Category Archives: State & Local Finance

Overpaid or Underpaid? Public Employee Compensation in the State of Alaska

Source: Mouhcine Guettabi and Matthew Berman, University of Alaska Anchorage, Institute of Social and Economic Research, ID: 1675, July 2016

From the summary:
Are state workers better paid than their counterparts in private industry? That question is likely to come up more often, as the state deals with a huge budget shortfall. The answer is generally no, but there are exceptions.

We analyzed the question in two ways, using different data sources for cash wages but the same assumptions about benefit levels. Using two sources helped us better answer the question, and each yielded the same broad conclusion: state workers are not on average paid more.

That’s true, whether we consider just wages, or total compensation—wages plus benefits. But there are significant differences in pay and total compensation of public and private workers in individual occupations. We did this research for the Alaska Department of Administration (see back page). Below we summarize our findings, and inside report more details…..

2016 State of Missouri Compensation & Benefits Study

Source: CBIZ Human Capital Services, July 29, 2016

CBIZ Human Capital Services (“CBIZ”) was engaged by the State of Missouri (“State”) to conduct a comprehensive compensation study for its employees, including a review of current compensation practices, an update of the compensation plan, and a benefits analysis.

In order to assist the State in implementing a compensation system that considers both market and internal factors, CBIZ matched the State’s positions to positions in the market, developed a new salary structure, and calculated the cost of implementing the recommendations. In addition to evaluating base salaries at the State, CBIZ assessed total cash compensation and competitive benefits levels.

As a part of this process, the employee data reflects the 2% general structure adjustment that took effect on July 1, 2016.

This report details CBIZ’s findings and recommendations, the summary of which indicates that the State’s current compensation practices are, in the aggregate, below market-competitive levels as evidenced by the following:

• Base salary is, on average, 10.4% below the recommended salary range midpoints, which approximates the published survey data market median. (See Exhibit 5A for additional detail.)
• Total cash compensation (the sum of base salary and incentives, the latter of which the State does not provide) is, on average, 12.6% below market. (See Exhibit 8 for additional detail.)
• The benefits offered by the State are 19.7% above market and improve the overall market position of the State. However, State employees remain 4.6% below market when totaling base salary, incentives, and benefits. (See Exhibit 8 for additional detail.)
• The cost to adjust compensation to the threshold of market competitiveness, identified as the minimum of the proposed pay ranges, is $13,690,388 as the result of 5,050 State employees being paid below the proposed pay range minimums. (See Exhibit 5A for additional detail.)
• Missouri ranks last among the 50 states in average employee pay. (See Exhibit 10 for additional detail.)

For reasons detailed later in this report, this analysis has limited utility. CBIZ focused on the broader market for most of the analysis.

The remainder of this report will explain the methodology and expand on this summary in order to clearly document the comprehensive approach taken to analyze the State’s current compensation practices and develop its new compensation plan.
Exhibits 1A-10
Exhibit 11

Bail, Fines, and Fees: A look at how bail, fines, and fees in the criminal justice system impact poor communities in New Orleans

Source: Vera Institute of Justice, 2016

The New Orleans criminal justice system, like many other local systems across the country, operates significantly on funding generated from the people cycling through it—from bail and associated fees before trial, to fines and fees levied after conviction. These practices come with hidden costs to defendants—the majority of whom are poor and black—and taxpayers alike. Such “user fees” are often set without consideration of the defendants’ financial means and failure to pay can keep someone behind bars or land them back in jail. This perpetuates an overreliance on local incarceration that exacts significant unnecessary costs on individuals, communities, and taxpayers alike. This explainer video from the Past Due project sheds light on fines, fees, and financial bail in New Orleans.

The Financial Firm That Cornered the Market on Jails
Source: Arun Gupta, The Nation, August 1, 2016

Thousands of arrestees a year are forced into get-out-of-jail-broke cards that are loaded up with deceptive fees.

Forensics and the Future of a Connecticut Pension Plan

Source: Jean-Pierre Aubry and Alicia H. Munnell, Center for Retirement Research at Boston College, SLP#46, December 2015

The brief’s key findings are: 
– Connecticut’s State Employees Retirement System faces a large unfunded liability, despite recent efforts by the State to fund.
– A significant source of the liability is the “legacy debt” built up before the State began pre-funding its pensions in the 1970s.
– More recently, inadequate contributions, low investment returns (since 2000), and early retirement incentives have added to the problem.
– A promising approach for addressing the funding problem is to provide more breathing room in exchange for a real and sustained commitment to funding by:
– separately funding the legacy debt over multiple generations; while
– funding ongoing benefits using a stricter method for calculating required contributions, and reducing the long-term assumed return on plan assets.

An Explanation of Negative Swap Spreads: Demand for Duration from Underfunded Pension Plans

Source: Sven Klingler – Copenhagen Business School, Suresh M. Sundaresan – Columbia Business School – Finance and Economics, July 27, 2016

From the abstract:     
In September 2008, the US swap spread for 30-year swap contracts turned negative and is still negative as of today. Persistent negative swap spreads are puzzling, and the fact that they prevail only in 30-year swaps has not been explained. To this end, we offer a framework where underfunded pension plans’ demand for duration hedging leads them to demand fixed rates in interest rate swaps (IRS) with 30 years to maturity by funding them at floating rates. This demand when coupled with balance sheet constraints of swap dealers which arose after the crisis of 2008, can drive the long-term swap spread to become negative. We develop a simple model with stochastic term structure to derive these implications. We then construct an empirical measure of the aggregate funding status of Defined Benefits (DB) pension plans from the Federal Reserve flow of funds accounts. We show that this measure of the extent of aggregate under-funding is a significant explanatory variable of thirty-year swap spreads. We also show that this channel seems to be at work only for 30-year IRS and not for swaps with shorter maturities.

Airbnb and Taxes: What Other States are Doing and How Much Revenue Might Be Raised in Massachusetts

Source: Phineas Baxandall, Massachusetts Budget and Policy Center, July 22, 2016

In the last three years, in the face of very rapid growth of Airbnb andsimilar companies, several state and local governments have changed the tax rules for short-term accommodations. In doing so, they have cited a need to create clarity for a rapidly changing industry, to level the playing field between new and more traditional accommodations, and to recapture lost public revenue.1 Others have opposed these measures as extensions of the scope of taxation, or because they seek more comprehensive health, safety, and zoning regulations applied to these rentals along with taxation.

Taxes on hotel stays were created long before the Internet or Airbnb, and it has taken states time to catch up to the rapid change in this industry. In the past, people might rent a room to someone they knew, or allow people to rent by the month or at will; and state and local governments did not attempt to apply room occupancy taxes to these arrangements. Large-scale renting of short-term residential accommodations wasn’t practical before the advent of integrated online booking, reputation, and payment systems.

This month the Massachusetts Senate approved economic development legislation that would revise the state’s Room Occupancy Tax to end the current exemption for an owner-occupied “bed and breakfast home” that rents out three or fewer rooms. The new legislation would eliminate this category. It instead creates a new legal category of taxable “transient accommodations,” which includes any vacation, leisure, or short-term accommodation offered in exchange for rent that wouldn’t qualify as a hotel, motel, lodging house, or bed and breakfast establishment (categories that are already taxed under the law). If enacted, Massachusetts would join 20 other states where statewide or local rules have extended short-term rental taxes to booking arrangements like Airbnb.2

State Budget Strategies: Understanding the Assumptions Behind Budget Numbers

Source: Pew Charitable Trusts, Issue Brief, June 21, 2016

From the overview:
Not all state budget estimates are created equal. Although most estimates represent good-faith efforts to translate uncertainty into reasonable expectations, some merit closer scrutiny. As state policymakers begin reviewing line items as part of legislative budget negotiations, they should keep in mind that many of the numbers presented are based on assumptions. For legislators to fully understand these numbers, they need to ask the right questions and seek greater clarity about what was assumed.

Specifically, legislators should remember that some budget estimates are more sensitive to assumptions than others. For example, estimated costs for a fixed appropriation generally have a much higher degree of certainty than the estimated costs for an eligibility-driven social insurance program or a business tax credit. Both of these rely on difficult-to-forecast assumptions such as individual or company behavior and broader fiscal and economic conditions. Assumptions about federal law, the speed of policy implementation, and even political viability can sometimes yield significantly misleading estimates.

The following examples highlight instances in three major budget areas where questionable or unrealistic fiscal assumptions could cause significant problems for states.

State and Local Government Contributions to Statewide Pension Plans: FY 14

Source: National Association of State Retirement Administrators (NASRA), Issue Brief, July 2016

From the introduction:
Pension benefits for employees of state and local government are paid from trusts to which public employees and their employers contribute while they are working. Timely contributions are vital to the funding and sustainability of these plans, and over time yield investment earnings that account for the largest share of pension revenues. Failing to pay required contributions results in higher future costs, due to the foregone investment earnings that the contributions would have generated.

Nationally, contributions made by state and local governments to pension trust funds in recent years account for around four percent of all spending. Pension spending levels, however, vary widely among states and are actuarially sufficient for some pension plans and insufficient for others. Unlike employees, who must always contribute the amount prescribed in statute or by plan rules, some public employers—states, cities, etc.—have discretion to set the contributions they make to public pension plans. The result of this disparity in contribution governance arrangements is a wide range of experience among public employers concerning required contributions. Overall, however, the experience for FY 14 reflects an improved effort among state and local governments to make the full actuarially determined pension contribution, as well as a decline in the rate of growth of pension costs.
This brief describes how contributions are determined; the recent public employer contribution experience; and trends in employer contributions over time.

Public Pension Funds Perform Better When They Keep Politics at Bay

Source: Simon C.Y. Wong, Harvard Business Review, July 19, 2016

….Interference by elected officials — from imposition of local economic development obligations to excessive constraints on head count and compensation that impede recruitment of talented staff — has contributed to poor investment choices, higher total costs, diminished organizations, and disappointing performance at some institutions…..