Reading the News with Meep: Pay-as-you-go Retiree Health Care, Taxing the Rich, New Jersey Debt, and More!
Doesn't this sound like fun?
Howdy all — this is a news round-up among my favorite topics. Once upon a time, I kept these links/roundups on the Actuarial Outpost, but the new version of the AO is not to my taste, and my favorite actuarial online community, GoActuary, is not really set up for what I have in mind (and I need to control it on my own website in any case).
So here we go with a few stories I’ll comment on, and a bunch more of plain links that I found interesting in my favored topics.
Why retiree healthcare should be pre-funded: pay-as-you-go doesn’t work in bad times
America’s retired municipal workers are getting squeezed on their health care.
Cities and states can’t afford to keep the same medical benefits they promised government retirees.
For all 50 states combined, revenue declines for 2020 and 2021 could reach 13% cumulatively, according to Moody’s Analytics projections, while the average cost of an employer health-care plan for an individual increased 4% in 2020 to $7,470, according to the Kaiser Family Foundation nonprofit.
The pandemic has crushed sales-tax income and tourism dollars, leaving local governments struggling to find ways to cut costs.
Over the past decade, New Jersey, Michigan, Connecticut, Kentucky and Texas reduced benefits, tightened eligibility requirements or increased premiums and fees, according to the National Association of State Retirement Administrators.
That’s just bad luck, isn’t it.
Oh wait, it’s entirely foreseeable. That’s not luck-related at all.
Let’s look at one of the few plans that pre-funded retiree healthcare:
Some funds such as the State Teachers Retirement System of Ohio, or STRS, are comparatively well-positioned to continue paying health-care benefits to retirees.
The net amount for STRS’s health-care fund reached $3.9 billion in 2019, according to the fund’s annual financial report, with a 182% funded ratio as of last month.
In any case, when times are bad, governments often have lower tax revenues and higher costs. This is why it’s good to pre-fund all your retiree benefits, whether pensions or healthcare.
Next argument for state/local bailout: it’s tough to tax the rich
Especially if they can move to a lower-tax location!
I’m excerpting a small corner of this piece from The Atlantic: If You Soak the Rich, Will They Leave?
The pandemic recession has battered local coffers, causing revenue losses of an estimated $155 billion in 2020 and $167 billion in 2021, about 6 percent of local revenue. New York alone is projecting a $59 billion shortfall through 2022. The federal government could easily finance those kinds of deficits by issuing bonds. But doing so is harder for local governments, which generally have to keep their budgets balanced and often have limits on their borrowing. When big recessions hit, and the COVID-19 recession is a huge one, many of them have no choice but to raise revenue or cut services.
State and city income-tax takings have held up surprisingly well because job losses and lost hours have been concentrated among low-wage workers unlikely to pay much local income tax to begin with. Rich folks have rebounded and, in some cases, thrived during this recession: Employment is up among high-wage workers, property values are climbing, and the stock market has fully recovered. If anyone’s coffers are getting raided, why not the 1 percent’s?
Local tax increases can cause high-net-worth individuals to move, tax experts said; tax avoidance and tax arbitrage are multitrillion-dollar affairs, and rich people are sensitive to tax rates. But many of the people who move when their home state raises taxes are close to retirement anyway.
The election may determine whether states and cities need to raise additional revenue at all: Democrats and Republicans have been squabbling for months over whether Uncle Sam should keep filling local budget gaps. If Joe Biden wins and Democrats take the Senate, a large bailout is likely.
Guess what, guys?
If Dems manage to eke out a Senatorial win in Georgia, I’m willing to bet they’ll still have a hard time bailing out all the varied groups that need/want a bailout.
Given that the federal government can borrow limitlessly, for cheap, and given states’ and cities’ desperate need to funnel more money into constituent services, a bailout is a great idea. “States have balanced-budget requirements, so absent federal aid, they need extra taxes for short-run revenue purposes,” Gabriel Zucman, an economist at UC Berkeley, told me. The federal government “has no short-run revenue need in the current low-rate environment,” as Uncle Sam functionally borrows cash for free.
Oh dear God, please save us.
In the long run, lawmakers should keep in mind that tax rates are far from the only reason a rich person might consider flight: Decaying infrastructure and degrading public services are surely just as important. Both the federal government and the states should go ahead and soak the rich to reduce inequality and raise money for health care, child care, infrastructure investment, education, decarbonization, and a thousand other priorities. Zucman noted that the 91 percent top tax bracket in place from World War II to 1963 reduced inequality without reducing innovation or growth. And, I’d add, without causing many greedy, unpatriotic rich people to flee the country.
I’m just going to chortle and move on. The person who wrote this piece does not come across as someone who knows anything useful in this sphere.
I can think of loads of other things that differed for the period from WWII to the mid-1960s, most of which were far more profound in effect than tax policy. If you sit and think awhile, you may come across these concepts, and I will give you one big hint: at least one major group was treated far more unequal in loads of important dimensions over that period than now in the U.S.
If you can’t think of it, you’re probably someone who really did grow up surrounded by privilege, and this crap is because you’re annoyed that some other people are making more money than you, and you have a frou-frou degree, get published by the Atlantic, and you still get no respect! What’s up with that?!
New Jersey bonds downgraded
I would say that it’s amazing they hadn’t been lower-rated earlier, but they really haven’t had as bad finances as Illinois.
Of course, no state has.
Seeking Alpha: New Jersey GO bond rating cut to BBB+ by S&P; outlook stable
S&P Global Ratings lowers its rating on New Jersey’s general obligation bonds by one level to BBB+, still squarely in investment-grade territory, from A-.
The state’s long-term and underlying ratings are cut to BBB from BBB+ on various other bonds secured by annual appropriations from the state.
Outlook on all bonds is stable.
“The downgrade reflects our view that New Jersey will continue to have a significant structural deficit that will be difficult to close in the coming years because of decreased revenues as a result of the COVID-19 pandemic, combined with high and increasing debt, pension, and other post-employment benefit liabilities,” said S&P Global Ratings credit analyst David Hitchcock.
Even if there is a short-term federal bailout of states and local governments, it really cannot fill the gaping maw of places like Illinois and New Jersey on an ongoing basis. They really have bottomless pits of money hunger, and if you throw money in the pit, the pit merely gets more cavernous. Funny how that happens.
Some more stuff on NJ debt, with a lot from John Bury at Burypensions:
Burypensions: NJ Covid Bonds (1) Potential Sale
NJ Senate Republicans: NJ Budget Brief: Governor Murphy’s Emergency Bond Plan
So many investors are desperate for yield…. and no state has defaulted! Yet! Well, in decades! Illinois will go first!
Illinois finance and pensions
Speaking of Illinois….
Illinois voters defeated a measure that would have allowed the state to raise taxes on its wealthiest residents, striking down a pillar of Governor J.B. Pritzker’s plan for shoring up the state’s finances and preventing its debt from being cut to junk.
The defeat of the constitutional amendment that would have scrapped the state’s flat income tax by a vote of 55% against sent the prices of Illinois’s bonds tumbling, with those due in 2034 down about 7%. If approved, the state would have been able to proceed with enacted legislation to apply higher rates to incomes over $250,000, raising levies on the highest earners.
The loss adds a new challenge to the Democratic governor’s effort to steady the finances of Illinois, whose rising pension-fund costs and chronic budget shortfalls left it with the lowest bond rating among U.S. states even before the pandemic struck. Failure of the measure won’t automatically trigger a downgrade to junk and ratings companies have said they’ll be watching for the state’s backup plan.
S&P referring to last Illinois report but I spoke with lead Illinois analyst Carol Spain & she makes clear they are watching closely over the next 2 months what actions are taken on structural verse one-shots & Nov. rev update/forecast also will play role in assessing credit.
2:29 PM · Nov 4, 2020·Twitter Web App
The outcome was stunning: despite months of ads telling voters that a “yes” vote would ensure that the wealthiest 3% of Illinoisans would “pay their fair share” and the rest of the state would see a tax cut, voters rejected the ‘Fair Tax’ amendment to the state’s constitution, which would have stricken from the constitution the requirement that the state’s income tax be levied as a flat percentage of income across all income levels. With 98% of the vote counted, the Chicago Tribune this morning reported that “no” votes exceeded “yes” votes by a margin of 55% to 45%.
Austin Berg, vice president at the Illinois Policy Institute, made another pitch against the amendment (for instance, here at the Chicago Tribune as well as at various web forums): it would allow the legislature to raise tax rates more easily by dividing up taxpayers, and raising taxes on one tax bracket at a time, ultimately raising everyone’s tax burden but without the political pushback of an all-at-once hike.
Instead, I suspect that the ultimate reason for voters’ rejection of an amendment that promised a free lunch, is that years and years of fiscal mismanagement, without any genuine reform, meant the tax’s supporters had no credibility with the voters. The Chicago Tribune reminded its readers repeatedly of the state’s failed promises and indifference to reform — everything from the failure to reform pensions, to failures to reform property taxes, rejection of redistricting reform, rejection of consolidation of local governments. In a mid-September editorial, the Tribune listed one abandoned promise after the next made by Illinois’ elected officials, from the pledge that tolling would be removed from Illinois’ tollways, to numerous pledges that “just one more” tax hike would fix the state’s finances, over and over again.
In a set of tweets this afternoon, Pritzker claimed that the only remaining options are to “immediately make billions of dollars in cuts” or “impose a higher flat tax, which falls disproportionately on working and middle-class families.” He then blamed “the millionaires and billionaires” for opposing it and accused them of “deceiving the public about its purpose.”
What it boils down to is that the amendment’s failure was a vote of no confidence in Pritzker and in all of Illinois’ elected officials. Pritzker’s easy blaming of Republicans and millionaires and billionaires, rather than recognizing that Illinoisans made the only rational choice in a state with such a legacy of mismanagement and without any willingness for reform, certainly indicates that the state has a long way to go.
There is a lot of commentary on Pritzker’s big pratfall re: this amendment, and I will link some of it below.
Credit rating agencies need to realize that no ginormous money pile is going to fall on Illinois and fill the hole of underfunded pensions and other retiree benefits. Even if Dems squeak out a bare majority in the Senate with Kamala Harris as a tie-breaking vote in the next Congress, they are not going to be shoving half a trillion dollars at Illinois to deal with their debt problem.
Illinois may be able to increase taxes for a while and get some extra revenue. Maybe the new Congress will repeal the SALT cap. But it’s not like Illinois is going to get fiscally prudent anytime soon.
Crain’s Chicago: State’s biggest pension records second-lowest returns of the decade – this is the Illinois Teachers fund
City Journal: Are Democrats Cornered in Illinois? – not until the credit card starts getting refused
National Review: Illinois’s Proposed ‘Fair Tax’ Gets Its Just Deserts
Yvette Shields: Coronavirus torpedoes plan for Illinois legislative session
Orphe Divounguy in Crain’s: This anchor is dragging down Illinois’ economy – it’s the unfunded pension debt
Eric Allie: Editorial cartoon on the fair tax fail
Greg Hinz at Crain’s: City of Chicago Borrowing to Cost City Taxpayers an Extra $2 Billion
The Center Square: Despite fiscal peril, experts say Illinois no closer to pension reform
That last item is about the Chicago Teachers Pension Fund, and let me give you a taste:
Nearly half the leadership staff at the Chicago Teachers’ Pension Fund alleges discrimination and other ill-treatment by a few of the fund’s board trustees, according to a lawyer representing them.
“It’s been a racially hostile environment for some time, sort of conjoined with intimidation, bullying and harassment,” alleged Michael Leonard, a Chicago attorney hired by four of the fund’s leadership staff and a former top staffer who recently exited. All requested, through Leonard, that their names not be used.
Well, if a lawyer is representing them in an employment dispute, I highly doubt their names are going to be secret for long. In general, legal proceedings are a public matter.
In any case, there are plenty of people already on the record:
Problems at the pension surfaced in August when the president of the fund’s board, Jeffery Blackwell, went public with a host of criticisms directed at the board’s trustees. “For the last year and a half I have been witness to some of the most abhorrent, disturbing and despicable actions by former and current trustees on this board,” Blackwell said in a statement at the beginning of the Aug. 20 trustee board meeting, citing “a culture of intimidation, intentional misinformation, discrimination, slander, misogyny, fear-mongering, blatant racism, sexism and retaliatory actions from trustees towards staff and vendors.”
Here is the Public Plans Database page for the pension, and the pattern there is really not good. One doesn’t need a bunch of pension trustees and staffers having this level of interpersonal conflict.
There is other weirdness that has been going on in Illinois pensions (beyond the expected super-underfundedness) which has not been made public (yet), and I keep scanning various sites for even gossip. I guess somebody got some lawyers to sew up all the gossip tight….
Public finance stories
Girard Miller at Governing: State and Local Reforms to Unlock Congressional Stimulus
John Cochrane at the Chicago Booth Review: Debt still matters
Urban Institute: How the COVID-19 Pandemic is Transforming State Budgets – interactive, it shows private & public employment level changes, by state vs. U.S.
David Crane at Govern for California: On California tax revenues year-to-date
Jack Humphreville at City Watch LA: LA’s Budget Bailout Needs Some New Ideas
Nicole Gelinas at NY Post: Cuomo, de Blasio must admit: Biden won’t give them bailout they want
The Daily Beast: These Blue States Are Screwed—Even Under Biden
The Institutional Risk Analyst: Will Senate Republicans Force New York into Default? – this is about NYC, not the state.
Public pension stories
Teri Sforza at the OC Register: As public pension costs soar, some Southern California agencies turn to controversial borrowing to fill deep holes – pension obligation bonds (POBs), of course
Jean-Pierre Aubry at the Center for Retirement Research: 2020 Public Plan Investment Update and COVID-19 Market Volatility
Joe DeLong on CT pensions: Opinion: Lamont must reform unsustainable public pensions
NCPERS: Ten Ways to Close Public Pension
Funding Gaps – for those who know, it will shock nobody to see anything about changing benefit structure (such as risk-sharing). There is a panoply of “solutions” that make my skin itch, like POBs.
ai-CIO: 10 Ways to Close Public Pension Funding Gaps – same as above.
Elizabeth Bauer at Forbes: Social Security Benefit Accruals Stop After 35 Years Of Work History. Is That Fair?
Allison Schrager at E21: The False Promise of Student Loan Forgiveness
City Journal: The Chump Effect
Allison Schrager at National Review: You Are Better Prepared for Retirement Than You Think
Douglas Carr at The Hill: It’s time for a grand agreement on Social Security
ai-CIO: Two More Pension Funds Apply to Treasury Department for Benefits Cuts – this is about multiemployer pensions
Catholic News Agency: Pope Francis transfers financial administration out of Secretariat of State