to subsidizing big-spending states to take on more debt BABs were used to finance a convention center complex in Dallas, Texas when no private investor was willing. BABs have allowed the most indebted states to effectively ignore market signals concerning risk and increase their debts thanks to the subsidies provided by a very over-extended federal government.

But don’t expect BABs to fade quietly. They have a constituency. Florida Republican, Rep. John Mica, who will chair the House Transportation and Infrastructure Committee aims to find a way to reincarnate the program.

Payroll Tax Increase and Iowa Jobs

Iowa Job-seekers and wage-earners will feel the sting of the longest running unemployment benefits extension in U.S. history.

Thomas L Cardella & Associates expected to create 500 jobs in Cedar Rapids, Iowa. But now 200 of those jobs will be located in El Paso, Texas. The firm changed their plans because of the effect of the increased payroll tax. The company’s payroll tax is increasing form 1.5 percent to 8 percent, or $900,000. That hike makes the firm unprofitable and Cardella doesn’t want to pass it on to the customer as the government recommends. Instead the firm will freeze wages and benefits and slash corporate salaries.

A peculiar argument currently being circulated is that the federal-state unemployment program is stimulating the economy, and unbelievably, creating jobs. Rep. Pelosi made this claim. And it has been echoed by opinion-makers.

Read Thomas Cardella’s op-ed in today’s Press-Citizen refuting it.

When Local Fiscal Troubles Turn Into a Miscarriage of Justice

A sad and sordid NPR story caught my ear.

As Thanksgiving approached three years ago, the Richardson family of Clarksville, Texas, had gathered to celebrate. Around 10:30 PM, their celebrations were abruptly interrupted when police charged through the door and arrested brothers Vergil and Mark Richardson and their half-brother, Kevin Calloway.

It turns out that unbeknownst to Vergil (the owner of the home), Kevin had been dealing drugs out of a shed in the back of the property.

There were a number of problems with the case, however. For one thing, the bust was executed before a search warrant had been signed. Moreover, there was no evidence that either Vergil or Mark Richardson knew anything about Kevin Calloway’s extralegal activities. (Calloway had confessed and said he was the only one responsible for his actions.)

Eventually, these facts came to light and Vergil and Mark Richardson sued the DA, the sheriff and the Clarksville police department in a $2 million civil rights lawsuit.

Given the mishandling of the case, the state’s attorney general office elected to drop the charges (“in the interest of justice”). Then things got really weird: the judge refused to let them do so.

State Judge John Miller refused to accept the attorney general’s decision to drop the case. The ruling was so unusual that it lifted legal heads around the state.

But the judge was just getting started. He told defense lawyers that he intended to replace the attorney general’s office and appoint a new special prosecutor, someone who would agree to prosecute all of the members of the Richardson family, not just their half-brother Calloway.

What was behind the judge’s unusual decision? One explanation may be race. The brothers are black while the judge is white. But one reporter has another theory:

Bill Hankins, a reporter for The Paris News in nearby Paris, Texas, who has been covering the story closely, thinks this case is about more than just race.

“You know, [Red River County] is a poor county … and I think … [Miller is] concerned about the lawsuit eating up funds that they don’t have,” he says.

Read the whole story.

Legal Plunder

How does law enforcement finance operations? Increasingly, police departments across the country pay for their activities, equipment and supplies by seizing the assets of people who have never committed a crime. It’s a process called civil forfeiture, and it’s at best, controversial. At worst, it provides direct monetary incentive for states and the federal government to steal property from innocent citizens. Gives a whole new meaning to Bastiat’s “legal plunder.”

Radley Balko explains how civil forfeiture perverts the “protect and serve” motto by introducing a profit motive: Continue reading

The Failure You Know

Better the devil you know, than the devil you don’t. – Traditional idiom

Sayings become traditional if they contain sufficient truth, but truth can usually be graded on a scale, from absolute to non-existent; better writers have called this the “truth-of-the-head” and the “truth-of-the-heart.”

The truth-of-the-head is that American public schooling is failing. Expenses are too high, political influence is too systemic, and results are terrifyingly low. This isn’t news. We’ve written and talked about it extensively.

A new study from the National Center for Policy Analysis adds to the mountain of evidence that school choice overwhelmingly benefits students, especially the poor.

From 1998 to 2008, the Children’s Educational Opportunity (CEO) Foundation funded a $52.4 million voucher program for residents of the low-performing Edgewood Independent School District in San Antonio, Texas. The vouchers were available to any student in Edgewood whose family chose to participate, regardless of academic ability or income.

The evidence shows that the voucher students weren’t the only ones who benefited. The students who remained in the Edgewood public schools benefited from increased funding resources due to increasing property values, and improvements in the public schools in response to increased competition.

Those are impressive results. Yet anti-reform groups and their legislative supporters have almost successfully killed school choice in Washington, DC, arguably the flagship federal school-choice program. Reason.tv has documented the trials, triumphs, and tribulations of the D.C. program for several years.

The recurring arguments against choice have always been theoretical. Students might be worse off. Communities might be forced into educational ghettos. Students might be subjected to failing systems, where private educators care only about power and money.

But any reasonable person has to agree, replace “might” with “is,” and “private” with “public,” and you have a fair critique of the current state. When faced with possible problems but tangible benefits, the devil you know seems egregiously evil.

I guess that’s why “idiom” and “idiot” are only one letter apart.