Category: Public Finance

Good Illinois pension news doesn’t alleviate underlying financial pressures, report states

Mary Pat Campbell

Link:https://news.yahoo.com/good-illinois-pension-news-doesn-155356123.html

Excerpt:

The state saw its unfunded pension liability decrease in fiscal year 2021 for the first time in four years, due in large part to investment returns exceeding 20 percent, according to a new report from the Commission on Government Forecasting and Accountability.

Measuring by the current-day values of the pension fund assets, unfunded liabilities – or the amount of debt the state pension funds owe that they can’t afford to pay – dropped by nearly 10 percent, to $130 billion in FY 2021 from $144 billion in the previous fiscal year. That put the state’s five pension funds at 46.5 percent funded, up from 39 percent the previous year.

….

That’s the name commonly used to refer to Public Act 88-0593, or the state’s 50-year plan to bring the its five pension funds to 90 percent funded by 2045.

The actual target for that ramp should be a 100 percent-funded pension system within the next 25 years or preferably sooner, according to a letter attached to the COGFA report from its actuary, Segal Consulting.

Author(s): Jerry Nowicki

Publication Date: 10 Dec 2021

Publication Site: Yahoo News

Original Sin (or Pandora’s Box) and Public Finance and Pensions

Mary Pat Campbell

Link:https://marypatcampbell.substack.com/p/original-sin-or-pandoras-box-and?justPublished=true

Graphic:

Excerpt:

The kinds of messages that are welcomed are “innovative” in terms of telling you that you don’t have to do the thing you really don’t want to do (put more money into the pensions, promise less, cut back on many things, tax more, etc.)

Yes! You don’t have to fully-fund pensions!

Absolutely, pension obligation bonds will allow you to do really real arbitrage! Don’t worry about the extra leverage!

For sure, you should be chasing the waterfalls of alternative asset classes! You can get those high returns and not worry about extra risk! Otherwise, you’d have to decrease your discount rate!

Author(s): Mary Pat Campbell

Publication Date: 29 Jan 2022

Publication Site: STUMP at substack

Senator Martwick At It Again, Leading Move To Increase Chicago Pension Liability By Billions – UPDATED – Wirepoints

Mary Pat Campbell

Link:https://wirepoints.org/senator-robert-martwick-at-it-again-leading-move-to-increase-chicago-pension-liability-by-billions-wirepoints/

Excerpt:

Illinois State Senator Robert Martwick (D-Chicago) is pushing ahead with legislation that, according to a Bloomberg report, could increase Chicago’s police pension obligations by another $3 billion in total through 2055. An earlier city estimate put the cost at $2.1 billion. Senate Bill 2105 would do that by removing a birthdate restriction on eligibility at age 55 for a 3% automatic annual increase in retirement annuity.

Where would Chicago get money to cover the additional liability? No answers.

….

Chicago’s police and firefighter pensions already are in utterly abysmal shape, having just 18% and 23%, respectively, of the assets their actuaries say they should have. Together with two other pensions sponsored by the city, Chicago officially reports about $33 billion of unfunded pension liabilities. But using more realistic assumptions, Moody’s estimates the total unfunded liability at $60 billion. Moody’s also reports the city of Chicago’s total debts as a percentage of annual revenues are at 735%, the highest of any major city in the country.

….

It’s as if Martwick is saying, “We rob banks routinely so you might as well make it legal for us to rob banks.”

Author(s): Mark Glennon

Publication Date: 28 Jan 2022

Publication Site: Wirepoints

SALT change likely to be cut from bill, say Senate Democrats

Mary Pat Campbell

Link: https://thehill.com/homenews/senate/591378-salt-change-likely-to-be-cut-from-bill-say-senate-democrats

Graphic:

Excerpt:

Senate Democrats say a proposal to raise the cap on state and local tax (SALT) deductions, a top priority of Senate Majority Leader Charles Schumer (D-N.Y.), is likely to be cut from the revised Build Back Better Act.   

Senate Democrats who were involved in negotiations over the bill before Sen. Joe Manchin (D-W.Va.) blew it up last month say there’s simply not enough room for the expensive tax change, which Republicans argue would benefit wealthy suburban households in blue states.

….

Pulling the SALT fix out of the legislation also will make it tougher to pass the legislation through the House, where last week three Democrats from New York and New Jersey insisted they won’t support any bill that doesn’t raise the $10,000 cap former President Trump imposed on SALT deductions in 2017.   

….

“The problem that the Democrats have here is not only does SALT relief cost a lot of money, but it is extremely regressive,” Gleckman said. “We looked at a number of versions of this. We looked at an $80,000 cap, we looked at a $25,000 cap, we looked at a $400,000 phaseout … and there are real significant differences, but all of them are extremely distributionally regressive. All of them largely benefit the highest-income people, no matter how you do it.”  

Middle-income individuals and families hardly see any benefit because the vast majority of them do not itemize deductions.   

Author(s): Alexander Bolton

Publication Date: 26 Jan 2022

Publication Site: The Hill

Amid SALT tax standoff, here’s where Illinois senators stand: The latest D.C. Memo

Mary Pat Campbell

Link:https://www.chicagobusiness.com/juice/salt-deduction-cap-durbin-duckworth-restate-call-repeal-dc-memo#new_tab

Excerpt:

The Illinois congressional delegation is thus far standing firm in its bid to repeal the $10,000 cap on state and local tax deductions—albeit strictly along party lines.

It’s become a potentially divisive issue for Democrats—just as Republicans intended when the cap was instituted as part of the Trump tax cuts at the end of 2017. But it’s also proved to cut both ways.

….

A 2018 report issued by Chicago-area Democratic representatives, using data compiled by the Institute for Taxation and Economic Policy, found that 500,000 metro households felt the pinch to some extent, including 71,000 of 170,000 homeowners in the 6th District, where Casten unseated Roskam and is now trying to hold off Rep. Marie Newman after redistricting.

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But repealing the cap has threatened to open a divide between Democratic progressives and traditional liberals. For progressives like Sen. Bernie Sanders of Vermont it’s also a fairness issue, in that if he insists that the richest Americans pay more in taxes, that also goes for Democrats in that group. He’s suggested repealing the SALT cap only up to household incomes of $400,000, citing President Biden’s like-minded campaign pledge that he would not raise taxes on those earning up to that amount.

Author(s): Ted Cox

Publication Date: 26 Jan 2022

Publication Site: Crain’s Chicago Business

The Looming Tipping Point of New Jersey’s Pension System

Mary Pat Campbell

Link:https://burypensions.wordpress.com/2021/12/14/the-looming-tipping-point-of-new-jerseys-pension-system/

Excerpt:

Andrew Biggs prepared a report for The Garden State Initiative that focused on the impact of more retirees than employees.

Notable excerpts:

Nationally, unfunded state and local government pension liabilities remained roughly stable at about $1 billion from 1975 through 1999, but accelerated rapidly in the following two decades, reaching $4.0 trillion in 2020. The combined unfunded liabilities of New Jersey public plans have increased significantly as well, from $58 billion in 2000 to $186 billion in 2019. (page 4)

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In summary, federal government figures demonstrate that New Jersey lawmakers promised benefits to employees that were larger than lawmakers were willing or able to fully fund. The New Jersey pension systems instead relied upon returns on risky investments to make up the gap. But, as New Jersey’s investment experience shows, risky investments pay higher expected returns than safe investments precisely because they are risky, even over long periods of time. This leaves only more conventional solutions available, which are both financially and political difficult. All New Jersey pension stakeholders — including lawmakers, public employees and retirees, and taxpayers — must carefully consider how the costs and benefits of pension reforms will be borne. (page 33)

Author(s): John Bury

Publication Date: 14 Dec 2021

Publication Site: Burypensions

Sagging Stocks Aren’t the Only Threat to Pension Plans

Mary Pat Campbell

Link:https://www.governing.com/finance/sagging-stocks-arent-the-only-threat-to-pension-plans

Excerpt:

You need money to make money, and the programs long in trouble didn’t have enough assets on hand to take full advantage of a banner year. Say your plan started 2021 with a funding level of 80 percent (meaning you had enough assets to cover 80 percent of your anticipated liabilities). With a 30 percent return, your plan would then be 104 percent funded. But if you only started with a 30 percent funding level, the same percentage gain would bump you up only to 39 percent funded.

“The problem of a deeply underfunded plan is that they don’t have a lot of assets, so big returns aren’t as helpful to them,” says Donald Boyd, co-director of the Project on State and Local Government Finance at the University at Albany. “They’ve still got a huge way to go.”

….

Maintaining discipline has been hard. When pension plans have a good year, as in 2021, there’s a temptation for legislators to skip contributions. This would be akin to an individual seeing her retirement account gain $10,000 and figuring she can skip that year’s $5,000 contribution.

The problem is that you have to maximize your gains in good years, not fritter them away, because inevitably you’re going to have to make up for bad years at some point. “When politicians have a lot of money around, they tend not to put it in the fund,” says the Urban Institute’s Johnson. “When things are bad, they kick the burden down the road and let future taxpayers worry about it.”

Author(s): Alan Greenblatt

Publication Date: 25 Jan 2022

Publication Site: Governing

How High Are Federal Interest Payments?

Mary Pat Campbell

Link:https://www.crfb.org/papers/how-high-are-federal-interest-payments

Graphic:

Excerpt:

Even with exceptionally low interest rates, the federal government is projected to spend just over $300 billion on net interest payments in fiscal year 2021. This amount is more than it will spend on food stamps and Social Security Disability Insurance combined. It is nearly twice what the federal government will spend on transportation infrastructure, over four times as much as it will spend on K-12 education, almost four times what it will spend on housing, and over eight times what it will spend on science, space, and technology. 

Publication Date: 10 Mar 2021

Publication Site: Committee for a Responsible Federal Budget

Summary of the Latest Federal Income Tax Data, 2022 Update

Mary Pat Campbell

Link: https://taxfoundation.org/summary-latest-federal-income-tax-data-2022-update?mc_cid=aeb8f14671&mc_eid=4737d05e09

Graphic:

Excerpt:

In 2019, taxpayers filed 148.3 million tax returns, reported earning nearly $11.9 trillion in adjusted gross income, and paid $1.6 trillion in individual income taxes.

The top 1 percent of taxpayers paid a 25.6 percent average individual income tax rate, which is more than seven times higher than taxpayers in the bottom 50 percent (3.5 percent).

The share of reported income earned by the top 1 percent of taxpayers fell to 20.1 percent from 20.9 percent in 2018. The top 1 percent’s share of federal individual income taxes paid fell to 38.8 percent from 40.1 percent.

The top 50 percent of all taxpayers paid 97 percent of all individual income taxes, while the bottom 50 percent paid the remaining 3 percent.

The top 1 percent paid a greater share of individual income taxes (38.8 percent) than the bottom 90 percent combined (29.2 percent).

The Tax Cuts and Jobs Act reduced average tax rates across income groups.

Author(s): Erica York

Publication Date: 19 Jan 2022

Publication Site: Tax Foundation

Iowa’s Bold Tax Reform

Mary Pat Campbell

Link:https://www.wsj.com/amp/articles/iowas-bold-tax-reform-kim-reynolds-11642614230

Excerpt:

Gov. Reynolds is proposing a bold tax reform that would increase the incentives to work and invest in the Hawkeye State. Her proposal unveiled last week would reshape the state income tax, gradually consolidating brackets en route to a flat 4% rate by 2026. “When the bill’s fully implemented,” she said, “an average Iowa family will pay more than $1,300 less in taxes.”

The flat 4% levy would drop the state’s top rate by more than a third. Under current law Iowans are set to pay 6.5% on earnings above about $80,000, a threshold that catches much of the middle class. That and three other income-tax brackets would be swept away by Gov. Reynolds’s reform.

The plan would also slash the state’s corporate tax, which is even more punishing. Iowa-based companies pay 9.8% of their earnings above $250,000 in state tax. Ms. Reynolds’s reform would gradually reduce the top rate to 5.5%, capping corporate-tax revenue at $700 million a year and using excess revenue to offset annual rate cuts. An immediate rate cut would be better economically, providing more clarity for corporate investment decisions. But the revenue target should be met if the economy continues to grow.

Author(s): WSJ Editorial Board

Publication Date: 19 Jan 2022

Publication Site: WSJ

TO FIX ILLINOIS’ PENSION CRISIS, FIRST CHANGE ITS CONSTITUTION

Mary Pat Campbell

Link:https://www.illinoispolicy.org/to-fix-illinois-pension-crisis-first-change-its-constitution/

Excerpt:

Illinois allocates more of its budget to pensions than any other state, but pension spending has only skyrocketed. A constitutional amendment is the only way to reform the state’s unsustainable and underfunded pension systems.

Daley College Professor Mike Crenshaw is far from retirement, but he constantly worries whether the State Universities Retirement System will be solvent for him.

“I have 20 years until I can retire, and my biggest fear is that the money’s not going to be there,” Crenshaw said.

….

Because pension benefits are defined in the Illinois Constitution, only a constitutional amendment approved by voters could change pension structures. Amending the constitution would open the door to changing the compounding raises to simple inflationary adjustments – protecting the systems for retirees and ending the excessive drain on taxpayers.

Author(s): Dylan Sharkey

Publication Date: 18 Jan 2022

Publication Site: Illinois Policy Institute

Puerto Rico Released From Bankruptcy as Economic Problems Persist

Mary Pat Campbell

Link:https://www.wsj.com/articles/puerto-rico-released-from-bankruptcy-as-economic-problems-persist-11642537090

Excerpt:

Puerto Rico received court approval to leave bankruptcy through the largest restructuring of U.S. municipal debt ever, ending years of conflict with creditors as the U.S. territory confronts other stubborn economic problems.

Tuesday’s court ruling approved a write-down of $30.5 billion in public debts built up during an economic decline marked by high joblessness, outward migration and unsustainable borrowing that tipped Puerto Rico into bankruptcy in 2017. The restructuring plan calms tension between Puerto Rico and its Wall Street creditors dating to its debt default, the largest ever on bonds backed by the full faith and credit of a U.S. municipality.

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The territory entered bankruptcy with $74 billion in bond debt and a $55 billion gap between the pension benefits promised to employees and retirees and the funding set aside to pay for them. Public agencies were beset by cronyism and failed for years to draw up accurate budgets or account for expenses, according to a 2018 investigation commissioned by the board.

Sprawling bureaucracy and a high cost of doing business discouraged investment, especially after the expiration of some corporate tax breaks in 2006 pushed some pharmaceutical and other manufacturers to depart. To make up for a shrinking tax base, officials borrowed to paper over deficits and skimped on pension contributions.

Many residents of Puerto Rico, political leaders, and some investors have called for an independent audit of how the huge debt was built up, according to Judge Swain’s decision.

Author(s): Andrew Scurria and Soma Biswas

Publication Date: 18 Jan 2022

Publication Site: WSJ