Happy St. Patrick’s Day! Insert your own Irish-related drinking joke here.
Archive for the ‘Budget’ Category
Let’s take a look at this New York Times piece titled “Popular Domestic Programs Face Ax Under First Trump Budget.”
WASHINGTON — The White House budget office has drafted a hit list of programs that President Trump could eliminate to trim domestic spending, including longstanding conservative targets like the Corporation for Public Broadcasting, the Legal Services Corporation, AmeriCorps and the National Endowments for the Arts and the Humanities.
At this point I have to break out this Archer meme:
You know what all these programs have in common: None are constitutionally enumerated concerns of the federal government.
And note the headline: “Popular Domestic Programs.” Popular to who? Why, Democrats, of course. I would imagine that 90+% of the money spent on those programs goes directly into the pockets of Democrats, and mostly well-heeled and well-connected ones at that.
Work on the first Trump administration budget has been delayed as the budget office awaited Senate confirmation of former Representative Mick Mulvaney, a spending hard-liner, as budget director. Now that he is in place, his office is ready to move ahead with a list of nine programs to eliminate, an opening salvo in the Trump administration’s effort to reorder the government and increase spending on defense and infrastructure.
Most of the programs cost under $500 million annually, a pittance for a government that is projected to spend about $4 trillion this year. And a few are surprising, even though most if not all have been perennial targets for conservatives.
Mr. Trump has spoken volubly about the nation’s drug problems, yet the list includes the White House’s Office of National Drug Control Policy, which dispenses grants to reduce drug use and drug trafficking. And despite Mr. Trump’s vocal promotion of American exports, the list includes the Export-Import Bank, which has guaranteed loans to foreign customers of American companies since the 1930s.
While the total amount of annual savings of roughly $2.5 billion would be comparatively small, administration officials want to highlight the agencies in their coming budget proposal as examples of misuse of taxpayer dollars. An internal memo circulated within the Office of Management and Budget on Tuesday, and obtained by The New York Times, notes that the list could change. Proposals for more extensive cuts in cabinet-level agencies are expected to follow.
All this, of course, could be a trial balloon, and the actual budget cuts could be far more timid. But overall, it’s exceptionally promising, especially since Trump did not evidence much (if any) enthusiasm for budget cutting on the campaign trail. But a willingness to kill entire agencies (especially those that make of some of the Democratic Party’s favorite slush funds) is incredibly heartening.
If America is going to deal with the existential threat that is the national debt, there needs to be a lot more budget cutting ahead.
It’s been a long time since I compiled one of these, so this is going to be monstrously large. Also, just as I was finishing this up, the San Diego Chargers announced they were moving to Los Angeles. Hell, LA has proven in the past it’s incapable of adequately supporting one NFL franchise, much less two…
Increasingly, inside the party, it’s been the furthest Left candidates that win. In the Democrat-only Sanchez vs. Harris race for the U.S. Senate, the more progressive candidate triumphed easily, with a more moderate Latina from Southern California decimated by the better funded lock-step, glamorous tool of the San Francisco gentry Left.
Gradually, the key swing group — the “business Democrats” — are being decimated, hounded by ultra-green San Francisco billionaire Tom Steyer and his minions. No restraint is being imposed on Gov. Brown’s increasingly obsessive climate change agenda, or on the public employee unions, whose pensions could sink the state’s finances, particularly in a downturn.
The interior parts of California already rank near the bottom, along with Los Angeles, in terms of standard of living — by incomes, as opposed to costs — in the nation. Compared to the Bay Area, which now rules the state, the more blue-collar, Latino and African American interior, as well as much of Los Angeles, account for six of the 15 worst areas in terms of living standard out of 106 metropolitan areas, according to a recent report by Center for Opportunity Urbanism demographer Wendell Cox.
Given the political trends here, it’s hard to see how things could get much better. The fact that most new jobs in Southern California are in lower-paying occupations is hardly promising. In contrast, generally better-paying jobs in manufacturing, home-building and warehousing face ever-growing regulatory strangulation.
Sadly, the ascendant Latino political leadership seems determined to accelerate this process. In both Riverside and San Bernardino, pro-business candidates, including San Bernardino Democrat Cheryl Brown, lost to green-backed Latino progressives.
For whatever reason, Latino voters and their elected officials fail to recognize that the increasingly harsh climate change agenda represents a mortal threat to their own prospects for upward mobility. Before this week’s election, California policy makers could look forward to Washington imposing such policies on the rest of the country; now our competitor regions — including Utah, Arizona, Nevada and Texas — can double down on growth. Expect to see more migration of ambitious Californians, particularly Latinos, to these areas.
California is on the road to a bifurcated, almost feudal, society, divided by geography, race and class. As is clear from the most recent Internal Revenue Service data, it’s not just the poor and ill-educated, as Brown apologists suggest, but, rather, primarily young families and the middle-aged, who are leaving. What will be left is a state dominated by a growing, but relatively small, upper class, many of them boomers; young singles and a massive, growing, increasingly marginalized “precariat” of low wage, often occasional, workers.
California is about to face the music as Donald Trump becomes 45th President of the United States. Their Sanctuary Cities violate federal law and after Jeff Sessions is confirmed as Attorney General (and he will be), they are going to either have to knock that off or have funding to their law enforcement and their government stripped away. Sessions can’t wait and I have to say, I will enjoy watching this showdown. Los Angeles Mayor Eric Garcetti said that Trump pulling 37% of federal funding for their governments would cause chaos and upheaval. Yes, it will… it will also cause California to go absolutely toes up bankrupt.
It’s simple. They can either follow the rule of law, or the free flow of money from DC gets cut off. In 2015, that amounted to about $93.6 billion. That’s a lot of money to turn away because you insist on not following the law. Let’s see how long that lasts. I love the thought of this. It’s about time Sanctuary Cities were stopped and this is an excellent way to do it. New York, Chicago and DC will all face the same choice by the way. Imagine the meltdown. Good times.
California has 39 million people — 43% larger than the 2nd largest state (Texas). Such GDP comparisons don’t tell us much in terms of the PROSPERITY of a nation. Or a state.
The proper comparison is PER CAPITA GDP. Using that more meaningful figure, CA is the 10th most prosperous state.
But an even MORE accurate comparison is to take the per capital GDP and adjust it for COL. Because of California’s high taxes, crazy utility laws, stifling regulations (paid by consumers) and sky-high housing costs, CA in 2014 ranked WAY down in 37th place. Only 13 states were worse.
(Hat tip: Pension Tsunami.)
Governor Jerry Brown announced today that the budget was $1.4 billion in deficit. At the end of last year, the state announced that it was giving state employees a raise which would cost taxpayers over $2 billion over the next four years. Do you think there is a connection?
A story ran locally in Southern California saying that over 105 employees in Santa Monica, a medium sized city, earn over $300,000 a year. The Governor of the state of California earns $174,000 per year. If you do the research, you will find that there are over 200 state employees that earn more than that
When I was deciding what I wanted to do in my younger years, my mother told me I should go to work for the government, good benefits she said. I knew I would be bored and would die young if I became a government drone. My little sister listened to her. Today, my little sister is retired on a great government pension, I still fight to pay my taxes. Given the pay that even the lowest government official receives, my mother was right.
Our government pension system is over $500 billion upside down. Retired state employee health benefits add an additional $300 billion or more to that deficit. The system is out of control. Pay and benefits to government employees at state and local levels is incomprehensible, and the government leaders still come to you and I and ask us to foot the bill for their indulgences.
What is even more evil about the system is that government unions, led by thugs who force people to pay union dues for the privilege of having a government job, take the money from the government employees and put it into the political system to pay for the campaigns of the Governor, statewide elected officials, legislators and city councils with whom these unions then negotiate for the out-of-control pay and benefits. If anyone tries to limit them, as I once tried by tying everybody’s salaries to the Governor’s salary, they are marked for political defeat. And the system perpetuates itself, taxes to employees to unions to politicians, as it did in the Soviet Union, until the whole system collapses.
(Hat tip: Pension Tsunami.)
Driven by rising out-migration and falling birth rates, California’s population growth has stalled, leading analysts to consider a possible forecast of a so-called “no-growth” period in the future.
Although Americans nationwide have been flooding south and west for years, the Golden State has become an exception. Nearly 62 percent of Americans lived in the two regions, Justin Fox observed from Census figures. “That’s up from 60.4 percent in the 2010 census, 58.1 percent in 2000, 55.6 percent in 1990 — and 44 percent in 1950. The big anomaly is California, which is very much in the West, yet has lost an estimated 383,344 residents to other states since 2010.”
“The state’s birth rate declined to 12.42 births per 1,000 population in 2016 — the lowest in California history,” the San Jose Mercury News noted, citing a state Department of Finance report. “In 2010, the last time figures were compiled, the birth rate was 13.69 per 1,000 population.”
Last week California’s progressive lawmakers announced that they’ve put former Attorney General Eric Holder, now a Covington & Burling partner, on retainer as the state’s outside counsel. “This is potentially the legal fight of a generation, and with Eric Holder we’ve added a world-class lawyer,’’ said Senate majority leader Kevin de León.
This is odd. Typically states hire outside counsel for help with specific cases, but the legislature is paying Mr. Holder $25,000 a month for three months under the initial contract, apparently for 40 hours a month and the privilege of his attention if something comes up.
Overseers of the nation’s largest pension trust fund, the California Public Employees Retirement System (CalPERS), last month reduced – albeit reluctantly – its projection of future earnings by a half-percentage point.
With earnings on investments the last two years barely exceeding zero, CalPERS has been compelled to sell assets to make its pension payments – which far outstrip contributions from state and local governments and their employees.
Reducing the “discount rate” to 7 percent will force employers, and perhaps employees, to kick billions of more dollars into the system to slow the growth of CalPERS’ “unfunded liabilities,” as the $150-plus billion debt is termed.
However, the extra contributions generated by lowering the discount rate will not erase that debt, which is likely to keep growing if CalPERS’ investment earnings continue to fall short, as many economists expect. In fact, CalPERS’ own advisers see a prolonged period of relatively low earnings, and say the system shouldn’t count on more than 6.2 percent.
Rationally, the discount rate should have been lowered by at least another full percentage point. But CalPERS has already increased its mandatory contributions by 50 percent to make up for investment losses during the Great Recession and other factors, and cutting the discount rate to 6 percent would probably mean bankruptcy for a number of local governments, especially some cities.
(Hat tip: Pension Tsunami.)
This is why the CalPERS board must do far more — starting with, on a large scale, finally embracing pension reforms and, on a smaller scale, shuttering an over-the-top corner of the CalPERS website that says it’s a myth that pension costs are crowding out “government services like police and libraries.”
It’s no myth. The Los Angeles Times reported last month that pensions and retirement health benefits now consume 20 percent of revenue in Los Angeles and Oakland and a stunning 28 percent in San Jose. While the state government is in better shape than most local governments, it’s beginning to feel the strain as well. On Wednesday, Bloomberg reported that beginning in April, the state will increase vehicle registration fees from $46 to $56 to help cover the soaring cost of pensions for California Highway Patrol officers. In 2000, the state had to pay about one-eighth of annual CHP pension costs. Now it must pay about half.
Texas experienced a net gain of out-of-state residents in 2015, with 107,689 more people moving to Texas than Texas residents moving out of state. This is a 4 percent increase in the net gain of Texas residents from 2014 (103,465 residents).
The total number of residents moving to Texas from out of state in 2015 increased 2.8 percent year-over-year to 553,032 incoming residents. The highest number of new Texans came from California (65,546), followed by Florida (33,670), Louisiana (31,044), New York (26,287) and Oklahoma (25,555).
Texas once again ranked third in the nation for number of residents moving out of state (445,343) in 2015. The most popular out-of-state relocation destinations for Texans were California (41,713), Florida (29,706), Oklahoma (28,642), Colorado (25,268), and Louisiana (19,863).
Canadian apparel maker Gildan Activewear Inc. has won a bankruptcy auction for U.S. fashion retailer American Apparel LLC (curxq) after raising its offer to around $88 million, a person familiar with the matter said Monday.
Gildan’s takeover marks the end of an era for the iconic Los Angeles-based company, which was founded in 1998 by an eccentric Canadian university drop-out and grew to become a part of U.S. popular culture thanks to its racy advertising.
Gildan will not take any of American Apparel’s 110 stores, but will own its brand and assume some of its manufacturing operations, the source said. The deal is subject to a bankruptcy judge approving it on Thursday.
And if you hadn’t seen them already, two previous BattleSwarm stories that touch on the Texas vs. California issue:
Lock up your women and liquor, the legislature is back in town!
The 85th Texas Legislative Session started today, and one of the biggest concerns is a smaller budget, as detailed by the comptroller:
For 2018-19, the state can expect to have $104.9 billion in funds available for general-purpose spending, a 2.7 percent decrease from the corresponding amount of funds available for the 2016-17 biennium. If not for the new constitutional provision dedicating up to $5 billion in biennial sales tax revenue to the State Highway Fund (SHF) starting in fiscal 2018-19, projected funds available for general-purpose spending for 2018-19 would be $109.6 billion, 1.7 percent greater than in 2016-17.
The $104.9 billion available for general-purpose spending represents 2018-19 total revenue collections of $106.5 billion in General Revenue-related (GR-R) funds, plus $1.5 billion in balances from 2016-17, less $3.1 billion reserved from oil and natural gas taxes for 2018-19 transfers to the Economic Stabilization Fund (ESF) and the SHF.
Tax revenues account for approximately 87 percent of the estimated $106.5 billion in total GR-R revenue in 2018-19. Sixty-two percent of GR-R tax revenue will come from net collections of sales taxes, after more than $4.7 billion is allocated to the SHF. Other significant sources of General Revenue include motor vehicle sales and rental taxes; oil and natural gas production taxes; franchise tax; insurance taxes; collections from licenses, fees, fines and penalties; interest and investment income; and net lottery proceeds.
In addition to the GR-R funds, the state is expected to collect $74.9 billion in federal income as well as other revenues dedicated for specific purposes and therefore unavailable for general-purpose spending. Revenue collections from all sources and for all purposes should total $224.8 billion.
Absent any appropriations by the Legislature, the ESF balance is expected to be $11.9 billion at the end of the 2018-19 biennium, below the ESF constitutional limit of an estimated $16.9 billion.
Following a strong 5.9 percent increase in real gross state product in fiscal 2015, the Texas economy is estimated to have grown by only 0.2 percent in 2016, well below the average growth rate of 3.8 percent per year over the past 20 years. Contraction in activity related to oil and natural gas production has been a drag on state economic growth. Still, the diversity of the Texas economy has allowed for continued growth in employment over the past two years and we expect sustained growth over the coming biennium. Texas stands in contrast to other states with large energy industries, many of which have suffered through declines in employment and economic output.
Here’s an eyechart visual summary. Click for a bigger version.
The budget is the meat-and potatoes of the legislature, but we’ll get to some hot-button issues (like sanctuary cities and tranny bathrooms) at a later date.
Rep. Paul Ryan has been reelected Speaker of the House:
As expected, Republican Paul D. Ryan of Wisconsin on Tuesday was elected speaker of the House for the 2017-2018 congressional term. The final vote was 239-189, with five lawmakers not voting for either Ryan or Democratic Leader Nancy Pelosi of California.
There were issues with Ryan’s speakership (as there were with all his Republican predecessors), but with Republicans in control of all three branches of government, Ryan should be able to implement vastly more of the Republican agenda than they did under Obama. Ryan needs to enable Trump when he’s acting to implement conservative policies, and provide a check on him when he isn’t.
First order of business: Repealing ObamaCare. Second order: Junking as much of the remaining cruft of the Obama Administration as possible. Third order: Securing the border and staying the hell away from the siren song of “comprehensive immigration reform” that so many establishment Republicans still harbor a suicidal longing for.
There’s a hundred other things that need attending to (including doing something about the budget deficit), but the damage of the Obama years will not be undone overnight…
James Quintero, the Director of the Center for Local Governance at the Texas Public Policy Foundation, was kind enough to provide some detailed answers to questions I sent him about the municipal pension crisis in Dallas and other large Texas cities. My questions are in italics.
The Dallas police/fireman’s pension fund issue is generally described as stemming from the fund manager’s risky real estate speculation. Are there any additional structural problems that helped hasten that fund’s crisis?
When it comes to Texas’ public retirement systems, one of my greatest concerns is that there are other ticking time-bombs, like the DPFP, out there getting ready to explode. It’s not just Dallas’ pension plan that’s taken on excessive risk to chase high yield in a low-yield environment.
Setting aside the issue of risk for a moment, the DPFP, like most other public retirement systems around the state, suffers from a fundamental design flaw. That is, it’s based on the defined benefit (DB) system, which guarantees retirees a lifetime of monthly income irrespective of whether the pension fund has the money to make good on its promises or not. This kind of system is akin to an entitlement program, warts and all, and is very much at the heart of pension crises brewing in Texas and across the country.
One of the biggest problems with DB plans is that they rely on a lot of fuzzy math to make them work, or at least give the appearance of working. Take the issue of investment returns, for example. Many systems assume an overly optimistic rate of return when estimating a fund’s future earnings. Baking in these rosy projections is, among other things, a way to understate a plan’s pension debt. In an October 2016 study that I co-authored with the Mercatus Center’s Marc Joffe, I wrote the following to illustrate this very point:
For example, the Houston Firefighters’ Relief and Retirement Fund (HFRRF) calculates its pension liability using a long-term expected rate of return on pension plan investments of 8.5%. During fiscal year 2015, the plan’s investments returned just 1.53%. Over a 7- and 10-year period the rates of return were 6.4% and 7.9%, respectively. Not achieving these investment returns year-after-year can have a dramatic fiscal impact.
Even a small change in the actuarial assumptions can have major consequences for the fiscal health of a pension fund. According the HFRRF’s 2015 Comprehensive Annual Financial Report, a 1% decrease in the current assumed rate of return (8.5%) would almost double the fund’s pension liabilities, from $577.7 million to $989.5 million.
So while risky real estate deals were certainly a catalyst in the current unraveling of the DPFP, I suspect that its refusal to move away from the defined benefit model and into a more sustainable alternative—much like the private sector has already done—would have ultimately led us to this same point of fiscal crisis.
To what legal extent (if any) is Dallas police/fireman’s pension fund backstopped by the City of Dallas and/or Dallas County?
Let me preface this by saying that I’m not a lawyer nor do I ever intend to be one. However, Article XVI, Section 66 of the Texas Constitution plainly states that non-statewide retirement systems, like DPFP, and political subdivisions, like the city of Dallas, “are jointly responsible for ensuring that benefits under this section are not reduced or otherwise impaired” for vested employees. Given that, it’s hard to see how the city of Dallas—or better yet, the Dallas taxpayer—isn’t obligated in some major way when their local retirement system reaches the point of no return, which may be a lot closer than people think given all the lump-sum withdrawals of late.
Likewise, does the state of Texas have any statutory backstop to the Dallas police/fireman’s pension fund, or any other local pension funds?
For non-statewide plans, I don’t believe so. Again, I’m not a lawyer, but the Texas Attorney General wrote something fairly interesting recently touching on aspects of this question.
In September 2016, House Chairman Jim Murphy asked the AG to opine on “whether the State is required to assume liability when a local retirement system created pursuant to title 109 of the Texas Civil Statutes is unable to meet its financial obligations.” Title 109 refers to 13 local retirement systems in 7 major metropolitans that are a small-but-important group of plans that have embedded some of their provisions in state law (i.e. benefits, contribution rates, and composition of their boards) I’ve written a lot about this problem in the past (read more about it here).
In response to Chairman Murphy’s question, the AG had this to say:
In no instance does the constitution or the Legislature make the State liable for any shortfalls of a municipal retirement system regarding the system’s financial obligations under title 109. The Texas Constitution would in fact prohibit the State from assuming such liability without express authorization.
…a court would likely conclude that the State is not required to assume liability when a municipal retirement system created under title 109 is unable to meet its financial obligations.
So at least in the AG’s opinion, state taxpayers wouldn’t be required by law to bail out this subset of local retirement systems. But of course, the political calculus may be different than what’s required by law.
Compared to the Dallas situation, how badly off are the Houston, Austin and San Antonio public employee pension funds?
If you’re a taxpayer or property owner in one of Texas’ major cities, I’d be concerned. Moody’s, one of the largest credit rating agencies in the U.S., recently found that: “Rapid growth in unfunded liabilities over the past 10 years has transformed local governments’ balance sheet burdens to historically high levels,” and that Austin, Dallas, Houston, and San Antonio had a combined $22.6 billion in pension debt—and it’s growing worse!
Using the Pension Review Board’s latest Actuarial Valuations Report for November 2016, we can parse the systems within each municipality to get a little bit better sense of where the trouble lies. Pension debt for the retirement systems in the big 4 looks like this:
Of course, it’s important to keep in mind that the figures use some of the same fuzzy math as described above, so the actual extent of the problem may be worse than the PRB’s latest figures indicate.
What similarities, if any, are there to current Texas municipal pension issues and those that forced California cities like San Bernardino, Stockton and Vallejo into bankruptcy? What differences?
The common element in most, if not all, of these systemic failures is the defined benefit pension plan. Because of the political element as well as the inclusion of inaccurate investment assumptions in the DB model, these plans are almost destined to fail, threatening the taxpayers who support it and the retirees who rely on it. And sadly, that’s what we’re witnessing now across the nation.
As far as the differences go, California’s municipal bankruptcies as well as Detroit’s were preceded by decades of poor fiscal policy and gross mismanagement. I don’t see that same thing here in Texas, but it’s also important that we don’t let it happen too.
California pensions were notoriously generous (20 years and out, spiking, etc.). Do any Texas state or local pensions strike you as unrealistically generous?
Any plan that’s making pension promises but has no plan on how to make good on those promises is being unrealistically generous. And unfortunately for taxpayers and retirees alike, a fair number of plans can be categorized as such.
The Pension Review Board’s Actuarial Valuations Report for November 2016 reveals that of Texas’ 92 state and local retirement system, only 4 of them are fully-funded. At the other extreme, a whopping 19 of the 92 plans have amortization periods of more than 40 years. Six of those 19 plans have infinite amortization periods, which effectively means that they have no plan to keep their promises but are instead planning to fail.
As far as specific plans go, there’s no question that the Dallas Police and Fire Pension System is the posterchild for the overly generous. The Dallas Morning News recently covered the surreal levels of deferred compensation offered, finding that:
The lump-sum withdrawals come from the Deferred Retirement Option Plan, known as DROP. The plan allows veteran officers and firefighters to essentially retire in the eyes of the system and stay on the job.
Their benefit checks then accrue in DROP accounts. For years, the fund guaranteed interest rates of at least 8 percent. DROP made hundreds of retired officers and firefighters millionaires. And once they stopped deferring the money, they received their monthly benefit checks in addition to their DROP balance. [emphasis mine]
It’s probably fair to say that any public program that makes millionaires out of its participants is probably being too generous with its benefits.
There seem to be only two recent local government bankruptcies in Texas, neither of which were by cities: Hardeman County Hospital District Bankruptcy and Grimes County MUD #1. Did either of these involve pension debt issues?
I’m not familiar with those instances, but when it comes to the issue of soaring pension obligations, I can tell you that the system as a whole is moving in bad direction.
In November 2016, Texas’ 92 state and local retirement systems had racked up over $63 billion dollars of unfunded liabilities, with more than half owed by the Teacher Retirement System. That’s a staggering amount of pension debt that’s not only big but growing fast. And worse yet, that’s in addition to Texas’ already supersized local government debt-load.
How we’re going to make good on all of these unfunded pension promises is anyone’s guess. But I imagine that it’ll involve some combination of much higher taxes, benefit reductions, and fewer city services.
What limits or constraints does Texas place on Chapter 9 bankruptcy?
The Pew Charitable Trusts’ Stateline has some good information on this, at least as far as municipal bankruptcy is concerned. A November 2011 report, Municipal Bankruptcy Explained: What it Means to File for Chapter 9, had this to say about the process:
Who can file for Chapter 9? Only municipalities — not states — can file for Chapter 9. To be legally eligible, municipalities must be insolvent, have made a good-faith attempt to negotiate a settlement with their creditors and be willing to devise a plan to resolve their debts. They also need permission from their state government. Fifteen states have laws granting their municipalities the right to file for Chapter 9 protection on their own, according to James Spiotto, a bankruptcy specialist with the Chicago law firm of Chapman and Cutler. Those states are Alabama, Arizona, Arkansas, California, Idaho, Kentucky, Minnesota, Missouri, Montana, Nebraska, New York, Oklahoma, South Carolina, Texas and Washington.
Hopefully this is a process that can be avoided entirely, but given the fiscal condition of the DPFP and potentially a few other systems, I’m not sure that’ll be the case.
Next to Dallas, which municipal pensions would you say are in the worst shape?
I’m most concerned about the local retirement systems in Title 109. The reason, again, is that these 13 local retirement systems are effectively locked into state law and there’s little that taxpayers or retirees in those communities can do to affect good government changes without first going to Austin. These systems have basically taken a bad situation and made it worse by fossilizing everything that counts.
In the Texas Public Policy Foundation’s 2017-18 Legislator’s Guide to the Issues, I cover this issue in a little more detail. In the article (see pgs. 122 – 124), I write of these plans’ fiscal issues which can be seen below, albeit with slightly older data.
(Funded ratios marked in red denote systems that are below the 80% threshold, signifying a plan that may be considered actuarially unsound. Source: Texas Bond Review Board.)
The fact that these systems either are in or are headed for fiscal muck is a big reason why the Texas Public Policy Foundation is helping to educate and engage on legislation that would restore local control of these state-governed pension plans. People on the ground-level should have some say over their local plans, and that’s what we’ll be fighting for next session. Encouragingly, a bill’s already been filed in the Senate (see SB 152) and there should be legislation filed shortly in the House to do just that.
Should Texas government agencies switched over to defined contribution (i.e. 401K) plans over standard pension plan, and if so, how might this realistically be accomplished without endangering existing retirees?
ABSOLUTELY. Ending the defined benefit model and transitioning new employees into something more sustainable and affordable, like a defined contribution system, is one of the best things that the state legislature can do. This is something I’ve long been an advocate of.
In fact, in early 2011, I played a very minor role in the publication of some major research spearheaded by Dr. Arthur Laffer, President Ronald Reagan’s chief economist, that advanced this same reform idea (see Reforming Texas’ State & Local Pension Systems for the 21st Century). I’ve also written a lot about the need to make the DC-switch, making the case recently in Forbes that:
DC-style plans resemble 401(k)s in the private sector and the optional retirement programs (ORP) available for higher education employees in Texas. These DC-style plans put the power of an individual’s future in their own hands instead of depending on the good fortune of government-directed DB-style plans. DC-style plans are portable and sustainable over the long term as they are based on the contributions of retirees and a defined government match.
With DC-style plans, retirees will finally have the opportunity to determine how much risk they are willing to take. They also reduce the risk that the government will default on their retirement or fund those losses with dollars from taxpayers who never intended to use these pensions. By giving retirees more freedom on how to best provide for their family, they will be in a much better position to prosper.
Because of their efficiency, simplicity and fully funded nature, the private sector moved primarily to DC-style plans long ago. For the sake of taxpayers and retirees dependent on government pensions, it’s time for all governments to move to these types of plans as well.
As far as dealing with transition costs, some much smarter people than I have written on this issue and found that it’s not as big of a challenge as it’s made out to be. Dr. Josh McGee, a vice president with the Laura and John Arnold Foundation, a senior fellow with the Manhattan Institute, and Chairman of the Pension Review Board, had this to say about the matter:
Moving to a new system would have little to no effect on the current system. State and local pensions are pre-funded systems, and unlike Social Security, the contributions of workers today do not subsidize today’s retirees. Future normal cost contributions are used to fund new benefit accruals that workers earn on a go-forward basis and are not used to close funding gaps. Therefore, it matters little whether the normal cost payments are used to fund new benefits under the current system or a new system.
Another pension expert, Dr. Andrew Biggs with the American Enterprise Institute, published research that found that:
In this study, I show that if a pension plan were closed to new hires, over time the duration of liabilities would shorten, and the portfolio used to fund those liabilities would become more conservative. However, the effects of these transition costs are so small as to be barely perceptible.
I’m confident that with the right plan in place, Texas’ state and local retirement systems can make the switch to defined contribution and we’ll be all the better for it.
Thanks to James Quintero for providing such a detailed analysis!
And since we’re on the topic, here’s a roundup of news on the Dallas Police and Fireman’s pension fund crisis:
Dallas created the police and fire plan in 1916. The system’s trustees eventually persuaded the state legislature to allow employees and pensioners to run the plan. Not surprisingly, the members have done so for their own benefit and sent the tab for unfunded promises—now estimated at perhaps $5 billion—to taxpayers. Among the features of the system is an annual, 4 percent cost-of-living adjustment that far exceeds the actual increase in inflation since 1989, when it was instituted. A Dallas employee with a $2,000 monthly pension in 1989 would receive $3,900 today if the system’s annual increases were pegged to the consumer price index. Under the generous Dallas formula, however, that same monthly pension could be worth more than $5,000. No wonder the ship is sinking.
The system also features a lavish deferment option that lets employees collect pensions even as they continue to work and earn a salary. Moreover, the retirement money gets deposited into an account that earns guaranteed interest. Governments originally began creating these so-called DROP plans as an incentive to encourage experienced employees to keep working past retirement age, which in job categories like public safety can be as young as 50. In Dallas, the pension system gives workers in the DROP plan an 8 percent interest rate on their cash, at a time when yields on ten-year U.S. Treasury notes, a standard for guaranteed returns, are stuck at less than 2 percent. According to the city, some 500 employees working past retirement age have accumulated more than $1 million in these accounts—on top of the pensions that they will receive once they officially stop working.
Over the years, the Dallas Police and Fire Pension System fund has amassed $2 billion to $5 billion in unfunded liabilities, the result of bad real estate investments and blatant self-enrichment from prior management. Coupled with a possible setback in ongoing litigation over public safety salaries, Dallas is in the most financially precarious position in its history.
City officials are openly uttering the word bankruptcy, not just of the pension fund but the city itself. As Mayor Mike Rawlings told the Texas Pension Review Board this month, “the city is potentially walking into the fan blades that might look like bankruptcy.”
The state Legislature created this mess by not giving the city a meaningful voice in the fund’s operation and allowing the former board of the pension fund to unilaterally sweeten its membership’s promised benefits without concern to the overall fiscal damage being done. Now it must help the city clean up the mess.
Dallas already provides nearly 60 percent of its budget to support public safety services and recently contributed $4.6 million to increase its share of pension contributions to 28.5 percent — the maximum allowed under state statute. However, if Dallas loses the lawsuit over salaries and no changes are made to the pension fund, the city could take an $8 billion hit. That is roughly equal to eight years of the city’s general fund budget.
Austin, Dallas, Houston and San Antonio collectively face $22.6 billion worth of pension fund shortfalls, according to a new report from credit rating and financial analysis firm Moody’s. That company analyzed the nation’s most debt-burdened local governments and ranked them based on how big the looming pension shortfalls are compared to the annual revenues on which each entity operates.
“Rapid growth in unfunded pension liabilities over the past 10 years has transformed local governments’ balance sheet burdens to historically high levels,” the report says.
Chicago had the most dire ratio on the national list. Dallas came in second. According to the report, the North Texas city has unfunded pension liabilities totaling $7.6 billion. That’s more than five times the size of the city’s 2015 operating revenues.
Both those cities may turn to the public to partially shore up their shortfalls. Houston Mayor Sylvester Turner wants to use $1 billion in bonds to infuse that city’s funds. Dallas police officer and firefighter pension officials also want $1 billion from City Hall, an amount officials there say is too high.
Meanwhile, Austin ranked 14th on the Moody’s list with unfunded pension liabilities of $2.7 billion. San Antonio ranked 22nd with a $2.3 billion shortfall.