October 17, 2014

Government Pensions Should Be Portable, as Well as Sustainable

I was hired by the California Legislative Counsel right out of law school at the age of 25. At the time, I could see myself spending the next several decades there, but I wasn’t ready to commit to the proposition. Unfortunately, in order for my retirement package to be valuable, I would have had no choice but to make a career of it.

California’s retirement system uses a defined benefit plan and would have paid me a generous amount each month during retirement, but only if I spent several decades in the system. If I stayed at my job for less than a decade, my retirement benefit hardly would have been worth the contribution I was paying into the system.

Situations like mine are common where government employees are in a defined benefit system. The following chart illustrates my point by showing benefit growth in the New York City Teachers’ Retirement Plan.

NY teachers pension graph

 

An employee who stays in that system for a full 15 years will only earn $100,000 in benefits, but 15 years later, the value of the benefits will quadruple. These types of formulas often incentivize employees to stay at a job longer than they would like. They also make the position unattractive to new hires who might not want to stay with the job for 20 or 30 years.

Sustainability is the main problem with defined benefit pensions. Unlike with a 401(k)-type retirement system, where an employee invests a definite amount each paycheck and collects the return during retirement, defined benefit plans commit public institutions to vast pension obligations to be paid out years in the future. The discrepancy between promised benefit and actual amount invested means that defined benefit systems are often inadequately funded and can create fiscal crises when pensions mature.

An important side benefit of pension reform is the potential increase in the quality of government workforces. By switching to a more portable system, governments would attract a more experienced and a more diverse workforce. Employees would join government workforces at the middle and end of their careers, bringing valuable private-sector experience with them, and people would feel free to take a government job at the beginning of their careers, even if they weren’t sure they wanted to be there until retirement.

June 30, 2014

Vetoes, Vetoes, And More Vetoes

There has been a lot of consternation in the Missouri Legislature about Gov. Jay Nixon’s vetoes and withholds (withholds differ from vetoes in that withheld money can be released if state revenues are available later in the year, while vetoed funds are just not spent) from the fiscal year 2015 budget. Many legislators are upset with the governor for claiming that their budget is out of balance while his own executive budget was larger than the one the legislature passed. To be fair, a lot of the difference is due to the governor’s budget including funds for expanding Medicaid, but the governor’s budget also was relying on revenue growth that was higher than even the legislature was expecting.

All that said, there actually is a lot to like in these vetoes. For example, the governor vetoed more than $7 million in funds for biodiesel incentives. The state should be eliminating these types of incentives and it is a good thing that Gov. Nixon is cutting back on them. The governor also is vetoing $2 million in funding for the Rolling Stock Tax Credit. The Show-Me Institute has published numerous writings about the desirability on cutting back on these types of tax credits. It is good to see Gov. Nixon trying to do so.

Gov. Nixon’s vetoes could go further. For example, he withheld $5 million from efforts trying to lure the Republican National Convention to Kansas City. There has been a lot said about using government money to try to lure big events, but in this case, the money isn’t necessary because the Republican National Committee has already narrowed its search down to Cleveland and Dallas. Gov. Nixon should have simply vetoed this specific appropriation.

There was a lot to like in the governor’s vetoes. If the legislature was more disciplined, many of the vetoes would not have been necessary. Hopefully, state spending can be controlled going forward.

April 24, 2014

Truth And Falsehoods

The Missouri School Boards Association (MSBA) is doing some pretty lousy work in its efforts to scare people into opposing Senate Bill 509. The MSBA’s “fact sheet” highlighting the harms the tax cut would supposedly do to the state’s foundation formula and individual Missouri school districts is chock-full of errors and mistakes.

First, the “fact sheet” uses the Governor’s Executive Budget recommendation in the analysis of the potential cost impact of SB 509. This is a mistake because the governor’s recommendations are just that, recommendations. The figure used is not the actual appropriation amount for the upcoming year. That has yet to be finalized.

Let’s just grant, for the sake of argument,  that SB 509 will reduce foundation formula funding to $3.13 billion next year. If you look at this year’s budget, you will notice that funding for the foundation formula is actually $3.08 billion. So even if the MSBA’s numbers are correct, the foundation formula will be getting more money next year.

However, this whole exercise is pointless because the first year that the tax cut would go into effect is 2017. Fiscal year 2015 ends in June 2015. This means there won’t even be a tax cut for two-and-a-half years. No revenue will be lost next year (or even the year after that) because of it.

I welcome healthy debate concerning major public policy issues, but people shouldn’t be scared with false facts, and that is what the “fact sheet” from the MSBA is: scare mongering filled with plainly false information.

April 18, 2014

Here We Go Again . . .

One of the biggest fights out of last year’s Missouri legislative session was about Missouri House Bill 253, which cut individual and business income taxes. Missouri Gov. Jay Nixon vetoed the bill and the legislature failed to override his veto. This failure didn’t stop the legislature from passing a new tax cut bill, Senate Bill 509. Below are some highlights of the bill:

  • The top tax rate is cut by .1 percent per year if state revenues increase by $150 million. Once fully phased in, the new top tax rate will be 5.5 percent.
  • Tax brackets are to be adjusted for inflation.
  • Business owners who pay their company’s taxes at the individual level will be able to deduct 5 percent of their business’s income. This deduction will increase by 5 percent every year until it reaches 25 percent.
  • Creates an additional $500 personal exemption for people with incomes less than $20,000.

Nixon already denounced the legislation and will likely veto the bill. He has trotted out the same talking points he used when he vetoed last year’s tax cut. “Once again, members of the legislature have chosen to ignore evidence that Missouri is already a low-tax state — sixth lowest in the nation,” Nixon said. I guess the governor felt that Missouri’s taxes weren’t low enough for Boeing when he signed a $150 million incentive package for the company to move manufacturing jobs here. Also, Missouri is not a low-tax state, particularly when it comes to income taxes.

You probably also will hear progressive groups complain that passing this bill will blow a hole in our budget and seriously harm state revenues. That’s what the Missouri Budget Project is doing. However, the group doesn’t show its arithmetic in its report. This is par for the course for the Missouri Budget Project and the “report” isn’t very useful for actually discussing the bill’s merits.

I’m glad the legislature is trying to cut taxes. I prefer more significant cuts (such as fully eliminating the individual and corporate income taxes). However, I’ll take any forward progress in cutting taxes. Hopefully, this time, the cuts will get enacted.

March 12, 2014

State Audit Recommends Sunset Of Low-Income Housing Tax Credit

A new state audit recommends a sunset of the state’s low-income housing tax credit. It’s a great recommendation that we have supported in the past. You can find the full audit here and the “citizen summary” here. The audit highlights a broad set of problems with the current program — not the least of which being that nearly $1.5 billion worth of Low-Income Housing Tax Credits (LIHTC) are outstanding and have not been redeemed. This paragraph from the auditor’s press release is indispensable (emphasis mine):

Currently, only 42 cents of every dollar issued actually goes toward the construction of low income housing; the remainder goes to the federal government in the form of increased federal income taxes, to syndication firms, and to investors. State law allows claiming the same project costs under two or more tax credit programs. This “stacking” of tax credits can be lucrative for developers, but it generates no additional economic activity or state benefit.

To reiterate: Less than half of the money spent through the LIHTC program… actually goes toward the building of low-income housing. Page 16 of the audit goes through all of the auditor’s recommendations, including the idea of adding substantive spending caps to the LIHTC. That’s an excellent idea. When you have a billion-dollar budget-buster like this sitting out there, a strong cap is an obvious and common sense reform, though the Missouri House’s track record on tax credit reform issues has been abysmal.

Either way, the auditor’s report recognizes the need for reform to the LIHTC. It’s an open question whether the legislature will also recognize the problem.

February 27, 2014

Marking-Up And The Funky Bunch

In last Saturday’s blog post regarding the disagreement between the Missouri governor and the legislature about state revenue estimates, I mentioned marking-up legislation. Marking-up basically means that members of a Missouri House committee are taking an introduced piece of legislation and amending it to fit their preferences (e.g., the Budget Committee and the Budget).

Usually, when crafting the budget, the House Budget Committee starts with the governor’s executive budget as introduced legislation. It then assigns these introduced bills to different appropriations committees depending on the department being funded. However, due to the disagreements about expected state revenues, the House is not doing that this year. Instead, the House is working off of last year’s budget and making changes based on that.

The House is doing this mainly for the sake of appearances. Representatives don’t want to be seen as cutting spending in popular areas such as education when compared to what the governor introduced in his budget. That’s understandable, but unnecessary. The House should fund education at the levels it believes are proper given the constraints that limited state revenues impose. If that happens to be less than what the governor suggests, then so be it. If it’s less than what was spent last year, that is fine as well. Don’t spend more just because you want to be seen as spending more.

The chairman of the House Budget Committee, Rep. Rick Stream, has asked appropriators to go line-by-line through the budget and find items to cut in order to free money for other, more important programs. The Show-Me Institute has highlighted several areas which appropriators could cut, such as ethanol subsidies. Hopefully, we can see some cuts to non-essential areas.

Creating a budget is arguably the most important task the legislature has every year. Being informed of how that process works is something worth knowing. The House really wants you to know that it plans to increase spending, just less than the governor does. Hopefully, representatives will get to a point where they can justify the spending levels they set, whether it is more or less than last year.

February 22, 2014

Budget Battle Breakdown

When entering into an argument, it is necessary to have a common ground from which to argue. For example, in arguing about whether the Cardinals or Royals will have a better season, it is necessary to agree that Major League Baseball will actually be played this year. If you can’t agree on that, it pretty much makes any further discussion useless. A similar (but by no means exactly the same) situation is occurring in Jefferson City this year, but instead of arguing about baseball, there is an argument about the state budget.

Every year there are arguments about the budget. Every department wants everything on its wish list and there is only a finite amount of money. Some (like yours truly) argue that certain programs shouldn’t even exist. However, things have started to degenerate. Now it seems that the governor and the legislature cannot agree about how much money there even is to dole out. Missouri Gov. Jay Nixon is much more bullish about the future of the state’s revenue collection. He expects revenues to grow by 5.2 percent this year. Conversely, the legislature believes the state’s revenues will grow by only 4.2 percent. That seems like small potatoes but the difference in terms of actual dollars is in the hundreds of millions.

The fact that the legislature and the governor haven’t settled on a consensus revenue estimate is newsworthy because these types of disagreements are rare. However, this disagreement isn’t a cause to panic. The House will mark up its own appropriations bills and the budgeting process will continue. It’s just disappointing to see that governor and legislature can’t seem to agree on a revenue estimate, which is probably one of the more straightforward, less partisan issues. Hopefully, next year, both sides can agree on a number. Then the real fighting can begin.

February 13, 2014

Taking The Missouri Budget Project Seriously

The St. Louis Post Dispatch recently published an article criticizing a bill that would create a 50 percent tax deduction for businesses whose earnings are taxed on the individual owners’ returns. The article quotes Amy Blouin, of the Missouri Budget Project. Blouin claims that enacting such a measure “would reduce state revenue by more than $500 million when fully implemented.” However, if you actually read the Missouri Budget Project’s (MBP) “analysis,” you won’t find how MBP actually came up with this number. I guess we just have to take their word for it.

This isn’t the only time the Missouri Budget Project has come up with revenue estimates out of whole cloth. In one of its write-ups about a Senate tax cut bill last year, the Missouri Budget Project stated that the bill would “slash Missouri’s general revenue budget by nearly $1 billion when fully implemented.” Page two of the report shows the year-by-year breakdown of estimated revenue losses, but you won’t see anything explaining how MBP came up with these numbers. There isn’t even an endnote.

Compare that to some of the analysis we do at the Show-Me Institute. When my colleague Policy Analyst Patrick Ishmael and I wrote “Passing Through Missouri: Left Behind On Taxes,” we included an entire section of the Appendix detailing our methodology and on what we based our estimates. The Missouri Budget Project’s tax analyses don’t contain anything like that. Yet when MBP officials are quoted in news articles, their numbers are accepted, seemingly without question.

The Missouri Budget Project is free to come up with any numbers it wants, but why aren’t those numbers backed up with explanations? As Wendy’s (and Walter Mondale) used to ask, “Where’s the beef?”

October 29, 2013

Governor Nixon And Higher Education

Missouri Gov. Jay Nixon recently stated that “education is the best economic development tool available.” He is correct: an educated work force is an important ingredient to economic growth. Sadly, it also helps explain why Missouri’s record of economic growth gets a failing grade.

In a recent Saint Louis Beacon editorial, I noted that budget decisions have reduced funding for higher education. Spending on higher education has declined in real terms since 1990. This has had several effects, including forcing Missouri universities and colleges to raise tuition. It also has affected the educational accomplishment of the average Missourian.

How does Missouri stack up when compared to other states in educational achievement by its citizens? In 2008, Missouri ranked 33rd out of the 50 states using the statistic “percent of adults having a bachelor’s degree or more.” Don’t like “number of degrees” as a measure of what you have learned? Using standardized test scores (the National Assessment of Educational Progress, or NAEP) as a measure of educational attainment, Stanford University professor Eric Hanushek recently reported that since 1992, the gain in NAEP test scores for Missouri relative to other states is unimpressive.  On this score, Missouri ranks 27th out of 41 states for which data are available.

Missouri’s lackluster educational record is one of several factors that has negatively affected our economic standard of living. In a 2012 Show-Me Institute study, SMI economists Joseph Haslag and Michael Podgursky reported that Missouri’s economy expanded at a slower pace than any of its neighbors since 1997. Compared to all 50 states, Missouri ranked 48th in terms of economic growth. Even in a world of social promotion, this is not a passing record of achievement.

Nixon has called for additional funds for higher education in the fiscal year 2015 budget. Whether these funds survive the political battlefield and find their way to colleges and universities is a dubious proposition. Nor do I mean to suggest that simply throwing more dollars at education is the answer to improving the situation. One thing is certain, however: Unless Missouri’s educational report card improves in the coming years, do not expect to experience an economic boom any time soon.

October 28, 2013

It Begins: Missouri Officials Already Planning To Spend More Of Your Money In 2014

Late last week, Missouri Gov. Jay Nixon backed off a plan that would have returned some food stamp work requirements to their pre-recession levels. “With greater certainty about what the federal funding level for the food stamp program will be after last week’s budget agreement,” he wrote, “we have made a determination that the appropriate course of action is to maintain the policy that is currently in place.”

In other words: we could have spent less on the program, but … we won’t.

That episode should have been the first clue of what the Missouri Legislature and the governor have in store for their constituents in 2014: big-time government spending. We are two months away from the next legislative session, but right on schedule, we are already seeing news percolate that Jefferson City bureaucrats are expecting even more money to be dumped into the fiscal sinkhole that is Missouri government. [Emphasis mine.]

In a subtle shift from years past, some Missouri budget officials now are openly talking about the potential to spend more – as opposed to emphasizing the need to pare back.

“Revenue is certainly looking better,” said Linda Luebbering, the budget director for Democratic Gov. Jay Nixon. “We don’t have as much of that hole to fill up as we have other years. Hopefully there will be some room to do a few more things” in the next budget.

Sad and predictable. For once, it would be nice to see state officials in Jefferson City plan to spend less of your money, not more.

August 29, 2013

Texas And Taxes: Time To Set The Record Straight

Texas Gov. Rick Perry released an ad (paid for by TexasOne, a public-private partnership aimed at economic development outreach) in Missouri touting Texas’ business-friendly climate and criticizing Missouri Gov. Jay Nixon for vetoing a tax cut. In some quarters, this has not been well received. Missouri Secretary of State Jason Kander criticized Perry for trying to entice Missouri companies to move to Texas. However, if all Missouri can do to respond to Texas is write strongly worded letters, then we’ve already lost the economic development battle. It is time for real reform, and mirroring Texas isn’t a bad way to go about it.

It’s true that Texas faced a serious budget shortfall after a recession hit. So did many states. However, Texas has managed to climb out of the hole it was in. Now, according to the Texas comptroller, Texas is looking at an $8.8 billion surplus. Even after making up for much of the cuts imposed by earlier budgets, Texas is still looking at a surplus. Texas also has significant assets in its “Rainy Day” fund. According to the Tax Foundation, Texas’ “Rainy Day” fund is 18.58 percent of general spending compared to 3.28 percent for Missouri.

Nixon and liberal advocacy groups such as the Missouri Budget Project worry about effects an income tax cut will have on education. Yet Texas, without an income tax, performs just as well as Missouri on a variety of education metrics.

Income taxes are among the most economically damaging taxes a state can impose. The Show-Me Institute has published research on how Missouri could eliminate the state income tax, or for the less bold, eliminate just the corporate income tax. Maybe instead of letters, Missouri can try real reform.

August 20, 2013

That Sucking Sound Is Your Money Being Taken From Missouri’s Private Economy

Whose money is it?

Supporters of higher taxes have spilled a lot of ink suggesting that Missouri House Bill 253 will decimate the state’s budget, the bill’s revenue triggers notwithstanding. Taking their figures as gospel only for the sake of argument, I wonder, do tax hike supporters recognize that all that tax money is actually the taxpayers’ money first and foremost? By sustaining the governor’s veto, tax cut opponents are actually taking every dollar it “costs” the state or a political subdivision from the private economy to grow the size of government. Put another way: Does taking more money out of taxpayers’ hands and letting the state spend it — a state that, under the present status quo, ranks 48th in the country in GDP growth since 1997 — sound like a recipe for economic success to you? Sounds like business as usual, and here in Missouri, business has been too bad for too long.

The implication at the core of the veto supporters’ argument is that the state knows how to spend that money better than we do. I disagree. If you support smaller government, you support tax cuts. If you support bigger government, you make excuses.

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