…. Research suggests that the real world differs from these assumptions, in some ways that mean the assumptions may understate risks, and in other ways that mean the assumptions may overstate risks. Investment returns may not be normally distributed and may not be independent over time. Perhaps more important, investment returns and tax revenue may be correlated: a poor economy may cause investment returns to fall short of expectations, and may also cause tax revenue to fall short. The resulting increase in required employer contributions may cause additional fiscal pressure if increases come when tax revenue is low.
We address these issues, focusing on the correlation between tax revenue and the economy, by building a small macroeconomic model that can generate internally consistent stochastic scenarios of growth in real gross domestic product (GDP) and returns from stock and bond investments. ….
Note: This paper will be presented at the 2018 Municipal Finance Conference on July 16 & 17, 2018.
State governments with large unfunded pension liabilities are paying more to borrow from capital markets than are other states, according to Chuck Boyer of the University of Chicago Booth School of Business.
In the paper, “Public pensions, political economy and state government borrowing costs,” to be presented at the 2018 Municipal Finance Conference at Brookings this week, Boyer argues that markets view states with large pension deficits as riskier investments. His evidence suggests that states are already paying for municipal government’s unfunded pension liabilities in the form of higher borrowing costs. He asks two questions: 1) how are state governments’ borrowing costs affected by unfunded pension obligations? and 2) do states with political constraints face higher borrowing costs?
Boyer constructs a panel dataset using each state’s Comprehensive Annual Financial Reports for the period 2005 to 2016. He focuses on balance sheet variables—revenues, expenses, assets, and liabilities—to capture a state’s financial health and credit default swap (CDS) spreads – the premium paid to protect buyers from an issuer defaulting – to measure borrowing cost. The author reasons that CDS reflects market sentiments better than market yields because CDS are more liquid, and because they are standardized, whereas market yields may be affected by additional features of a particular bond.
I find that public pension funding status has a robust and statistically significant relationship with state borrowing costs, as measured by credit default swap spreads. A one standard deviation increase in the net pension liability to GDP ratio is related to an 18 basis point increase in CDS spreads. This effect is most pronounced among states with constitutional protection for pension liabilities, suggesting the markets perceive these legal protections as material. I also find suggestive evidence that states with more powerful unions pay higher borrowing costs. Results are robust to using spreads from the underlying bonds themselves. These findings highlight the fact that states are already paying for potential future pension problems through higher borrowing costs.
The problem of underfunded public pensions confronts a number of states and local governments in the United States. In the past, numerous public employers in the United States have agreed to pension benefits that now appear challenging to afford given current revenues and the increased cost of providing governmental services. Further, this challenge has been exacerbated by past failures to set aside sufficient moneys to meet the pension benefits obligations incurred to date. All of this is occurring on the heels of the Great Recession of 2007, followed by an anemic recovery, and at a time many states and local governments are faced with an aging infrastructure that must be attended to and increased demands for basic public services (sanitation, water, streets, schools, food inspection, fire department, police, ambulance, health and transportation) that must be met. Because the public pension underfunding problem pits the requirement of meeting pension obligations against the need to provide for essential public services, all citizens have an interest in the fair and equitable solution to the dilemma.
Unfortunately, a just and effective method of resolving unaffordable public pension obligations has been elusive for some public governmental employers and employees. This is due in part to promised pension benefits costs exceeding the government’s ability to pay and the failure to fund promptly the incurred obligations. In some cases, solving the problem has been complicated by the lack of any ability to adjust or modify pension benefits to those that are sustainable and affordable to the fullest extent possible without adversely affecting the funding of essential public services. This paper will provide a review of some legal and practical obstacles that have been making needed pension reform and balancing the budget difficult, if not impossible, and will suggest possible new approaches to the problem that have not yet been tried. …..
From the abstract:
Teachers unions are notorious figures in state politics, asserting influence over elections and education policy with their large memberships and well‐funded PACs. Nonetheless, during the Great Recession Republican‐controlled state governments repeatedly clashed with teachers unions over their members’ compensation and collective bargaining (CB) rights. Conversely, public safety officers were less frequently targeted—and in some cases explicitly shielded—from CB conflicts. Is this because teachers support Democrats, while cops support Republicans? I evaluate this proposition considering state reform patterns and union partisan campaign donations.
…..SEIU 925 is the target of an “opt-out campaign,” a new anti-union initiative by the State Policy Network (SPN), the web of billionaire-backed right-wing groups that helped fund the Janus v. AFSCME lawsuit. The Washington-based Freedom Foundation is a star member.
SPN got the Supreme Court ruling it wanted in Janus, which nationalized right-to-work conditions across the public sector. All public sector workers now have the option of receiving union benefits without paying for them. If enough workers choose to stop paying dues, union budgets and power will be greatly diminished.
SPN is now building on the Janus victory with opt-out campaigns to contact government employees in union-dense states and encourage them to drop their membership. Their targets include blue states such as California, Illinois, New York, Oregon and Washington that have resisted passing anti-union legislation. The plan is simple: Gut unions of members and money so they have less influence on state elections. Once sympathetic politicians are in office, corporate interests can pass state laws to torch what remains of organized labor.
But unions have also spent months preparing for this moment…..
….Estimates vary as to how drastically right-to-work policies ultimately reduce union membership, but the consensus at this point is that they’re a drag. Michigan offers a useful illustration, in part because it passed a right to work law in 2013, meaning enough time has passed to judge its initial effects, and because the state’s largest teachers union, the Michigan Education Association, files financial and membership information with the Department of Labor. (Many purely public sector unions don’t because they aren’t required to.) According to those documents, the union has lost 18 percent of its membership since the statute was passed. Dues and membership fees have declined, meanwhile, by 28 percent. The union hasn’t collapsed, but it is significantly reduced…..
….David Crim, a spokesman for the Michigan Education Association, told me that many teachers decided to leave the union even though they supported it, because dropping their membership and not paying dues was the only way they felt they could increase their incomes at a time when educators’ wages in Michigan have been stagnant. If true, that points to how right-to-work policies can create a vicious cycle for unions: Weakening organized labor makes it harder for public sector unions to organize and bargain for better pay, encouraging more teachers to drop their memberships for the sake of their own finances…..
The State of Minnesota (Aa1 stable) approved legislation late last month that will change certain public pension benefits and modestly increase plan contributions by government employers and employees. The changes are credit positive for the state and its local governments because they will reduce unfunded pension liabilities and improve plan funding. Even after the changes, however, local governments across Minnesota, particularly school districts, will continue to face high pension burdens….
In a closely watched case, the U.S. Supreme Court overturned 40 years of precedent by ruling that mandatory public-sector union dues are unconstitutional.
In a 5-4 vote on June 27, the justices held that states and public-sector unions may no longer require workers to pay agency fees. “Neither an agency fee nor any other payment to the union may be deducted from a nonmember’s wages, nor may any other attempt be made to collect such a payment, unless the employee affirmatively consents to pay,” Justice Samuel Alito Jr. wrote for the majority.
In dissent, Justice Elena Kagan said the decision will have large-scale consequences. “Public employee unions will lose a secure source of financial support. State and local governments that thought fair-share provisions furthered their interests will need to find new ways of managing their workforces,” she wrote…..
…. Today’s ruling means that all public-sector unions could essentially operate under “right-to-work,” depriving labor of critical funding, increasing the problem of “free ridership” and potentially decimating union membership.
Unions are bracing for the aftermath of the ruling. And mainstream media outlets, which do not generally devote much ink to labor stories, have highlighted the case in headline after headline. Yet what many fail to mention is that Janus would be particularly devastating for one group in particular: African-American women.
Public sector unions have long been a source of economic power for African-American women, who are disproportionately represented in their ranks. A March brief from Celine McNicholas and Janelle Jones at the Economic Policy Institute (EPI) shows that African-American women have the highest share of workers in the public sector—17.7 percent, equaling about 1.5 million workers.
The public sector provides job opportunities for African-American workers, and women especially, at a rate much higher than the private sector. In 2015, African-American women made up 10 percent of government workers, compared to just 6 percent in private-sector employment. ….
The argument that taxpayers cannot afford public pensions has gained traction despite a woeful lack of empirical evidence to support it. Legislators across the nation are contemplating options for the future funding of public-sector worker retirement benefits at a time when competition for finite state and local resources is fierce. The reasons are familiar: the lingering effects of recession and misguided budget priorities have taken a toll. Time and again, defined-benefit pensions for firefighters, police officers, teachers, and other public servants have ended up on the chopping block, even though plan participants have consistently held up their end of the bargain.
Unintended consequences often flow from policy actions that are made with short-term pressures in mind. There is a real risk that reducing or even dismantling public pension benefits will ultimately backfire. Tn this installment of ongoing research on the impact of public pensions on the U.S. economy, NCPERS set out to quantify that risk.
The question we asked is this: How does the payment of defined pension benefits and the investment of pension assets impact state and local economies and revenue generation? ….
Minnesota’s new pension bill is a positive step toward improving funding of the state’s pension plans, but because contributions remained fixed in state statute, there could eventually be a regression in plan funded status, in S&P Global Ratings’ view.