Category: Public Finance

Main Street Pensions Take Wall Street Gamble by Investing Borrowed Money

Mary Pat Campbell

Link: https://www.wsj.com/articles/main-street-pensions-take-wall-street-gamble-by-investing-borrowed-money-11630774800

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Excerpt:

Many U.S. towns and cities are years behind on their pension obligations. Now some are effectively planning to borrow money and put it into stocks and other investments in a bid to catch up.

State and local governments have borrowed about $10 billion for pension funding this year through the end of August, more than in any of the previous 15 full calendar years, according to an analysis of Bloomberg data by Municipal Market Analytics. The number of individual municipalities borrowing for pensions soared to 72 from a 15-year average of 25.

Among those considering what is known as pension obligation borrowing is Norwich, a city in southeastern Connecticut with a population of 40,000. Its yearly payment toward its old pension debts has climbed to $11 million in 2022—four times the annual retirement contribution for current workers and 8% of the city’s budget. The city will vote in November on whether to sell $145 million in 25-year bonds to cover the pensions of retired police officers, firefighters, city workers and school employees.

….

In 2009, Boston College’s Center for Retirement Research examined pension obligation bonds issued since 1986 and found that most of the borrowers had lost money because their pension-fund investments returned less than the amount of interest they were paying. A 2014 update found those losses had reversed and returns were exceeding borrowing costs by 1.5 percentage points.

Author(s): Heather Gillers

Publication Date: 4 September 2021

Publication Site: Wall Street Journal

Suburban Residents Risk Losing Homes Over Rising Pension Costs

Mary Pat Campbell

Link: https://www.riverbender.com/articles/details/suburban-residents-risk-losing-homes-over-rising-pension-costs-52884.cfm

Excerpt:

In the 1990s, Illinois property tax bills were around the national average. But in the two decades from 1999 to 2019, we’ve seen a massive 65% increase in residential property taxes, adjusted for inflation. That increase is what drove Illinois to have one of the highest tax burdens in the nation.

The source of Patricia’s – and her fellow Illinoisans’ – property tax pains? Public employee pensions.

More than 70% of Patricia’s property tax bill goes to the school district. While school districts account for a significant portion of property tax bills in localities across the United States, school district budgets across Chicago and Illinois are getting devoured by underwater pension systems.

While the state is responsible for paying employer pension costs for teachers outside of Chicago, rising pension obligations mean more state dollars are spent on pensions, leaving more classroom costs for school districts to fund through property taxes.

Author(s): Amy Korte

Publication Date: 5 September 2021

Publication Site: Riverbender

Social Security: Benefit Terminations and the Trust Fund Running out

Mary Pat Campbell

Link: https://marypatcampbell.substack.com/p/social-security-benefit-terminations

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Through the mechanism of the Trust Fund, Congress can put off having to act on the fundamental demographic problem that they can’t do much about. They hope they can run the Magic Money Machine to cover all the goodies they want, and in 2034, the Boomers will mostly be over age 80. Maybe another pandemic will deal with them….

(and nobody cares about us Gen Xers. In 2034, I won’t even be eligible for Social Security old age benefits.)

Nobody expects the Social Security benefits to be cut in 2034, or whatever other magic date when the Trust Fund runs out. The only thing the current Trust Fund mechanism requires is cuts… only if Congress doesn’t actually pass legislation to “fix” the issue.

They have been doing ad hoc “fixes” to Medicare and other parts for years so as to avoid massive cuts.

Author(s): Mary Pat Campbell

Publication Date: 6 September 2021

Publication Site: STUMP at substack

Social Security Costs Expected to Exceed Total Income in 2021 as Covid-19 Takes Financial Toll

Mary Pat Campbell

Link: https://www.wsj.com/articles/social-security-costs-expected-to-exceed-total-income-in-2021-as-covid-19-takes-financial-toll-11630436193

Excerpt:

Trustees for the Social Security trust fund in an annual report released Tuesday said the program is expected to pay benefits that exceed its income in 2021, the same as it anticipated last year at the outset of the pandemic.

While the pandemic had a significant impact on the program, the trustees said, they expect Social Security’s reserves to be depleted by 2034, only one year sooner than they estimated in their April 2020 report. Once the reserves are exhausted, benefits would be reduced automatically unless Congress steps in to shore up the program, which lawmakers have done previously.

The trustees now project elevated mortality rates related to the pandemic through 2023, and expect lower immigration and child-bearing this year and next, compared with their 2020 estimates. They also expect the pandemic has lowered worker productivity and thus economic output permanently.

Author(s): Kate Davidson

Publication Date: 31 August 2021

Publication Site: Wall Street Journal

DiNapoli bolsters pension fund stability—and cuts tax-funded costs

Mary Pat Campbell
DiNapoli bolsters pension fund stability—and cuts tax-funded costs

Excerpt:

DiNapoli announced today that he’s approved a recommendation by the State Retirement System Actuary to reduce, from 6.8 percent to 5.9 percent, the assumed rate of return (RoR) on investments by the $268 billion Common Retirement Fund, which underwrites the New York State and Local Employee Retirement System (NYSLERS) and Police and Fire Retirement System (PFRS), of which the comptroller is the sole trustee.

To be sure, even at 5.9 percent, the RoR that the pension fund literally counts on to pay constitutionally guaranteed benefits will remain considerably higher than the yields from commensurate low-risk U.S. Treasury or high-quality corporate bonds, which currently range from 2.3 percent to 3.3 percent. Nonetheless, in isolation, cutting the RoR assumption is an unequivocally good and prudent thing for the comptroller to do.

Assuming lower earnings also tends to result in higher required contributions by employers—which is why politically sensitive public pension fund administrators across the country have tended to set their RoRs at much higher levels than those required for private corporate plans. To guard against volatility in investment returns, which has been especially pronounced over the past 25 years, DiNapoli and other pension fund administrators also resort to “asset smoothing” — i.e., counting average market returns over several years—as a basis for estimating the assets available to pay retirement benefits. In New York’s case, the smoothing period is five years.

Author(s): E.J. McMahon

Publication Date: 25 August 2021

Publication Site: Empire Center for Public Policy

Public Statement on the MA Legislature’s Blanket Pension Giveaway

Mary Pat Campbell
Public Statement on the MA Legislature’s Blanket Pension Giveaway

Excerpt:

And it doesn’t apply just to state and municipal workers who had to actually go into work during the pandemic; they must only have “volunteered to work… at their respective worksites or any worksite outside of their personal residence.”  Employees who went in for a single day would also qualify.  So do employees who worked from home but one day when the internet was down went to a family member’s home to work.  (They meet the provision that you did your job from a “worksite outside of [your] personal residence.”)

Administrators, accountants, techies, teachers, finance officers, grant writers, trash collectors and all those paid with public dollars are potentially in line for the benefit.  As currently written, state legislators are eligible to take advantage of the bill.  More than half of the Legislature has signed on to H.2808. Support spans the political spectrum.  The bill may provide a jump in pension benefits for those employed during the pandemic who have already retired.

…..

Pioneer estimates that the bill’s cost would be in the billions of dollars. As of this May, the state pension fund, state Teachers’ Retirement System and the Boston Teachers Retirement system were underfunded by a combined $44 billion.  Annual payments to the systems are scheduled to rise from the current $3.1 billion to nearly $12.4 billion over the next 15 years, and would be even higher under H.2808.  The bill would also further burden over 100 local pension funds in the Commonwealth, many of which are already woefully underfunded.

Author(s): editorial staff

Publication Date: 26 July 2021

Publication Site: Pioneer Institute

The Massachusetts ‘Essential Worker’ Pension Boost Proposal Is A Case Study In Public Pension Failures

Mary Pat Campbell

Link: https://www.forbes.com/sites/ebauer/2021/08/19/the-massachusetts-essential-worker-pension-boost-proposal-is-a-case-study-in-public-pension-failures/

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The text of the bill, H. 2808/S. 1669, is brief. All employees of the state, its political subdivisions, and its public colleges and universities, a bonus of three years “added to age or years of service or a combination thereof for the purpose of calculating a retirement benefit,” if, at any point between March 10, 2020 and December 21, 2020, they had “volunteered to work or who [had] been required to work at their respective worksites or any other worksite outside of their personal residence.”

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In subsequent reporting, government watchdog group The Pioneer Institute voiced its opposition. In a statement posted on their website, they criticized the broad coverage — acting as an unfunded mandate for municipalities, including workers even if they had worked outside their home for a single day, encompassing both blue collar and white collar workers. They estimate the bill’s cost at “in the billions of dollars” and point to a massive boost even for a single individual, the president of the University of Massachusetts, whose lifetime pension benefit would increase by $790,750.

…..

And left out of Zlotnik’s proposal is a recognition that the state’s main retirement fund is 64% funded, and the teachers’ fund, 52%, as of 2019.

Author(s): Elizabeth Bauer

Publication Date: 19 August 2021

Publication Site: Forbes

One chart tells you much about Chicago’s property tax and its pensions – Wirepoints Quickpoint

Mary Pat Campbell
One chart tells you much about Chicago’s property tax and its pensions – Wirepoints Quickpoint

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The above is only for taxes that fund the city’s main operating account — its Corporate Fund. Property tax bills in the city include separate charges for the school district and other overlapping taxing districts.

Also, since money is fungible, it’s a bit arbitrary for the city to budget a portion of the property tax to pensions. The city has other revenue sources, though the property tax is the biggest.

Still, the chart makes the point everybody should know: Pensions are a huge and growing crisis. They are the 800-pound gorilla in the room — for Chicago, the state and most of its municipalities.

Author(s): Mark Glennon

Publication Date: 19 August 2021

Publication Site: Wirepoints

Taxing Tuesday: The SALT Cap Battle Continues

Mary Pat Campbell

Link: https://marypatcampbell.substack.com/p/taxing-tuesday-the-salt-cap-battle

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 ….these representatives are doing exactly what they should be doing: representing the interests of the people of their districts.

This helpful site provides all sorts of statistics by Congressional district.

According to their data, Tom Suozzi’s district, NY-3, has a median household income of $120K. Gottheimer’s district, NJ-5, has a median household income of $110K.

….

Of the top 50 congressional districts by median household income, they are represented by 42 Democrats and 8 Republicans.

The top 17 districts are all represented by Democrats. You have to get to #18 to get to your first Republican.

Nancy Pelosi’s district is at #4. That must burn her britches. Do better, San Franciscans!

Suozzi’s district is at #5.

Gottheimer’s district is at #16.

Author(s): Mary Pat Campbell

Publication Date: 10 August 2021

Publication Site: STUMP at substack

The SALT Deduction Has Always Been Hard to Defend — And to Kill

Mary Pat Campbell

Link: http://www.taxhistory.org/thp/readings.nsf/ArtWeb/663D98E8EB142B3B852581C6005A9982

Excerpt:

The SALT provision of the 1862 tax disappeared with the income tax itself in 1872. It returned, on paper if not in practice, when the income tax was briefly revived in 1894 (before being struck down by the Supreme Court in the 1895 Pollock decision). But when the income tax returned for good in 1913, it brought the SALT deduction back for the long haul.

Over the decades, the deduction evolved to reflect its fiscal environment. When states began to rely on sales taxes, the deductibility of those levies in the federal system was made explicit. The introduction of the standard deduction in 1944 also reshaped the SALT deduction, reducing its scope dramatically (and shifting the distribution of its benefits up the income scale). Later revisions in the 1960s and 1970s modestly curbed the deduction, but it remained largely intact through the 1980s.

Its survival, however, did not reflect any sort of elite consensus that the deduction was a good idea. Indeed, policy experts were increasingly hostile to it. In earlier decades, the deduction had escaped careful scrutiny, perhaps because it was widely perceived to be necessary in a system marked by high marginal rates; many experts believed that absent the deduction, the combination of federal and state income taxes might have approached confiscatory levels.

Publication Date: 27 October 2017

Publication Site: Tax History Project

Washington State’s Tax Revolt

Mary Pat Campbell

Link: https://www.city-journal.org/cities-balk-at-washington-state-capital-gains-tax

Excerpt:

Five Washington communities—Spokane, Yakima, Spokane Valley, Granger, and Battle Ground—have passed resolutions in recent weeks pledging to outlaw income taxes at the local level if the state adopts income or capital gains taxes. More jurisdictions are promising to follow suit. Local officials are intent on sending the state a message. “Small businesses are the backbone of our local, regional, state, and national economy and it is imperative that the city not put unnecessary hurdles in the way of their success,” Battle Ground’s resolution declared. “Citizens want good government that is fiscally responsible,” Republican state representative Chris Corry argued at a hearing in Yakima. “Putting an income tax ban locally shows a commitment to being fiscally responsible.”

Washington lacks an income tax thanks to a 1932 state Supreme Court ruling that interpreted the state constitution as prohibiting the levy. Over the years, voters have rejected ten attempts to amend the constitution to institute an income tax. The last vote was in 2010, when nearly 65 percent of voters gave a thumbs-down to a ballot initiative heavily supported by the state’s public-sector unions and Bill Gates Sr. (Then-Microsoft CEO Steve Ballmer and Amazon founder Jeff Bezos helped lead the opposition.)

Author(s): Steven Malanga

Publication Date: 16 August 2021

Publication Site: Reason

Something Is Awry in the Treasury Market This Summer

Mary Pat Campbell

Link: https://www.wsj.com/articles/something-is-awry-in-the-treasury-market-this-summer-11629034404

Excerpt:

The core of the problem is that as inflation soared, bond yields fell, creating an instant contradiction: Inflation is poison to bond investors, so they would normally be expected to sell. I have an explanation, but it isn’t perfect.

My take: Investors came to the realization that the huge post-pandemic debt burden will keep rates lower than in the past, while they kept faith that inflation will be manageable. There is little to indicate investors fear a recession-inducing mistake by the Federal Reserve, and they aren’t expecting runaway inflation either.

The market response from March to the start of this month can be thought of as pricing in a repeat of the secular stagnation brought on by the 2008 financial crisis, with the twist of slightly higher inflation than in the past decade.

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And there is one more oddity that is far harder to understand: By Aug. 3, yields on 10-year Treasury inflation-protected securities, or TIPS, reached minus 1.2%, the lowest point for inflation-adjusted yields in history.

It could only make sense if investors were expecting stagflation, or weak economic growth combined with higher inflation. But if the risk of stagflation were rising, investors should be buying gold — which usually rises when TIPS yields fall — and dumping the junkiest corporate bonds, as defaults would be sure to rise. Instead, the relationship between gold and TIPS broke down, while junk bond yields rose only a little from what had been close to record low spreads over Treasurys.

Author(s): James Mackintosh

Publication Date: 15 August 2021

Publication Site: Wall Street Journal