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Archive for the ‘States’ Category

Once of the reasons that tax increases in Washington are such a bad idea (and one of the reasons why a value-added tax is an especially bad idea) is that the prospect of additional tax revenue kills any possibility of genuine entitlement reform. Simply stated, politicians won’t do the heavy lifting of fixing those programs if they think can use a tax hike to prop up the current system for a few more years.

However, if we don’t fix the entitlements, the United States faces a very grim fiscal future regardless of new revenue because the burden of government spending will be expanding faster than the growth of the private economy.

Indeed, tax hikes presumably will accelerate the problems by weakening economic performance, creating an even bigger gap between the growth of government spending and the growth of productive output. Sort of a double violation of my Golden Rule.

Well, the same thing is happening in Illinois.

That state is a fiscal disaster. Taxes already are high, government spending already is excessive, and promises of lavish future benefits for government bureaucrats have created a mountain of unfunded liabilities. To make matters worse, there’s a never-ending trickle of taxpayers fleeing to other states, thus making the long-run outlook even worse.

A column in today’s Wall Street Journal discusses this unfolding disaster.

…what about the state’s fiscal apocalypse, which is not only happening right now but has plunged Illinois into a bona fide financial disaster? …the state has amassed $11 billion in unpaid bills—predicted to climb to more than $27 billion by the end of 2019. Illinois is facing the worst pension crisis of any U.S. state, with unfunded obligations totaling $130 billion, according to the state’s Commission on Government Forecasting and Accountability. That amounts to about $10,000 in debt for each resident. …Illinois also had the lowest credit rating among the 50 states as of October, when Moody’s Investors Service downgraded it again… Given all this, it’s no surprise that people are leaving. In 2016 Illinois lost more residents than any other state—for the third consecutive year. A total of 37,508 people fled, leaving the state’s population at its lowest level in nearly a decade.

By the way, the net payers of tax are the ones leaving, not the net consumers of tax. And every time one of the geese with golden eggs decides to fly away, Illinois falls deeper into a hole.

I discussed this phenomenon in a column for The Hill.

…there are some very uncompetitive, high-tax states, such as Illinois, that are in deep trouble due to internal migration.Most people have focused on the overall population loss of 37,508 in Illinois, but the number that should worry state politicians is, on net, a staggering 114,144 people left for other states. Only New York (another high-tax state with a grim future) lost more people to internal migration.Of course, what really matters, at least from a fiscal perspective, is the type of person who leaves. Data from the internal revenue service shows that states like Illinois are losing people with above-average incomes. In other words, the net taxpayers are escaping.

And don’t forget that Illinois is increasingly uncompetitive compared to neighboring states.

Here’s a blurb from a Wall Street Journal editorial in January,

Nearby Kentucky passed a right-to-work law last week and Missouri is expected to take up similar legislation in coming weeks. …this would leave Illinois, a non-right-to-work state, as an island with undesirable labor laws surrounded by states including Michigan, Indiana and Wisconsin that provide more worker choice and business flexibility.

I have some theoretical problems with right-to-work laws, but the WSJ is correct that private employers tend to avoid states where unions wield a lot of power.

Also, we can’t forget that the main city in Illinois has its own set of problems.

As discussed in an article for the American Thinker, Chicago adds crime and corruption to the mix.

Chicago has become the icon of bloody violence on its streets, but corruption also is part of its misery… Chicago’s city government is known for much more than just its one-sidedness.  From Mayor Richard J. Daley’s well known rackets of yesteryear to former U.S House representative Jesse Jackson, Jr. (who just last year completed his prison sentence after having pleaded guilty to multiple federal charges including fraud, conspiracy, wire fraud, criminal forfeiture, and more), the list of Democrats committing and getting caught committing fraud, taking bribes, running scams, and other malfeasance while in office is very long. …As reported by Gazette.com, “according to Illinois corruption researchers Dick Simpson and Thomas Gradel, more than 30 Chicago aldermen have been convicted of crimes since 1973, most of them on bribery and extortion charges. “More than 1,000 public officials and businessmen in Illinois have been convicted of public corruption since 1970, including imprisoned former Gov. Rod Blagojevich. But corruption among politicians on Chicago’s premier lawmaking body has been ‘particularly persistent’, the researchers wrote in an anti-corruption report.”

Gee, what a surprise. Politicians create big government in part so they have lots of goodies to distribute, and they then use those goodies to extort money from people.

Hmmm…, where have I seen that message before?

But let’s not get distracted. We’ve now established that Illinois is a giant mess. We also know that the state can only be saved if there is both short-run spending restraint and long-run spending restraint (to deal with unaffordable benefits promised to the state’s massive bureaucracy). Though we also know that the chances of getting those necessary reforms will evaporate if tax hikes are an option.

So is anybody surprised that the state’s supposedly anti-tax governor is getting seduced/pressured into throwing taxpayers under the bus?

The Wall Street Journal opines on this development.

Illinois Governor Bruce Rauner has been trying to pull the Land of Lincoln out of economic decline…, and it’s a losing battle. After two years without a state budget, Mr. Rauner is now bending as Democrats promise to hold the budget hostage if he doesn’t sign a tax increase. In his State of the State address last week, Mr. Rauner said he was open to “consider revenue increases” in conjunction with “job-creating changes” in pursuit of a budget deal. He endorsed negotiations underway with state lawmakers to craft a “grand bargain”…the speech was greeted with derision by the state’s Springfield mafia that assumes it now has the Governor where it wants him. …The deal now being crafted in the state Senate would increase the state’s flat income-tax rate to somewhere around 5% from the current 3.75%. …Democrats are still peddling that they can tax their way out of Illinois’s economic decline, while taxpayers are picking up and heading to neighboring states.

Incidentally, there was a temporary hike in the tax to 5 percent a few years ago. How did that work out?

…the years of an elevated income tax produced one of the country’s weakest state economic recoveries, with bond-rating declines in Chicago and staggering deficits statewide. …Senate President John Cullerton said the point of the temporary hike was to pay pensions, “pay off our debt [and] to have enough money to pay the interest on that debt.” But the roughly $31 billion it generated made hardly a dent. Since 2011 the unfunded pension liability in Illinois has grown by $47 billion, even as the tax hike was mostly spent on pensions.

Here’s the bottom line. Governor Rauner made a huge mistake by stating that he would “consider revenue increases.”

Illinois, after all, is not suffering from inadequate tax collections.

Moreover, now that Rauner has waved the white flag, there’s a near-zero chance that he’ll be able to get something in exchange such as a Colorado-style spending cap or much-need constitutional reform to control pension expenditures.

Instead, higher revenues will trigger even more wasteful outlays (as leftists in the state sometimes accidentally admit).

I guess there’s still a chance he’ll do what’s best for the state and reject tax hikes, but as of now it looks like Rauner will be the next winner of the Charlie Brown Award.

Oh, and he’ll also jeopardize his own political career. Which helps to explain why the GOP is known as the “stupid party.”

P.S. I don’t think it beats my examples from Greece and Japan, but Illinois at least can compete in the dumbest-regulation contest.

P.P.S. Illinois is a terrible state for gun rights, and it even persecutes people who use guns to fight crime. The only silver lining to that dark cloud is this amusing example of left-wing social science.

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Which state gets the biggest share of its budget from the federal government?

Nope, not even close. As a matter of fact, those two jurisdictions are among the 10-least dependent states.

And if you’re guessing that the answer is New York, New Jersey, Maryland, Connecticut, or some other “blue state,” that would be wrong as well.

Instead, if you check out this map from the Tax Foundation, the answer is Mississippi, followed by Louisiana, Tennessee, Montana, and Kentucky. All of which are red states!

So does this mean that politicians in red states are hypocrites who like big government so long as someone else is paying?

That’s one way of interpreting the data, and I’m sure it’s partially true. But for a more complete answer, let’s look at the Tax Foundation’s explanation of its methodology. Here’s part of what Morgan Scarboro wrote.

State governments…receive a significant amount of assistance from the federal government in the form of federal grants-in-aid. Aid is given to states for Medicaid, transportation, education, and other means-tested entitlement programs administered by the states. …states…that rely heavily on federal assistance…tend to have modest tax collections and a relatively large low-income population.

In other words, red states may have plenty of bad politicians, but what the data is really saying – at least in part – is that places with a lot of poor people automatically get big handouts from the federal government because of programs such as Medicaid and food stamps.  So if you compared this map with a map of poverty rates, there would be a noticeable overlap.

Moreover, it’s also important to remember that the map is showing the relationship between state revenue and federal transfers. So if a state has a very high tax burden (take a wild guess), then federal aid will represent a smaller share of the total amount of money. By contrast, a very libertarian-oriented state with a very low tax burden might look like a moocher state simply because its tax collections are small relative to formulaic transfers from Uncle Sam.

Indeed, this is a reason why the state with best tax policy, South Dakota, looks like one of the top-10 moocher states in the map.

This is why it would be nice if the Tax Foundation expanded its methodology to see what states receive a disproportionate level of handouts when other factors are equalized. For instance, what happens is you look at federal aid adjusted for population (which USA Today did in 2011). Or maybe even adjusted for the poverty rate as well (an approached used for the Moocher Index).

P.S. For what it’s worth, California has the nation’s most self-reliant people, as measured by voluntary food stamp usage.

P.P.S. And it’s definitely worth noting that the federal government deserves the overwhelming share of the blame for rising levels of dependency in the United States.

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In just 10 days, voters will go to the polls and deal with the rather distasteful choice of Donald Trump and Hillary Clinton.

In some states, they also will have an opportunity to vote for or against various ballot initiatives and referendums.

Here are the five proposals that would do the most damage in my humble opinion.

ColoradoCare (Amendment #69) – Apparently learning nothing from what happened in Vermont, advocates of big government in Colorado have a proposal to impose a 10 percent payroll tax to finance statewide government-run healthcare. The Tax Foundation points out that, if this scheme is approved, Colorado’s score in the State Business Tax Climate index “would plummet from 16th overall to 34th,” while the Wall Street Journal opines that “California would look like the Cayman Islands by tax comparison” if Colorado voters say yes.

Oregon Gross Receipts Tax (Measure #97) – Back in 2010, presumably guided by the notion that it’s okay to steal via majoritarianism, Oregon voters approved a class-warfare tax hike on upper-income taxpayers. Now they’re about to vote on a scheme to pillage the state’s businesses with a gross receipts tax, which is sort of like a value-added tax but with no credit for taxes paid earlier in the production process, which means the burden “pyramids” as goods and services are created. The Tax Foundation warns that this levy could lead to “a 25 percent increase in the Oregon state budget” and that “Oregon’s corporate tax climate would be the worst in the nation.”

Maine Income Tax Hike (Question #2) – Voters are being asked whether to boost the state’s top income tax rate to 10.15, which would be the second-highest in the nation. According to the Tax Foundation, the Pine Tree State “would drop to 45th overall” in the State Business Tax Climate Index (down from #30) if this class-warfare scheme is enacted. The National Taxpayers Union warns that the ” tax would make the state a less competitive place in which to do business.”

Oklahoma Sales Tax Increase (Question #779) – Sales taxes don’t do as much damage, per dollar raised, as income taxes, but it’s still a foolish idea to impose a big tax hike in order to finance bigger government. And that’s what will happen if voters in the state agree to boost the state sales tax by one-percentage point. The Tax Foundation notes that “Question 779 would give the Sooner State the second highest combined state and local sales tax rate in the nation, after only Louisiana.

California Tax-Hike Extension (Proposition #55) – One of worst ballot initiatives in 2012 was California’s Proposition 30, which imposed a big, class-warfare tax hike on upper-income residents and gave the Golden State the nation’s highest income tax rate. One of the arguments in favor of Prop 30 was that the tax increase was only temporary, lasting until the end of 2018. Well, as Milton Friedman famously observed, there’s nothing so permanent as a temporary government program. And that apparently applies to “temporary” taxes as well.  Proposition #55 would extend the tax until 2030.

Unfortunately, there aren’t a lot of ballot initiatives that would move policy in the right direction. Here’s the one that probably matters most.

Massachusetts Charter Schools (Question #2) – Much to the dismay of teacher unions (and presumably the hacks at the NAACP as well), this initiative would expand charter schools. It’s remarkable that even the very left-leaning Boston Globe is embracing Question 2, opining that “the proposal would create new opportunities for the 32,000 students, predominantly black and Latino, who are now languishing on waiting lists hoping for a spot at a charter school” and that “Students in all Massachusetts charter schools gain the equivalent of 36 more days of learning per year in reading and 65 more days of learning in math.”

A related measure is Amendment #1 in Georgia.

Now let’s shift to a ballot initiative that is noteworthy, though I confess I don’t have a very strong opinion about the ideal outcome.

Washington Revenue-Neutral Carbon Tax (Initiative #732) – The bad news is that a carbon tax would be imposed. This means, according to the Tax Foundation, that the “average household would pay $225 more per year for gasoline under the proposal, and $64 more for electricity.” The good news is that the sales tax would drop by one cent and the state’s gross receipts tax would almost disappear. So is this a good deal? Part of me says no because it’s never a good idea to give politicians a new source of tax revenue. But the fact that the measure is opposed by many hard-left green groups suggests that the idea probably has some merit.

For what it’s worth, I would vote against I-732 because of concerns that it eventually will lead to a net increase in the burden of government.

Last but not least, I’ll also be following the results on initiatives dealing with marijuana and tobacco.

States Voting for Marijuana Legalization (and Taxation) – Voters in Arizona, California, Maine, Massachusetts, and Nevada will have an opportunity to fully or partly legalize marijuana. These initiatives also include buzz-kill provisions to levy hefty taxes on producers and consumers.

States Voting for Tobacco Tax Increases – Politicians in California, Colorado, Missouri, and North Dakota all hope that voters will approve tax hikes that target smokers (and, in some cases, vapers). In every case, the tax hikes will fund bigger government.

P.S. I can’t resist adding that I’m also keeping my fingers crossed that other voters in Fairfax County will join me in rejecting a scheme to add a 4 percent tax on restaurant meals. Not just because it’s a tax hike to fund bigger government, but also because the hacks in the county government are using dishonest and reprehensible arguments to push the tax.

P.P.S. I will be updating my prediction for the presidential election, and also making predictions for the House and Senate, the morning of November 8.

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America’s main long-run retirement challenge is our pay-as-you-go Social Security system, which was created back when everyone assumed we would always have a “population pyramid,” meaning relatively few retirees and lots of workers.

But as longevity has increased and fertility has decreased, the population pyramid increasingly looks like a cylinder. This helps to explain why the inflation-adjusted shortfall for Social Security is now about $37 trillion (and if you include the long-run shortfalls for Medicare and Medicaid, the outlook is even worse).

But Social Security is not the only government-created retirement problem. State and local governments have “defined benefit” pension systems for their bureaucrats, which means that their bureaucrats, when they retire (often at an early age), are entitled to receive monthly checks for the rest of their lives based on formulas devised by each state (based on factors such as years employed in the bureaucracy, pay levels, contributions, etc).

Unlike Social Security (which has a make-believe Trust Fund), these pension systems are supposed to be “funded” in the proper sense, which means that money supposedly is set aside and invested every year so that there will be a big nest egg that can be used to pay benefits to future retirees.

At least that’s how it’s supposed to work in theory. In reality, politicians like promising big retirement benefits to government bureaucrats, but they oftentimes aren’t willing to actually set aside the money needed to fund the nest egg. After all, it’s more fun to spend the money appeasing other interest groups (state and local bureaucrats don’t approve of underfunding, but their retirement benefits generally are seen as a contractual obligation, so they don’t have much incentive to lobby for honest accounting).

The net result is that every retirement system for state government workers is underfunded. How far in the red? That’s a hard question to answer because you have to make long-run assumptions about the investment earnings of the various pension funds.

But the answer is going to be a big number regardless of methodology. According to a new report from the American Legislative Exchange Council, the shortfall is enormous.

When state pension funds are examined through the lens of a more realistic valuation, pension funding gaps are revealed to be much larger than reported in official state financial documents. This report totals state-administered plans’ assets and liabilities and finds nationwide total unfunded liabilities to be $5.59 trillion. The nationwide funding level is a mere 35 percent, which is one percentage point lower than two years ago. Combined across all states, the price tag for unfunded pension liabilities is now $17,427 for every man, woman and child in the United States. …Taxpayers are on the hook for the legal obligation to cover the promised benefits of traditional, defined-benefit pension plans. …When unfunded pension liabilities are viewed as shared debt placed on each individual, Alaska, where each resident is on the hook for a staggering $42,950, tops the list. Ohio and Illinois follow for the highest per person unfunded pension liabilities.

Here’s a map from the report. It’s bad news if your state is dark blue. And if your state is gray, your burden is relatively low.

Though keep in mind that these numbers are not adjusted for state income.

Louisiana, Mississippi, and Kentucky get bad scores, but they probably are in even deeper trouble that lower-ranked states like California and New Jersey where per-capita income is higher (yes, the cost of living is lower in those southern states, but that doesn’t matter since the relevant comparison is per-capita income vs per-capita pension liabilities.

The ALEC report is more pessimistic than other estimates, but that’s because they use more cautious assumptions about the potential investment earnings of the various pension funds that manage money for state and local bureaucrats.

State Budget Solutions uses a more reasonable valuation to determine the unfunded liabilities of public pension plans. Given that many plans’ assumed rates of return are too high and invite risk, State Budget Solutions uses a more prudent rate of return, rather than the loftiest goals of money managers. This study uses a rate of return based on the equivalent of a hypothetical 15-year U.S. Treasury bond yield. …. State Budget Solutions is not alone in calling attention to the flawed accounting practices of state agencies. A recent study released by the Stanford Institute for Economic Policy Research, Pension Debt: United States Public Employee Pension Systems, also suggests that states use unrealistically high rates of return to discount their pension liabilities. The study found that pension debt totals $4.8 trillion, a finding similar to this report.

A new study from Pew isn’t nearly as pessimistic, but it still shows a huge gap.

The nation’s state-run retirement systems had a $934 billion gap in fiscal year 2014 between the pension benefits that governments have promised their workers and the funding available to meet those obligations. …This brief focuses on the most recent comprehensive data from all 50 states and does not reflect the impact of weaker investment performance in fiscal 2015, which averaged 3 percent. Performance has been even weaker in the first three quarters of fiscal 2016. …Total pension debt is expected to be over $1 trillion for state plans, an increase of more than 10 percent from fiscal 2014. When combined with the shortfalls in local pension systems, this estimate reaches more than $1.5 trillion for fiscal 2015 and will likely remain close to historically high levels as a percentage of U.S. gross domestic product (GDP).

Here’s a visual from the report showing how the fiscal outlook for state pension systems has deteriorated over the past 15-plus years.

Equally troubling, most states are heading in the wrong direction.

…this brief shows that 15 states currently follow policies that meet the positive amortization benchmark—exceeding 100 percent of needed funding—and can be expected to reduce pension debt in the near term. The remaining 35 states fell short; those performing the worst on this measure typically had the largest unfunded pension liabilities.

Here’s the chart from the study. As you can see, Kentucky, New Jersey, and Illinois are falling deeper in the red at the fastest rate.

Kudos to New York and West Virginia, by the way, for being the most aggressive in trying to address long-run problems.

Moody’s Investor Services also has a new report on pension shortfalls. Here are some of the highlights, or perhaps lowlights would be a more appropriate word.

Total US state aggregate adjusted net pension liabilities (ANPL) totaled $1.25 trillion, or 119% of revenue in fiscal 2015, Moody’s Investors Service says in a new report. The results, based on compliance with new GASB 68 accounting rules, set a new ANPL baseline and are poised to rise for the next two fiscal years as market returns fall below annual targets. “The median return for public pension plans in FY 2016 was 0.52% compared to an average assumed investment return of 7.5%,” Moody’s Vice President — Senior Credit Officer Marcia Van Wagner says. “We project that aggregate state ANPL will grow to $1.75 trillion in FY 2017 audits.” Moody’s new report also introduces a new “Tread Water” benchmark, which measures whether states’ annual contributions to their pensions are enough to keep the unfunded net liability from growing. …there were several states whose pension contributions were notably below the Tread Water mark, including Kentucky (Aa2 stable), New Jersey (A2 negative), Illinois (Baa2 negative), and Texas (Aaa stable). …The states with the highest pension burdens — measured as the largest three-year average ANPL as a percent of state governmental revenue — were consistent with previous years. Illinois topped the list with pension liabilities at 280% of total governmental revenue, followed by Connecticut (Aa3 negative) at 209%, Alaska (Aa2 negative) at 179%, Kentucky at 162%, and New Jersey at 157%.

Wow, it doesn’t matter what report you look at, or what methodology is being used, Illinois, New Jersey, and Kentucky are a big mess (Alaska’s numbers also are awful, but the state – within certain limits – can use energy tax revenues to cover much of its shortfall).

So what’s the solution to all this mess? As I noted a couple of months ago when sharing other grim numbers about state pension systems, the answer is to, 1) stop promising excessive benefits to bureaucrats (and stop giving them excessive pay as well), and 2) switch to “defined contribution” plans so that workers have their own piles of money and the underfunding problem automatically disappears.

P.S. I’ve already granted the “Politician of the Year Award” to the President of the Philippines, the Prime Minister of Malaysia, and the President of France, which probably means I should have a “Politician of the Month Club” instead. And if the Award is expanded, the politicians from the Solomon Islands obviously would be good candidates for the honor.

There was a public outcry in the Pacific island nation in May 2015, when a parliamentary commission voted to exempt MPs’ earnings from tax. …now the Court of Appeal – the Solomon Islands highest court – has said that MPs can benefit from tax-free salaries after all. It ruled that while the policy may be unpopular with the public, it’s still legal.

Living off taxpayers while paying no tax. Who do they think they are, IMF or OECD bureaucrats?

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One (hopefully endearing) trait of being a policy wonk is that I have a weakness for jurisdictional rankings. At least if they’re methodologically sound.

This is why I was so happy a couple of weeks ago when I got to peruse and analyze the 2016 version of Economic Freedom of the World (even if the results for America were rather depressing).

Heck, sometimes I even can’t resist commenting on methodologically unsound rankings, such as the profoundly stupid “Happy Planet Index” that puts despotic hellholes such as Cuba and Venezuela above the United States.

Given my interest in rankings, you can appreciate how excited I am that my colleague at Cato, Chris Edwards, just unveiled the 2016 version of his Fiscal Policy Report Card on America’s Governors and that the Tax Foundation just released its annual State Business Tax Climate Index. It’s sort of like Christmastime for me.

Here’s the big news from Chris’ Report Card. As a Virginia resident, I’m not terribly happy the Governor McAuliffe scores a D (not that his GOP predecessor was any good). It’s also perhaps somewhat newsworthy that Governor Pence earned an A (so he seems committed to smaller government even if the guy he’s paired with doesn’t share the same philosophy).

And here’s the Tax Foundation’s map showing each state’s ranking, with top-10 states in blue and bottom-10 states in light orange.

If you pay close attention, you’ll notice that zero-income-tax states are disproportionately represented among the states with the best scores.

All this is quite interesting (at least to me), but it occurred to me that it might be even more illuminating to somehow meld these two rankings together.

After all, Chris’s Report Card is a measure of whether a state is moving in the right direction or wrong direction while the Tax Foundation is more of a comparative measure of how a state ranks at a given point in time compared to other states.

So I created the following matrix that looks only at the states that received A or F in the Cato Report Card and also were either in the top 10 or bottom 10 of the Tax Foundation Index.

As you might guess, the best place to be is in the top-left portion of the matrix since that shows a state that is both moving in the right direction while also having a very competitive tax system. So kudos to Florida and Indiana (with honorable mention for North Carolina, which received an A in the Cato Report Card but just missed cracking the top 10 in the Tax Foundation Index).

The bad news, if you look at the bottom-left quadrant, is that there are three states with good tax systems but bad governors. South Dakota, Oregon, and Nevada are in strong shape today, but it’s hard to be optimistic about those states preserving their lofty rankings since policy is moving in the wrong direction.

And the worst place to be is the bottom-right quadrant, which means that a state has both a bad tax system and a bad policy environment.

Last but not least, the sad news is that the top-right quadrant is empty, which means there aren’t any bad states moving aggressively in the right direction.

So the bottom line is that American citizens should think about moving to Florida and Indiana. Especially if they live in Vermont, California, or Connecticut.

P.S. It would be even better to move to Monaco, Hong Kong, or the Cayman Islands, but those presumably aren’t very practical options for most of us.

P.P.S. Actually, the best place for an American taxpayer to live is Puerto Rico since it’s a legal tax haven.

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Proponents of liberty generally are big fans of federalism. In part, this is simply an issue of “good governance” since both voters and lawmakers at the state and local level are more likely to actually understand the real issues in communities and be able to develop policies that are more sensible.

But we also like federalism because it’s relatively easy for people to move across state and local borders and this means governments have to compete with each other, both in terms of not driving away productive people and also in terms of not attracting those who want to mooch off the government.

The obvious implication is that if we can dramatically shrink the federal government so that it only handles the few (enumerated) powers envisioned by the Founding Fathers, that would give states far more authority to determine tax burdens and the degree of redistribution, and they would presumably do a better job because they would compete with each other for jobs and investment.

This is why I’m always interested when organizations produce rankings that show the degree to which states seem inclined to adopt good policy. For instance, I routinely highlight the findings of the Tax Foundation’s State Business Tax Climate Index so I can see which states have acceptable tax policy. And the Mercatus Center’s Ranking the States by Fiscal Condition is a must-read publication to see which states follow sensible budget policy.

The latest addition to this group is the Cato Institute’s Freedom in the 50 States. It’s a comprehensive publication with lots of data and number-crunching, so wonks will have a field day digging into the details.

But if you simply want the highlights, I first looked to see which states have the best fiscal policy. Here’s the relevant table from the document and I’ve modified it to show which states have no income tax (blue stars), which ones have flat taxes (red stars), and which ones have no sales tax (black stars).

The obvious implication is that having no state income tax is probably the single most important way of controlling the fiscal burden of government.

But fiscal policy is just one variable of economic freedom. And while states obviously don’t have any leeway on monetary policy and trade policy, they have considerable powers over issues related to regulation.

And when you add these factors to the mix, you can get a measure of overall economic freedom.

If you compare these first two tables, there are some predictable similarities (New York and California score poorly while South Dakota, Tennessee, and New Hampshire do well).

But you also get some odd results. Pennsylvania, for instance, is 13th for fiscal policy, but drops to 30th for overall economic policy. I guess this means they are regulatory maniacs.

By contrast, Indiana is ranked a mediocre 26th for fiscal policy, but jumps to 11th place for overall economic policy, which presumably means a very laissez-faire approach to red tape.

Now let’s add personal freedom issues to the equation (issues such as guns, gambling, sex, education, booze, and even fireworks).

The bottom line, if you value overall liberty, is that you better be tolerant of cold weather since New Hampshire and Alaska are atop the rankings. New York is in last place by a comfortable margin.

Interestingly, if you compare the fiscal ranking with the above table for overall freedom, you’ll notice that there’s a lot of overlap. New Hampshire is first in both and New York is last, for instance.

But there are some odd anomalies. Iowa, for example is 9th for overall freedom but only 30th for fiscal freedom, a gap of 21 spots. There’s also a big difference for Kansas, which is 33rd in fiscal freedom but 16th for overall freedom.

Conversely, Texas is 10th for fiscal freedom, but drops to 28th place for overall freedom. And Alabama also has a split personality, ranking 6th for fiscal policy but 23rd for overall freedom.

Why are some states bad on fiscal policy but good on regulation and personal freedom, like Iowa and Kansas? Or, in the case of states like Alabama and Texas, the other way around?

Beats me. Maybe some southern states like controlling people’s lives so long as it doesn’t involve the power of the purse (sort of like Singapore). And maybe some farm states exploit the power of the purse, both otherwise leave people alone (sort of like the Nordic nations).

Here’s something easier to understand, a measure of which states have improved the most and deteriorated the most in the 21st century.

The bad news is that only nine states have moved in the right direction, with Oklahoma easily winning the prize for pro-liberty reforms. Honorable mention to Alaska, Maine, and Idaho.

By the way, is anybody surprised that Illinois is in last place? The dropping scores for Hawaii, New Jersey, and Connecticut also aren’t surprising.

But why have Kentucky, Nebraska, and Tennessee fallen so much?

P.S. Since we’re ranking states, here’s one final bit of information.

I wrote recently to debunk the left’s claim that California is an economic success story. My main point was to share per-capita income data from the BEA to who that California has been losing ground over the medium-term and long-term to states such as Kansas and Texas. And even in the short-term as well if you look at Census Bureau data on median household income.

But some leftists pushed back by arguing that the numbers nonetheless showed higher income levels in California. That’s certainly what we see in both the BEA and Census data, though I would argue that’s actually not relevant unless one (incorrectly) claims that California became a rich state because of big government. As i wrote in that column, “we’re focusing on changes in per-capita income (i.e., which state is enjoying the most growth, regardless of starting point or how much money can buy in that state).”

Speaking of “how much money can buy,” let’s look at some great work from the Tax Foundation on that topic. If you have $100 of income, where will you be able to buy the best basket of goods and services. As you can see, you’re far better off in Texas or (especially) Kansas than in California.

The bottom line is that living standards in Texas and Kansas would be higher than those in California if BEA and Census numbers were adjusted for purchasing power parity (as happens when comparing living standards across nations).

Some people may want to live in California (or some other high-tax state) because of the climate or scenery. They just have to accept lower living standards caused by bigger government. Just like there are certain benefits of living in nations such as France and Italy, but you have to accept bloated government and economic stagnation as part of the package

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I’ve written (some would say excessively) about the fact that America has too many bureaucrats and that they’re paid too much.

That’s true in Washington. That’s true at the state level. And it’s true for local governments.

But since I’m a big believer in beating a dead horse, let’s revisit this issue. We’ll narrow our focus today and look solely at the issue of retirement benefits for state and local bureaucrats.

Why? Because, as explained by Andrew Biggs of the American Enterprise Institute, the unfunded liability for these schemes has mushroomed into a giant $5 trillion problem.

If the Actuarial Standards Board enacts recommendations from its Pension Task Force, actuarial valuations for state and local government pensions will report unfunded liabilities of over $5 trillion and funding ratios of just 39 percent. The public pensions industry will hate it, but those figures are the best available measures of the costs of public employee retirement plans. …That $5.2 trillion is the number most economists would think is most relevant to considering the costs of public sector pensions. …The simple reality is that public pension underfunding is a significant problem that can only really be addressed by increasing contributions or by lower pension benefits, choices that pretty much everyone involved in the pension world would prefer to avoid.

You won’t be surprised to learn that some states are more irresponsible than others.

CNBC reports that Nebraska is the most prudent and Alaska is the worst (politicians can’t resist squandering oil revenue). Several blue states rank poorly (think Illinois, Connecticut, California, and New Jersey), but there also are red states (such as Louisiana and Kentucky) that have made very foolish promises.

In Nebraska, for example, the pension liability amounts to about $386 per person, the lowest in the nation. That compares with Alaska ($19,394 per person: the highest in the country), Illinois ($15,158 per person) and Connecticut ($14,769). The average pension shortfall in 2014 amounted to $4,383.

The Wall Street Journal has an interactive table that allows readers to see which states have the biggest shortfall.

Meanwhile, Governing has an interactive map showing which states have the biggest gaps.

In other words, state and local bureaucrats have been promised a lot of money when they retire.

Much more money than is available.

And when you add Social Security benefits to the mix, as Andrew Biggs has calculated, you wind up having lots of bureaucrats enjoying very lavish levels of retirement income.

I tabulated the pension benefits paid to full-career “regular” state government employees (meaning, non-public safety) retiring in 2012. For states in which public employees participated in Social Security, I estimated the Social Security benefit the retiree would be eligible to receive. And finally, I compared total retirement benefits to the worker’s earnings immediately preceding retirement. …Mississippi paying the lowest replacement rate of 54% of final earnings. …West Virginia paid the most generous benefits, equal to 115% of final earnings, followed by New Mexico (113%), Oregon (105%), California (102%) and, yes, conservative Texas (101%).

Here’s a map that accompanied the article.

But maybe big numbers, maps and tables are too abstract.

To give some examples of how this is leading to a fiscal crisis, consider these recent news reports.

A story from the Las Vegas Review-Journal:

Nevadans should brace for reduced services, higher taxes or both — the necessary consequence of the Public Employee Retirement System of Nevada (PERS) having badly missed its investment target last year…PERS has now missed its target over the past five, 10, 15, 20 and 25 years — suggesting that another taxpayer-rate hike is on its way. Remarkably, this shortfall has occurred even though markets have nearly tripled from their 2009 lows, and currently sit at or near all-time highs. Nevada’s soaring pension costs — ranked third-highest in the nation at 9.8 percent of own-source revenue, according to 2013 data from the Public Plans Database — aren’t just due to overly optimistic investment assumptions, however. Another factor is the extraordinarily generous nature of the benefits.

A column from the Orange County Register:

…in the world of public sector pensions – among the biggest institutional investors in global markets – politicians…pretend they can count on big investment returns every year, while disregarding warning signs, mounting debts and increasingly unsustainable pension systems. We’re seeing the latest pension fund returns come in, and almost uniformly, it was a terrible year for states – and thus taxpayers. The California Public Employees’ Retirement System, the largest U.S. public pension fund, logged a paltry annual return of 0.6 percent. …CalPERS is currently only 76 percent funded, a figure that will inevitably drop given the latest weak returns.

A report from the Portland Tribune:

Oregon’s major business groups want lawmakers to start dealing with rising public pension costs as early as the session that opens Feb. 1. Although those costs start to kick in with the 2017-19 budget cycle — 18 months away — advocates say it’s not too early to whittle down an unfunded liability projected at $18 billion over the next few decades. …projected increases in contributions to PERS, which covers about 95 percent of Oregon’s public workers, will eat deeply into what they can spend over the next several two-year budget cycles. Cheri Helt, co-chair of the Bend-La Pine School Board, says pension costs will jump from the current 16 percent of payroll to 20 percent in 2017-19, and to 25 percent in the cycle afterward. …Jamie Moffitt, vice president and chief financial officer for the University of Oregon, says rising pension costs will eat up 40 percent — about 2 percentage points — of the 5.5 percent average annual increase in tuition.

An editorial about New Jersey in the Wall Street Journal:

New Jersey’s Senate president is in a Brando-like fight with government unions that he says are trying to extort or bribe legislators into doing their bidding. …At issue is the woefully underfunded state pension system. The teachers union wants to put a measure on the November ballot to amend the state constitution to require quarterly state pension payments of increasing amounts. …government unions have so much political sway over politicians that they often call the shots on their own pensions and benefits. …New Jersey’s public pensions are underfunded to the tune of $82 billion. Thomas Healey of the state’s bipartisan Pension and Health Benefit Study Commission notes that pensions and health care now eat up 11% of New Jersey’s budget, and without reform this will grow to 28% by 2025. …The pension commission has proposed reforms—including a shift to a hybrid retirement plan that includes features more akin to a 401(k)—but unions have blocked them. They now want voters to rewrite the state constitution so pension reform would be all but impossible.

A column about the corrupt system in Illinois:

Illinois’s government, says [Gov.] Rauner, “is run for the benefit of its employees.” Increasingly, it is run for their benefit when they retire. Pension promises [are] unfunded by at least $113 billion… The government is so thoroughly unionized (22 unions represent almost all government employees), that “I can’t,” Rauner says, “turn on a light switch without permission.” He exaggerates, somewhat, but the process of trying to fire someone is a career, not an option. …high-tax Illinois will continue bleeding population and businesses, but with one contented cohort — the Democratic political class, for whom the system is working quite well.

The crux of the problem is that most state and local governments have “defined-benefit” plans for bureaucrats, which means that taxpayers are on the hook to provide retiring bureaucrats a specific amount of benefits (not just retirement income, but other goodies such as health care) based on formulas that count years in the workforce, highest salary levels, and other factors. That may not sound totally unreasonable, but politicians realize they can buy votes by cutting deals with government unions and providing retirement benefits that are extremely generous, especially compared to what’s available for workers in the private sector.

But that’s simply one part of the problem. The other part of the problem is the employers with defined-benefit plans (usually referred to as “DB plans”) are supposed to set aside money in investment funds so that there’s a growing pool of assets that can be used to pay for the lavish benefits promised to the bureaucracy. But as we’ve already learned, politicians often are reluctant to take this step. They like committing lots of future money to bureaucrats, but when putting together annual budgets, they generally can buy more votes by allocating money to things like schools and roads rather than depositing money into a pension fund.

So the net result is that there’s a big unfunded liability, meaning that the amount that politicians have promised to give bureaucrats is larger than what’s set aside in the pension funds. And to make matters worse, the pension funds usually have dodgy accounting (they assume the investments will earn more money than is realistic). Which is why the actual shortfall is about $5.2 trillion, as noted above.

Given this ticking time bomb, some of you may be wondering why the title says there’s a libertarian quandary. Surely the answer is to cauterize this fiscal wound with immediate cuts and to avoid an even bigger long-run disaster by shifting newly hired bureaucrats to a defined-contribution system such as IRAs or 401(k)s. This type of reform automatically eliminates any liability for taxpayers since retirement benefits for bureaucrats would be solely a function of contributions to retirement accounts and the investment performance of those funds (most state and local bureaucrats also are part of the Social Security system).

Yes, that is the answer, but the quandary (to add to my collection) is whether the federal government should force, or even encourage, this type of reform. Don’t state and local governments, after all, have the right to make stupid decisions?

Writing for the Wall Street Journal, Ed Bachrach argues that Uncle Sam should limit these suicidal policies.

The pensions of states and local governments are, collectively, trillions of dollars in the hole. This debt is crippling budgets and will dump an enormous burden on future generations. Yet state and local politicians have proven that they cannot, or will not, solve the problem. The federal government ought to step in. But how? Instead of bailing out these pensions, Congress should pass a law allowing states and local governments to reduce promised benefits—something that is now illegal under some states’ statutes or constitutions. …Many pensions allow retirement at age 55; states and local governments could mandate that benefits cannot be drawn until age 65. Payments could be capped at 150% of the median income in the local jurisdiction. Automatic cost-of-living increases that now exceed expected inflation could instead be tied to increases in the median income. …Local governments must also be required to terminate their defined-benefit plans. These should be replaced with defined-contribution plans, like 401(k)s or 403(b)s… Rep. Devin Nunes (R., Calif.) proposed withholding federal aid to government entities that don’t accurately report pension funding. That would be a step forward but would not solve the problem of underfunding.

I obviously agree that there should be no bailouts, but I’m still not convinced that Washington should mandate good policy by state and local governments.

Federalism means the freedom to adopt good policy…but also the leeway to commit fiscal suicide.

Though Andrew Biggs points out that the part about accurate reporting certainly sounds reasonable.

Congress has a tremendous opportunity to require state and local government employee pension plans to accurately disclose their multi-trillion dollar unfunded liabilities. …For years, economists and government agencies like the Congressional Budget Office have called for so-called “fair market valuation,” which both more accurately calculates the value of public pension liabilities and accurately tells those plans that taking more investment risk doesn’t make their plans cheaper. …there’s legislative language already written: Rep. Devin Nunes’s Public Employee Pension Transparency Act (PEPTA), which has a number of Congressional co-sponsors including House Speaker Paul Ryan, would require state and local plans to accurately disclose their liabilities using fair market valuation. The federal government would respect state and local rights by not forcing any changes to how pensions are funded, but Nunes’s plan would require that state and local governments to tell the public – including people thinking of purchasing municipal bonds – how much they really owe to their pensions.

P.S. By the way, advocates of limited government don’t experience many victories, but there actually was a very good reform of the pension system for federal bureaucrats during the Reagan years. Yes, federal bureaucrats are still over-compensated, but it’s not nearly as bad as it used to be. Yet another example of how Reaganomics was a success.

P.P.S. Shifting to bad news (or laughable news), the hacks in California tried to argue that lavish pensions for bureaucrats boost the economy. Andrew Biggs does a great job of debunking this nonsense.

The California Public Employee Retirement System (CalPERS) issued a report in July claiming that its benefit payments to retired government employees in 2013-2014 “supported 104,974 jobs throughout California and generated more than $15.6 billion in additional economic output.” …To reduce pension benefits for public employees, the study implies, would harm the overall California economy. …This study is nothing short of propaganda that wouldn’t get a passing grade in a freshman economics course. …the CalPERS study lacks one important component, called “counting both sides of the equation.” It needs to count economic costs as well as economic benefits. …CalPERS doesn’t create money out of thin air. Every single dollar of CalPERS benefits comes from a dollar that taxpayers or government employees contributed to the program or from the interest earned on those contributions.

Sounds like the bureaucrats at CalPERS should be working for the Congressional Budget Office.

P.P.P.S. The focus of this column is on the inherent instability of defined-benefit pension plans for bureaucrats, but let’s not lose sight of the fact that the underlying issue is that bureaucrats are ripping off taxpayers. Here are some blurbs from a Reason report by Eric Boehm on how this scam works in California.

If public service truly is a sacrifice, then join me in shedding a tear for the 20,900 public workers in California who pulled down more than $100,000 in retirement benefits during 2015. …Leading the way for 2015 was Michael Johnson. The former Solano County administrator received a $388,407 pension last year. …Rounding out the top three are Stephen Maguin, a former Los Angeles County Sanitation District general manager who pulled down $340,811 in 2015 and Joaquin Fuster, a former UCLA professor who got a pension worth $338,412 last year. …Curtis Bowden, a former member of the California Highway Patrol…retired all the way back in 1947, which means he’s been collecting pension checks for 68 years, after working just 5.3 years for the state. He got $24,800 from CalPERS in 2015.

Wow, I’m not sure what’s more impressive, Getting an annual pension of nearly $400K after being a country bureaucrat or working for just a bit over five years and getting 68 years worth of retirement checks?

Seems like both of them should be part of the Bureaucrat Hall of Fame.

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