Tag Archives: union

Agony Over the Property Tax Cap

At the New Jersey  League of Municipalities convention to be held in Atlantic City tomorrow officials will be focused on a central problem, “How are we going to run our towns while keeping property tax growth below 2 percent?” The new cap is part of Governor Christie’s “tool kit” to reform local spending.

Will the cap work to reform local government spending? The true problem in New Jersey is not necessarily the state’s large number of small municipalities. In the 1950s, New Jersey had the same number of local governments. Schools were financed with local revenues. What has changed in the interim? The amount of things that state and local governments do, who provides these services, and how they are financed.

Since the 1960s, the rise of the public sector union, state and federal aid to local governments, court decisions on education financing, state mandates, environmental and business regulations have already achieved a level of ‘fiscal centralization,’ by planting a state and federal spending agenda in municipalities. The challenge of local spending reform is first to recognize the degree to which governments are entangled. The funding for locally provided goods, like education, are centralized through state and federal mandates, regulations, and state financing formulas.

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.

Will We Learn From Greece?

A few weeks ago Thomas Hoenig, the president of the Federal Reserve Bank of Kansas City, warned, “Greece is a lesson for us…. We shouldn’t be so arrogant to think that that couldn’t happen to us.” Mr. Hoenig was talking about our “very, very significant deficit” at the federal level.

Mr. Hoenig is right to worry about the Federal Government’s financial footing, but as a growing number of commentators have argued, the comparison between Greece and the U.S. states may be more apt than that between Greece and the U.S. Federal Government.

Like Greece, nearly every state in the union faces a major budget gap. The National Governors Association and the National Association of State Budget Officers estimate that these gaps total $127.4 billion for the remainder of 2010, 2011 and 2012. Like Greece, these gaps manifested themselves during the recession but their underlying cause is unsustainable levels of government spending. Like Greece, the states have made unrealistic promises to their public employees in the form of unfunded pensions and health benefits. Like Greece, these promises loom as the single largest threat to fiscal solvency in the coming years. And like Greece, the states have a limited number of ways to deal with the situation: they may not declare bankruptcy and they may not inflate their way out of the mess.

In both situations, however, the governments can appeal to the next level of government for aid. In the US, the states received some $135 billion from the Federal Government in the stimulus package passed last spring. And in Europe, the EU has promised to bail out Greece to the tune of $146 billion. These actions send the signal that the US and the EU apparently think that some governments are too big to fail. They also establish a strong incentive for US state and EU member nations to live beyond their means.

The Economist recently noted another similarity between Greece and the US states: as in Greece, many leaders at the state government level are reluctant to make the tough choices necessary to deal with the problem.

This last comparison, however, may prove false. That is because the Greeks may finally be on the verge of addressing their problem. This week, the ruling Socialist Party, PASOK, unveiled their reform proposals and on Friday, the government agreed to the bill. According to Reuters, “The reform cuts benefits, curbs widespread early retirement, increases the number of contribution years from 35-37 to 40 and raises women’s retirement age from 60 to match men on 65.”

My colleague Eileen Norcross has just written a paper with AEI’s Andrew Biggs which reveals the scope of the pension problem in the state of New Jersey. They found that the pension system there is underfunded by as much as $170 billion. Note that this one state’s pension problem dwarfs the $127.4 billion sum total of all state budget gaps over the next two and a half years.

Worse, these unfunded liabilities will come due soon. A series of studies by Joshua Rauh (Northwestern) and Robert Novy-Marx (University of Chicago) find that seven states will run out of pension money by 2020. And when they do, the costs will be enormous. When Illinois’s pension system goes broke in 2018, for example, the state’s pensions costs will be nearly half the size of the entire 2008 state budget.

If Mr. Hoenig is right and Greece is a lesson, let’s hope that policy makers in the US learn it before the pension crisis hits.

New Jersey’s Pension Crisis: New Research

Eileen Norcross and Andrew Biggs have a new paper out this morning entitled “The Crisis in Public Sector Pension Plans: A Blueprint for Reform in New Jersey.” While it’s focused on New Jersey, it does an excellent job of outlining the larger problem with state pension plans nationwide and what policy makers can do about it.

Here’s the abstract:

New Jersey’s defined benefit pension systems are underfunded by more than $170 billion, an amount equivalent to 44 percent of gross state product (GSP) and 328 percent of the state’s explicit government debt. Depending on market conditions, the state will begin to run out of money to pay benefits between 2013 and 2019. The state’s five defined benefit pension plans cover over 770,000 workers, and more than a quarter million retirees depend on state pensions paying out almost $6 billion per year in benefits. Nationwide, state pensions are underfunded by between $2.8 trillion and $5.2 trillion, some 20 to 37 percent of America’s annual output as much as $3 trillion, approximately 20 percent of America’s annual output..

This path is not sustainable. In order to avert a fiscal crisis and ensure that future state employees have dependable retirement savings, New Jersey should follow the lead of the federal government and the private sector and move from defined benefit pensions to defined contribution pensions. While significant liabilities will remain, the first step to addressing the pension crisis is capping existing liabilities and providing new employees with more sustainable retirement options.

Specifically, the paper recommends that policy makers:

  • Extend the defined contribution plan already available to state university faculty and staff and the state’s Defined Contribution Retirement Program to all state employees.
  • Reduce or freeze cost of living adjustments (COLAs) to reduce the state’s unfunded liability.
  • Transition non-vested workers to defined contribution plans.

Whole thing here.

Governors Revolt!

What’s gotten in to the governors? Across the country, a number of them seem to be fed up with their respective budget crises and are proposing bold action. As Eileen has written in the New York Post, New Jersey’s Governor Christie has shown remarkable resolve in tackling “the third rail of New Jersey’s budget: union-negotiated contracts and control.”

On Tuesday, I wrote about New York’s Governor Paterson and his plans to lay-off nearly 10,000 government workers (effective upon his successor’s first day in office). Now the Governor has gone a step further, announcing that he is “taking over” the budget cuts in order to keep the state afloat. After weeks of fruitless negotiations with state lawmakers, the state budget is more than 2 months overdue and there seems to be no consensus about how to deal with the $9.2 billion gap. So Paterson plans to impose dramatic cuts by including them in an emergency spending plan.

A little further west, in Illinois, Governor Pat Quinn and the state legislature are wrestling with a yawning $13 billion gap. Yesterday, the governor declared his intention to make the tough cuts that legislators seem unwilling to make. Of course, when pressed for details, he declined to offer a substantive plan. Hopefully, he’ll come around.

Hopefully, all of the governors will come around. A new report by the National Governors Association and the National Association of State Budget Officers (NASBO) will be released this morning. According to the Wall Street Journal (gated), it shows that states across the country still face a $127 billion gap over the next two years.

Union Pensions: Next Stop on the Bailout Train?

Senator Bob Casey (D-PA) has a proposal in the works. The “Create Jobs and Save Benefits Act” will bail out private sector union pension plans. The idea is to allow the Pension Benefit Guaranty Corporation, the federal guarantor of private sector pensions, to take over the pension liabilities of companies and dedicate tax dollars to paying them off.

The PBGC was established in 1974 to protect workers from the loss of their pensions. It was supposed to be self-financing through a combination of insurance premiums paid by plan sponsors and returns on pension investments. The PBGC itself is currently insolvent.

The plan being discussed would rescue multi-employer plans jointly run by companies and unions. Moody’s estimates such plans face long-term deficits of $165 billion. Senator Casey’s proposal would cover the most troubled plans including the Teamsters Central State fund.

A pension bailout would be unprecedented. And it opens the door for the bailout of state and local government pension plans, with unfunded liabilities estimated at $3 trillion. When will states begin to run out of assets to meet their obligations? Joshua Rauh estimates Illinois will be the first to run of out pension fund assets in 2018, followed by Indiana, Connecticut and New Jersey in 2019. And that’s assuming an 8% return on investments and 3% revenue growth. In other words, it could be sooner.

A Greek Tragedy in U.S. Municipal Debt

In recent days, as the debt crisis in Greece and throughout the Euro zone has been splashed across world headlines, smoldering problems in public finance are coming to the fore of public attention.  In Europe and the United States, federal, city, and state governments have habitually bowed to the requests of their employees and public labor unions, offering salaries and benefit packages that they lack the tax dollars to support.

In the public sector environment of generous pay and benefits, some New York state policymakers are pursuing the difficult option of freezing state and local employees’ pay at current levels.

The Buffalo News reports:

In emergency legislation to keep the government running without a 2010 final budget in place, Paterson has not paid the 4 percent raises for state workers in the executive branch that were to have kicked in April 1. The extra pay is being delayed.

The governor also is threatening to start a once-a-week furlough program next week for about 100,000 state workers. The furlough plan would be put, under Paterson’s current thinking, in next week’s “extender” legislation to provide emergency funding for things like state worker paychecks, some road construction and unemployment and Medicaid payments. The bill requires a straight up-or-down vote — meaning if the Legislature rejected the bill because of the furlough, the government would run out of money and have to shut down.

The Empire Center, a conservative New York think tank, determined that canceling state workers’ raises for this year, as well as limiting municipal worker raises, would be legal if the state Legislature declares a fiscal emergency.

This dramatic action would help New York close its budget gap for the year, but larger municipal finance challenges, such as unfunded pension obligations, will continue to plague workers until state policymakers are willing to stand up to union demands that states cannot afford to meet.

A New Paradigm: New Jersey Property Taxes and School Budgets

On April 20th, for the first time since 1976, the majority of  school budgets in New Jersey were rejected. In large part the results reflected voter anger over budgets that were presented with deep cuts, layoffs and property tax hikes to pay for teacher salary increases and free health care benefits. The teachers unions were asked by many school districts (and the Governor) to take a one-year salary freeze to help balance school budgets. Only 145 out of 600 districts agreed to a wage freeze for either teachers, administrators and/or superintendents. Only 20 teachers’ unions agreed to a wage freeze.

To resolve rejected budgets the municipal government may step in to recommend cuts, adjust levies or approve the school district’s budget as-is: tax hikes and all.

The next step for the Governor is to propose a stricter property tax cap and changes to public benefits and collective bargaining rules.

The most important part of this week’s vote is that it shows the important link between property taxes and local control.

As Alan Steinberg notes in an op-ed:

“Under the New Christie Paradigm, the Governor emphasized that the school budget vote was the electorate’s most important means of controlling school district spending and taxation. He urged the voters in yesterday’s elections to defeat budgets they deemed to be excessive, particularly those in which the local teachers’ union did not agree to a one year pay freeze.

It was evident even before the polls closed yesterday that the New Christie Paradigm had succeeded. The New Jersey electorate had been largely apathetic to school budget elections in the past, as evidenced by continuing abysmal turnout. Governor Christie had communicated to the electorate the effectiveness of the school budget vote as a tool to limit property tax increases. The citizenry of New Jersey responded to the Governor’s message by going to the polls in record numbers.”