Category: Public Finance

ILLINOIS’ PUBLIC PENSION MESS SHOWS THREAT OF UNCHECKED GOVERNMENT UNION POWER

Mary Pat Campbell

Link: https://www.illinoispolicy.org/illinois-public-pension-mess-shows-threat-of-unchecked-government-union-power/

Excerpt:

At the top of the Nov. 8 ballot is a proposal to change the Illinois Constitution called Amendment 1, which union backers are calling the “Workers’ Rights Amendment.” Just like the controversial decision to include rigid rules about pensions in the 1970 state constitution, Amendment 1 proposes rigid rules regarding how government unions are treated and makes their powers virtually untouchable.

State lawmakers cannot control soaring pension costs without changing the state constitution. Amendment 1 would similarly make it impossible for them to curb government union negotiating powers, and unchecked union power means an unchecked ability to make demands that taxpayers would have no choice but to fund. The cost of those demands is conservatively estimated at $2,100 for the typical Illinois family during the next four years if voters pass Amendment 1, but the tax damage could be far worse.

Looking back, the adoption of the pension protection clause in the 1970 Illinois Constitution started many of the problems Illinois faces today. Illinois’ pension protection clause has been interpreted to be more rigid than any similar provision in any state constitution. With no ability to rein in the cost of public pensions, payments have crowded out spending on education and public services even as Illinoisans bear some of the highest tax burdens in the country.

The state holds the lowest credit ratings in the country, and residents are consistently leaving for states unrestrained by an unyielding pension clause in their constitutions. State lawmakers made attempts to correct the problem in 2013, but the Illinois Supreme Court struck down most of those reforms. The only option left is to change the state constitution, which could let the state regain fiscal sanity.

Instead, state lawmakers went in the opposite direction and handed voters Amendment 1. Instead of giving Illinois more flexibility to handle its money problems, the proposal takes away options and is potentially more restrictive than even the 1970 constitution’s pension protection clause.

Author(s): Joe Tabor

Publication Date: 14 Sept 2022

Publication Site: Illinois Policy Institute

$50 to drive to Manhattan. $100 to come into N.J. How a fight over traffic cameras could prove costly.

Mary Pat Campbell

Link: https://www.nj.com/news/2022/10/50-to-drive-to-manhattan-100-to-come-into-nj-how-a-fight-over-traffic-cameras-could-prove-costly.html

Excerpt:

A war of words between New York and New Jersey legislators over red light cameras could prove costly to commuters who could be slapped with hefty fees to travel between New York City and the Garden State.

New York lawmakers want to slap Jersey drivers with a $50 “non-cooperation fee” when they drive into New York City, in response to a bill that would bar the state Motor Vehicle Commission from helping New York enforce red light and speed camera tickets against Garden State drivers.

If passed by New York State’s senate and assembly, that charge would be on top of the $16 cash toll to cross the Hudson into Manhattan, and could be added to proposed congestion pricing fees for driving south of 60th Street, that might take effect in 2024.

….

O’Scanlon reiterated his long standing opposition to automated enforcement, citing his analysis of National Highway Traffic Safety administration statistics that showed red light camera and other automated enforcement did not translate in to lower death rates in states that had them.

“There is no correlation to safety benefits. Every unbiased assessment showed no benefit,” he said. “It’s a demonstrable fact that automated enforcement and red light camera systems don’t improve safety.”

Author(s): Larry Higgs

Publication Date: 1 Oct 2022

Publication Site: NJ.com

Bank of England in £65bn scramble to avert financial crisis

Mary Pat Campbell

Link: https://www.theguardian.com/business/2022/sep/28/bank-of-england-in-65bn-scramble-to-avert-financial-crisis

Graphic:

Excerpt:

The Bank of England has been forced into emergency action to halt a run on Britain’s pension funds after the impact of Kwasi Kwarteng’s ill-received mini budget prompted fears of a 2008-style financial crisis.

Threadneedle Street said the fallout from a dramatic rise in government borrowing costs since the chancellor’s statement had left it with no choice but to intervene to protect the UK’s financial system.

City sources said the surprise move, less than a week after Kwarteng’s unfunded tax giveaways, was needed to halt a “doom loop” in the bond markets that risked draining pension funds of cash and leaving them at risk of insolvency.

….

Interest rates on government bonds, or gilts, have risen sharply since the chancellor’s £45bn package of tax cuts – making it punitively expensive for thousands of pensions funds to fund their hedging activities.

Officials in the Financial Services Group of the Treasury were at an away day – said to have been held at the Oval cricket ground in London – on Wednesday, but returned to their desks that afternoon. A source said they were not working on the response to the Bank of England’s announcement.

The Bank’s action helped provide Kwarteng with some respite from the financial markets after three days of turmoil that has seen sterling hit its lowest ever level against the dollar, strong criticism of the mini-budget from the International Monetary Fund, about 1,000 mortgage products pulled and interest rates on UK government bonds hit their highest level since 2008. Bond yields fell while the pound recovered in the currency markets after Threadneedle Street’s announcement.

Author(s): Larry Elliott, Pippa Crerar and Richard Partington

Publication Date: 28 Sep 2022

Publication Site: Guardian

Pension funds crisis forces £65bn bailout by Bank

Mary Pat Campbell

Link: https://www.telegraph.co.uk/business/2022/09/28/pension-funds-crisis-forces-65bn-bailout-bank/

Graphic:

Excerpt:

Britain’s pension funds were on Wednesday at the centre of the financial crisis sparked by the mini-budget forcing the Bank of England to launch a £65 billion emergency bailout. 

The Bank warned of a “material risk to UK financial stability” and stepped in to buy long-term gilts, as plunging markets for UK debt sent borrowing costs spiralling and forced pension funds to dump their assets. Economists compared the crisis to the run of withdrawals that led to the collapse of Northern Rock in the financial crisis. 

However, the move by Governor Andrew Bailey helped restore some calm to markets, and pensions experts said retirement pots were not under threat. Nevertheless, worries that Mr Kwarteng’s radical mini-Budget will trigger further shocks for investors in gilts wiped billions of pounds off the stock market value of Britain’s biggest pension funds.

….

The Bank hopes to halt a domino effect in the City by temporarily suspending plans to offload £80bn of gilts held on its balance sheet. Instead for 13 days it will revert to buying them at a rate of £5bn per day using newly created money in a process known as quantitative easing.

The measures sparked a sharp rally in the market for the 30-year gilts that pension funds had been forced to sell. The cost of such borrowing fell by more than 1 percentage point, a significant downward move. Meanwhile the pound fell initially after the Bank’s announcement on fears of further inflation but recovered to finish roughly flat at nearly $1.09 against the dollar.

Author(s):

Tim Wallace
and
Ben Riley-Smith

Publication Date: 28 Sept 2022

Publication Site: UK Telegraph

Macron buckles on raising France’s retirement age in budget bill

Mary Pat Campbell

Link: https://www.ft.com/content/cf3eff53-2dfb-4530-a756-1e1361990d7d

Excerpt:

French president Emmanuel Macron has decided against pushing through a rise in the retirement age to 65 in a budget bill, backing off an idea that had angered labour unions and divided his centrist alliance.

The move signals how Macron has been forced to contend with a stronger opposition in his second term after his party lost its majority in parliament in June.

….

Prime Minister Élisabeth Borne told Agence France-Presse on Thursday that the government would start negotiations with labour unions, employers and other political parties with a view to passing a law over the coming months.

The government still wants to raise the retirement age from 62 at present to 65, one of Macron’s campaign promises that he sees as key to fixing France’s public finances.

Author(s): Leila Abboud

Publication Date: 29 Sept 2022

Publication Site: Financial Times

Tax Revenue in Most States Surpasses Pre-Pandemic Growth Trend

Mary Pat Campbell

Link: https://www.pewtrusts.org/en/research-and-analysis/data-visualizations/2014/fiscal-50

Graphic:

Excerpt:

As the first quarter of 2022 came to an end and the United States passed the two-year anniversary of the start of the COVID-19 pandemic, total state tax revenue was at its highest level since just before its historic decline in early 2020. Collections were 18.1% greater than those for the final quarter of 2019, after adjusting for inflation and averaging across four quarters to smooth seasonal fluctuations. Only Wyoming and North Dakota had not taken in enough revenue to surpass their pre-pandemic levels.

Nationwide and in 31 states as of the end of the first quarter of 2022, cumulative tax receipts since the pandemic’s start, adjusted for inflation, were even higher than they would have been if pre-COVID growth trends had continued—despite fallout from the pandemic and a two-month recession. According to Pew estimates, Idaho led all states, with 16% more cumulative tax revenue than it would have collected under its pre-pandemic growth rate. New Mexico was second at 15.5% above the trend. Nationally, combined tax revenue at the end of the first quarter of 2022 was 3% above estimates of what might have been collected had the pandemic not occurred.

However, estimates also show that cumulative tax revenue fell short of its pre-COVID growth trend in slightly more than a third of states since the pandemic’s onset, and most other states’ recoveries largely followed historical trends.

Looking at cumulative totals since the start of the pandemic offers a way to identify states in which tax revenue has over- or underperformed since January 2020, based on pre-COVID trends. This approach also provides a different view of the strength of collections from the often-astonishing quarterly and annual percentage increases that were skewed by this particularly volatile period. For each of the nine quarters from Jan. 1, 2020 to March 31, 2022, Pew calculated the difference between actual tax revenue and estimates of how much each state would have collected had revenue grown at its pre-pandemic, five-year average annual growth rate.

Author(s): Melissa Maynard

Publication Date: 7 Sept 2022

Publication Site: Pew Trusts

A State Tax War

Mary Pat Campbell

Link: https://www.city-journal.org/remote-work-and-the-state-tax-war

Excerpt:

The Supreme Court’s unwillingness to intervene in a fight among states over taxing income from remote work may spark a jurisdictional revenue war. In August, the Court refused to take up a lawsuit by New Hampshire against Massachusetts’ practice of levying income taxes on Granite State residents employed by Bay State companies but working from home during the Covid lockdowns. Now New Jersey officials, who filed an amicus brief in the case because the state’s telecommuting residents are similarly taxed by New York, have proposed a law that would let the state tax telecommuters, including possibly tens of thousands of Empire State residents now working from home but employed by Garden State companies. The in-your-face legislation also provides incentives for Jersey residents to challenge New York’s law in tax court—one of the only venues left to residents after the Supreme Court decision. Given that several hundred thousand New Yorkers once commuted to other states to work and may now be staying home to telecommute, Albany risks losing revenues. 

Beginning in March 2020, Covid restrictions brought a sharp rise in telecommuting, or working remotely from home. Studies have suggested that, during the pandemic’s initial phases, up to 36 percent of all private-sector employees, or about 43 million people, worked at home at least one day a week, and 15 percent, or about 18 million, telecommuted full-time. Census data before the pandemic found that as many as 6 million workers regularly cross state lines to go to their jobs. So it’s likely that several million current telecommuters have jobs with firms in another state. In New Hampshire, about 15 percent of residents with jobs—some 84,000 workers—commuted to Massachusetts pre-pandemic.

Author(s): Steven Malanga

Publication Date: 26 Sept 2022

Publication Site: City Journal

The State Pension Funding Gap: Plans Have Stabilized in Wake of Pandemic

Mary Pat Campbell

Link: https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2021/09/the-state-pension-funding-gap-plans-have-stabilized-in-wake-of-pandemic

Graphic:

Excerpt:

Since the fiscal 2019 reporting period ended, an unprecedented $5 trillion in federal stimulus and other government interventions have buoyed financial markets and strengthened plan balance sheets.2 As a result, state plans earned returns of over 25% in fiscal 2021—a highwater mark not seen since the 1980s. Pew estimates that total unfunded liabilities dropped below $1 trillion by the end of fiscal 2021, which would push state plans to be more than 80% funded for the first time since 2008. (See Figure 1; for more detail, see also Appendix G.) The significant improvement in plans’ fiscal position is due in large part to dramatic increases in employer contributions to state pension funds in the past decade, which boosted assets by more than $200 billion. Since 2010, annual contributions to state pensions have increased by 8% annually, twice the rate of revenue growth. And for the 10 lowest-funded states, the yearly growth in employer contributions averaged 15% over this period. As a result, after decades of underfunding and market losses from risky investment strategies, for the first time this century states are expected to have collectively achieved positive amortization in 2020—meaning that payments into state pension funds were sufficient to pay for current benefits as well as reduce pension debt.

An increase in pension contributions of the size seen over the past decade signals a shift in budget priorities by state policymakers and a recognition that the costs of postponing obligations are untenable if left unaddressed. Although this has improved the outlook for state pension plans, it has also crowded out spending on other important programs and services and left states with less budgetary space to sustain future rises in pension payments.

Author(s): Greg Mennis, David Draine

Publication Date: 14 Sept 2022

Publication Site: Pew Trust

Measuring Public Pension Health

Mary Pat Campbell

Link: https://www.ncpers.org/files/ncpers-pension-metrics-2022.pdf

Webinar slides: https://www.nirsonline.org/wp-content/uploads/2022/03/FINAL-Pension-Health-Webinar-September-2022.pdf

Webinar video:

Graphic:

Excerpt:

This report describes a “scorecard”, a standardized summary of pension valuation results (shown on next page), as well as three new metrics, of varying degrees of novelty, to appear on it:


 The Scaled Liability is a measurement of pension liabilities against the size of the economy that supports these liabilities.
 The UAL Stabilization Payment (USP) is an objectively defined cash flow policy standard comparable to
the funding ratio, an objectively defined balance sheet policy standard.
 Risk-Weighting Assets is a proposed method to assess the value of a plan’s assets, taking into account
its capacity to endure the downside risk it has taken on through its allocation of investments.


Author(s): Tom Sgouros

Publication Date: September 2022

Publication Site: NCPERS

New Report Measures Public Pension Health

Mary Pat Campbell

Link: https://www.ai-cio.com/news/new-report-measures-public-pension-health/

Excerpt:

The National Conference on Public Employee Retirement Systems recently released a report entitled “Measuring Public Pension Health: New Metrics, New Approaches” that introduces new mechanisms to account and judge the sustainability of pension plans.

To create these, the report’s author, Tom Sgouros, fellow and co-chair at The Policy Lab at Brown University, formed and hosted the Pension Accounting Working Group, a group made up of actuaries and public pension experts. The group assembled to measure the health of plans, and create new metrics to generate greater insights into a pension’s sustainability, so that trustees and policymakers could make better and more informed decisions.

The working group came up with three new metrics. The first is “scaled liability,” a measurement of pension liabilities against the size of the underlying supporting economy. The second is “unfunded actuarial liability (UAL) stabilization payment,” an objectively defined cash-flow policy standard comparable to the funding ratio. And last is “risk-weighting asset values,” a method to assess the value of a plan’s assets that accounts for a plan’s capacity to endure the downside risk it has taken through the allocation of its assets.

The scaled liability measurement uses economic strength as a proxy for tax capacity. This measurement helps decisionmakers get a read on a plan’s sustainability by providing a comparison between a pension plan and the economic strength of its sponsor. The Federal Reserve includes a comparison of net pension liability with measures of GDP and state revenues in the “Enhanced Financial Accounts” component of its “Financial Accounts of the United States” report.

Author(s): Dusty Hagedorn

Publication Date: 23 Sept 2022

Publication Site: ai-CIO

Districts Spend Up to a Third of Their Payroll on Pensions. What That Means for Budgets

Mary Pat Campbell

Link: https://www.edweek.org/leadership/districts-spend-up-to-a-third-of-their-payroll-on-pensions-what-that-means-for-budgets/2022/09

Graphic:

Excerpt:

In at least some states and school districts, the share of pension costs now amounts to nearly a third of payroll, concludes a new analysis from Moody’s Investors Service, a credit-rating firm.

The gradually increasing burden of retirement costs on districts isn’t a new phenomenon. But the latest analysis is a good reminder of how pensions act as the third rail of district and state school finance—even if the average educator, parent, and principal doesn’t know a ton about their complexities.

Retirements don’t directly have much to do with the instructional quality students receive, but indirectly, they have a lot of impact. Cash going into these systems generally means it’s not going toward building improvements, teacher pay, learning materials, or programs.

Author(s): Stephen Sawchuk

Publication Date: 12 Sept 2022

Publication Site: Education Week

How Deceptive Lobbyists Are Exploiting the Goodwill of Public Employees

Mary Pat Campbell

Link: https://www.governing.com/finance/how-deceptive-lobbyists-are-exploiting-the-goodwill-of-public-employees

Excerpt:

If you followed the saga of the route to passage of the Inflation Reduction Act, you already know that a last-minute maneuver by Arizona Sen. Kyrsten Sinema torpedoed a provision in the Senate compromise bill that would have finally closed the so-called “carried interest loophole.” That’s where savvy real-estate financiers and managers of private partnerships such as hedge funds and private equity deals are able to cut their income taxes as much as 40 percent by masquerading their compensation as a capital gain that enjoys much lower income tax rates.

….

Public pension funds, public employees and their associations need to put a stop to this, and they have both the moral high ground and the clout to do so. It’s high time for political and financial blowback. The PR firms orchestrating this nonsense will just keep it up until their profiteering clients get called out.

….

The reality is that if the fund managers had to pay standard tax rates on their income, it would have zero impact on pension systems’ returns. What are the managers going to do? Cook up fewer deals? Pull up stakes and move to a tax haven? Demand even higher fees on top of their already cushy income? They can huff and puff all they want, but pensioners would lose nothing if the loophole were plugged.

Author(s): Girard Miller

Publication Date: 13 Sept 2022

Publication Site: Governing