Category Archives: State & Local Finance

COLA Cuts in State/Local Pensions

Source: Alicia H. Munnell, Jean-Pierre Aubry and Mark Cafarelli, Center for Retirement Research at Boston College, SLP#38, May 2014

The brief’s key findings are:
– Since the financial crisis, 17 states have reduced, suspended, or eliminated cost-of-living-adjustments (COLAs) for public employee pensions.
– This response was surprising as current employees and retirees tend to be legally shielded from benefit cuts.
– But the COLA cuts have largely been upheld in the courts under the rationale that – unlike core benefits – they are not part of a contractual right.
– In short, defined benefit promises in the public sector are not as secure as many thought.

U.S. Infrastructure Investment: A Chance To Reap More Than We Sow

Source: Beth Ann Bovino, Standard & Poor’s, Ratings Direct, May 5, 2014

In the debate about infrastructure investment in the U.S., the focus is invariably on cost–which is no surprise, given that there are dollar figures in the trillions at stake. Less discussed–but no less important, in Standard & Poor’s view–are the returns that infrastructure investment affords. And not just for lenders, who enjoy lower default rates and higher yields than they might get from investments in similarly rated corporate debt. We’re talking about the multiplier effect that such investments have on an economy: Specifically, how each dollar of infrastructure spending, if allocated wisely, translates into much more than that in terms of economic growth. Most think government spending on infrastructure gives short-term benefits to jobs and aggregate demand. However, investment in infrastructure yields long-term benefits as well, which is often overlooked when determining a project’s benefits (R.O.I.). In addition to the short-term benefit of job creation, significant investments in large projects can enhance efficiency and allow goods and services to be transported more quickly and at lower costs–a longer-term reward.

Overview:
• A $1.3 billion investment in real terms in 2015 would likely add 29,000 jobs to the construction sector and will add even more jobs to other infrastructure-related industries.
• That investment would also likely add $2.0 billion to real economic growth and reduce the federal deficit by $200 million (constant dollars) for that year.
• After an initial increase in aggregate demand, the economy’s productive capacity and output typically increase once the infrastructure is built and absorbed into the economy. That means increased growth and more job gains long after the project ended.

We found that a $1.3 billion investment (constant dollars) added 29,000 jobs to the construction sector, and even more to the economy when we count jobs added to infrastructure-related industries. This is in line with the Federal Highway Administration (FHWA), which found that a $1.25 billion investment supports 34,779 jobs related to the project. In our analysis, the associated multiplier effect resulted in an additional $2 billion to real GDP in 2015. However, the economy’s productive capacity and output also likely increase once the infrastructure is built and absorbed into the economy. So the investment will likely add more jobs to the economy long after the project ended, supported by studies from the Economic Development Research Group (EDRG) and the San Francisco Fed, which found long-term gains and job growth from investment in infrastructure. … In the U.S., the most telling example is the U.S. Interstate Highway System, championed by President Dwight Eisenhower, who signed the Federal Aid Highway Act of 1956. While the direct economic benefits of the system are difficult to quantify, it’s a safe bet that the world’s second-longest highway system, with an inflation-adjusted price tag of $400 billion to $500 billion, has added more to U.S. GDP in the past half-century than has been spent on it. Given that an estimated one-quarter of all vehicle miles driven in the U.S. are on the interstate system, the efficiencies it provides are self-evident. …

Pension Calculator

Source: Manhattan Institute, 2014

A defined benefit pension guarantees workers a fixed payment throughout their years of retirement. Though increasingly rare in the private sector, it remains the standard form of retirement benefit provided by state and local governments. Pensions are now one of the most hotly-debated topics in public finance, due to their rising costs and generosity relative to what most taxpayers receive.

The pension calculator tool below is intended to inform the pension debate, by allowing users to easily compare benefit levels across all 50 states. Simply click on a state highlighted in blue in the map below to estimate the pension that you would collect after a career in government. The calculator will also provide an estimate of the total annuity cost, or how much you would need to save to replicate that guaranteed income stream in retirement. To compare generosity of benefits between states, click on the “Compare States” tab.

Rich States, Poor States, 2014 Edition

Source: Arthur B. Laffer, Stephen Moore and Jonathan Williams, American Legislative Exchange Council (ALEC), 2014

From the summary:
Throughout the country, states are looking for ways to energize their economies and become more competitive. Each state confronts this task with a set of policy decisions unique to their own situation, but not all state policies lead to economic prosperity. Using years of economic data and empirical evidence from each state, the authors identify which policies can lead a state to economic prosperity. Rich States, Poor States not only identifies these policies but also makes sound research-based conclusions about which states are poised to achieve greater economic prosperity and those that are stuck on the path to a lackluster economy….

States Are Still Funding Higher Education Below Pre-Recession Levels

Source: Michael Mitchell, Vincent Palacios, and Michael Leachman, Center on Budget and Policy Priorities, May 1, 2014

From the summary:
Most states have begun in the past year to restore some of the cuts they made to higher education funding after the recession hit. Eight states, though, are still cutting, and in almost all states — including those that are have boosted their support — higher education funding remains well below pre-recession levels. The large funding cuts have led to both steep tuition increases and spending cuts that may diminish the quality of education available to students at a time when a highly educated workforce is more crucial than ever to the nation’s economic future.

The State of Retirement: Grading America’s Public Pension Plans

Source: Richard Johnson, Barbara Butrica, Owen Haaga, Benjamin Southgate, and Eugene Steuerle, Urban Institute, 2014

Our pension report card and interactive map grade state-administered retirement plans on their financing; how much retirement security they provide to short- and long-term employees; and the workforce incentives they create for younger, older, and mid-career employees. Results are based on the Urban Institute’s State and Local Employee Pension Plan (SLEPP) database, which includes detailed state-by-state information on plan rules for public school teachers, police officers and firefighters, and general state and local government employees.

Related:
Webcast

Why cutting the government doesn’t make it more efficient

Source: Noah Smith, The Week, Noahpinion, April 24, 2014

A corporate explanation for why government cuts usually backfire.

Lots of people seem to think that A) government is very inefficient, and that therefore B) we can make society more efficient by cutting the size of government. But actually, (B) doesn’t follow from (A). And in fact, the very thing that makes government inefficient in the first place might make cutting it a bad idea!

Why is government inefficient? Because of incentives. Companies generally make hiring and investment decisions based on a marginal cost/marginal benefit calculation (though corporate institutions can of course get in the way of that, and if there are externalities then it’s not efficient, etc. etc.). But government makes its decisions based on some other kind of cost-benefit calculation entirely. Sadly, we don’t have a good understanding of government decision-making, and this is an area that could use a LOT more research attention than it is getting.

Anyway, because government doesn’t make decisions on a monetary cost/benefit margin, it tends to be inefficient. But because of that, if you take a hacksaw to government, starving it of funds, or demanding that it fire workers and close divisions, these firing and closing decisions will not be made on a cost/benefit margin. If you force a corporation to downsize, it will usually lay off the least productive workers first. But if you force a government to downsize, it very well might lay off the most productive workers while retaining the least productive ones!

The very thing that makes government inefficient can make cutting government inefficient!….