In my previous post, I described the “California rule,” which puts state governments in a legal straitjacket when trying to reform underfunded public pensions. Specifically, it places pensions in a privileged position relative to other types of compensation, like salary or health insurance benefits, by making them more difficult to change. This post highlights a real-world example of the California rule’s dangers.
The place is Pacific Grove, California, a town of 15,000 residents on the Monterey Peninsula’s northern tip, with an annual budget of $11 to $12 million. In 2008, John Moore, a Pacific Grove resident and retired attorney, learned that the City of Pacific Grove had issued $19 million of pension bonds two years earlier, while at the same time it gave the police union a 30% raise.
After making several requests under California’s Public Records Act, Moore uncovered a tale of self-dealing by Pacific Grove and union officials to rip off California taxpayers. The result of Moore’s investigation, “The Fall of Pacific Grove,” was published in The Pine Cone, a Monterey County paper; it’s now available online thanks to the California Public Policy Center.
In 2002, the Pacific Grove city council adopted a 50 percent pension increase for public safety workers, after being told by the city manager that the increased benefit would cost around $51,500 per year. However, the city manager withheld from the council an actuary report that estimated the benefit at over $800, 000 per year. The hidden actuary report was not discovered until 2009. The results have been predictable and dire. Pacific Grove’s pension deficit has ballooned to $45 million, plus $20 million in pension bonds, and is growing at 7.5 percent a year, according to Moore.
[click to continue…]
Since the Federalist Papers, America has debated “Energy in the Executive.” But President Obama’s 2014 agenda framed by his State of the Union address heralds a class warfare agenda, one fusing an “income inequality” theme with federal industrial policy and other activism.
“When I can act on my own without Congress, I’m going to do so,” Obama promises. This spend-and-transfer fixation makes Americans poorer and dependent except for the lucky few running things.
Others have argued for federal budget rationality as essential to any anti-poverty agenda. This series proposes a greater prosperity enhancing opportunity, streamlining the nearly $2 trillion regulatory state and ending the uncertainty, wealth destruction and job loss it creates.
Congressional accountability and even something as dramatic as passage of the REINS Act (to require Congress to affirm major agency rules) would target future mandates rather than the existing regulatory state.
The Office of Management and Budget (OMB) pegs costs at up to $84 billion as of 2013 (Draft Report on Benefits and Costs of Federal Regulation, p. 3), a far from inclusive underestimate.
To deal with the existing enterprise of hundreds of billions of dollars annually, Congress should implement an ongoing Regulatory Reduction Commission to streamline aggregate regulation. Former Senator Phil Gramm (R-Texas) first proposed such an idea, modeled on the military Base Closure and Realignment Commission (BRAC).
The Progressive Policy Institute has embraced a similar idea, calling it a Regulatory Improvement Commission, perhaps making this now bipartisan idea capable of the most traction in a regulatory reform campaign.
[click to continue…]
These days, local governments announcing bankruptcy seems like routine in California. Since the onset of the 2008 financial crisis, many state and local governments have seen their pension funds take huge losses. Yet, many of the underlying problems that have made pension shortfalls difficult to address go back many years — more than half a century, in fact.
One major reason public pensions have been so difficult to reform is their having a special legal status above other kinds of employee compensation. A new Federalist Society paper by Emory University law professor (and CEI alumnus) Alexander Volokh explains how this strange situation came to be and offers some ideas for reform.
One of the most important developments in public pension policy occurred in 1955. That’s when the California Supreme Court created what became known as the “California rule” regarding the legal status of public pensions. The case, Allen v. City of Long Beach, concerned a challenge to a 1951 city charter amendment that increased the employee pension contribution and changed the formula for determining payouts.
[click to continue…]
In my previous post, I looked at some basic principles that should guide state policy makers when tackling pension reform. Now, we turn to the politics. And in that regard, Rhode Island’s 2011 pension reform offers a useful example for other states to consider.
In his Brookings study, “Pension Politics: Public Employee Retirement System Reform in Four States,” Drew University political science professor Patrick McGuinn looks at recent reform efforts in four states’ experience in implementing pension reform.
Two of these states—Utah and Rhode Island—enacted significant structural changes to their pension systems while the two others—New Jersey and Illinois—enacted more limited changes that were less innovative.
Drawing lessons from those four states, he then outlines some basic principles for how to implement reform, citing examples.
[click to continue…]
Few people would raise their hands when asked that question. But actually putting a state’s financing on sound footing is difficult in practice. That makes Rhode ‘s Island’s pension reform not only unique, but also a good example for other states to consider. Rhode Island got not only the policy, but also the politics right, according to Drew University political science professor Patrick McGuinn in a new Brookings Institution study.
In other words, how pension reform is accomplished is as important as what the reforms entail. In his study, McGuinn offers some sound principles on the politics — the “how” — of pension reform. Another new study, commissioned by the Society of Actuaries (SOA), offers some basic principles on the policy — the “what”.
[click to continue…]
Once again, according to a White House summary of his 2015 budget to be unveiled later today, President Obama will call for “closing loopholes” that he says help “Wall Street.” Once again, upon closer examination, these “loophole closures” are actually tax hikes that will hit Main Street the hardest.
There is something different this year, but that “something” is bad news for taxpayers and entrepreneurs. The difference is that House Ways and Means Committee Chairman Dave Camp (R-Mich.) has unfortunately signed onto some of these destructive proposals in the “tax reform” bill he introduced last week.
In particular, both Obama and Camp’s “carried interest” proposals would tax much of the capital gains of partnerships as ordinary income as well as subject them to hefty payroll taxes for Medicare and Social Security. Small business folks and innovative entrepreneurs who structure their firms as partnerships will be hindered by both the cost and complexity of Obama and Camp’s provisions aimed at “Wall Street” fat cats.
In his Wall Street Journal op-ed that ran last week on the day he unveiled his much awaited “tax reform” bill, Camp proclaimed that tax code “should not hinder small businesses from growing into large businesses. And the individual income tax needs to be simpler, fairer and flatter for everyone.”
Camp’s bill does make some needed and long overdue changes to the tax code. He gets rid of the deduction for state and local taxes, which has for decades favored high-taxing “blue” states. It trims the mortgage-interest deduction, a regressive deduction that encourages McMansions and was a big factor in the housing bubble.
It also gets rid of Obamacare’s “medicine cabinet tax,” which severely restricts the purchase of over-the-counter drugs in tax-preferred health savings accounts and flexible spending accounts. As I have written here before, this stealth tax has the perverse effect of tilting consumers toward prescription drugs that would be cheaper to the insured individual but cost the health care system much more.
[click to continue…]
President Obama released his Fy 2015 budget today. Like his past budgets, as I noted in a previous post discussing the highway and transit budget, continuing congressional gridlock means this package will almost certainly go nowhere. I’ll leave more sophisticated and comprehensive commentary to the budget analysts, but I will highlight one additional transportation provision: airport funding. Exactly like the FY 2014 budget from the White House, the FY 2015 budget calls for cutting Airport Improvement Program funding to $2.9 billion and increasing the cap on the Passenger Facility Charge (PFC) from $4.50 to $8.
AIP currently provides major airport infrastructure grants. These funds come from a variety of taxes and segment fees. However, while user-based to an extent, AIP funding is complex and less transparent, features that are generally undesirable in user fee frameworks — in addition to relying on some non-user revenue (see page 20 of the AIP Handbook for a breakdown of revenue sources). AIP funds are also not segregated by facility, leading to wasteful grants to low-value airports.
In contrast, the PFC is a direct and transparent user charge. The money collected from passengers goes directly to the facility. Ideally, as the president suggests, AIP should be phased out with PFCs picking up the slack. Unfortunately, the federal government currently caps PFCs at $4.50 per enplanement. The president’s proposed PFC increase to $8 is better than nothing, but it still fails to restore the PFC purchasing power to the level when it was last raised to $4.50 in 2000. As the American Association of Airport Executives notes, the PFC should at a minimum be raised to $8.50 in order to restore its previous buying power.
Rather than endless fights over the “appropriate” PFC level, Congress should eliminate the PFC cap all together. Federal policies force airports to be heavily reliant on airlines for funding. The effect of these policies is that airports have little leverage in negotiations with airlines over gate access, the result being a proliferation of long-term exclusive- and preferential-use gate leases. The impact on competitiveness and air fares is large. Exclusive- and preferential-use gate leases (as opposed to common use open entry) result in gate under-utilization by allowing incumbent airlines to essentially prohibit most new entry from outside carriers. It is estimated that air fares are more than $5 billion higher annually (in 2013 dollars) because of artificial barriers to airport access.
Hopefully, the president and Congress will move ahead with reforming the PFC system. Ideally, this would mean eliminating the cap, but restoring the PFC purchasing power to 2000 levels should be a bare minimum no-brainer.
Thus describes an Illinois state Senator the challenge states face in reforming their public employee pension systems. Given that reality, it’s astounding reform would ever succeed. But succeed it has, in states with very large pension shortfalls that threaten to blow up their budgets.
Staring into the financial abyss, it seems, can help politicians overcome their strong temptation to offer generous benefits to their supporters — government employee unions in the case of pensions — and passing off the bill to future generations. Yet, government unions will defend their benefits even in states in extreme financial distress, as the recent Rhode Island pension settlement shows.
On February 14, Rhode Island officials reached an agreement to end six legal challenges to the state’s 2011 pension reform, the most far-reaching in the nation to date. The agreement scales back some of the savings in the 2011 reform bill, but preserves most of them. Governor Lincoln Chafee and State Treasurer Gina Raimondo invested considerable effort and political capital in crafting and enacting the 2011 pension reform. So why did they agree to scale back any of it?
Because they had to. The state was forced into negotiating by a judge, ruling on a union legal challenge to the pension reform legislation. As Drew University political science professor Patrick McGuinn describes the decision in a new Brookings Institution study, “Pension Politics: Public Employee Retirement System Reform in Four States” (which points to Rhode Island’s reform as a model):
In December 2012, a Superior Court judge ordered the unions and the governor/treasurer’s office into mediation to resolve the dispute—an extremely unusual (and perhaps even unconstitutional) move.
In effect, the judge ordered the Chafee administration to negotiate with the unions to amend a law that had already been passed by the legislature and signed by the governor.
While legally dubious, the February 2014 agreement may be the least bad option in terms of achieving sound policy — which in the case of Rhode Island means preventing a budget meltdown. If a judge is willing to order the state government to renegotiate a law already on the books, who knows what might come next in court?
[click to continue…]
Two major pieces of surface transportation policy news dropped this week. President Obama is readying the release of his budget, which will contain over $300 billion in transportation funding. Across the aisle, Rep. David Camp, R-Mich., the powerful chairman of the House Committee on Ways and Means, released a sweeping proposal to overhaul the U.S. tax code, which includes a component that would direct $120 billion in tax savings into the Highway Trust Fund.
The president’s latest budget is far from surprising, as it differs very little from his previous surface transportation proposals. Of the combined highways and transit spending ($278 billion), he proposes to allocate 25 percent ($72 billion) to mass transit — a mode that makes up about 5 percent of trips.
Thankfully, neither proposal has any chance of being enacted, at least as standalone comprehensive packages. Unfortunately, most of Congress’s “business” is recycling and repackaging previous proposals, which means some aspects might well find their ways rolled into future legislation. With the current highway bill, MAP-21, expiring at the end of September 2014, Congress will begin the reauthorization process in the coming months. It is likely that some of these bad ideas will pop up again.
First, the president’s budget. He wants a $302 billion, four-year transportation bill. Half of that would supposedly come from tax reform, amounting to a massive bailout of the Highway Trust Fund. This is par for the course for President Obama, who has long advocated eliminating the Highway Trust Fund in favor of a slush fund that would enable additional gimmicky projects such as high-speed rail and urban streetcars.
[click to continue…]
Have a listen here.
The Supreme Court heard oral arguments this week in a case that could determine whether or not the EPA has the authority to regulate greenhouse gas emissions. CEI Senior Fellow Marlo Lewis has written about the case for Forbes.