Fixing the Public Pension Problem
States across the country are continuing to face structural budget deficits as they try to compensate for the pension promises made to their employees. These problems continue to divert money away from essential government services and taxpayers.
While there have been numerous reform initiatives, many have proved ineffective. They have left intact the structural problems troubling state pension systems; as a result, many states have already had to commence further reforms since 2009, and are looking to make still additional modifications. Many of these state pension plans assume a rate of return of 8 percent or more, higher than what can realistically be anticipated. If the projected rate of return for these pension funds continues to not meet states’ expectations, pension systems across the nation may be in even more distress.
Nowhere else is the problem worse than Illinois. On Wednesday, Illinois state lawmakers returned to the Capitol for a special session in hopes of developing an agreement on a comprehensive plan to reduce the nearly $100 billion pension debt. Matthew Glans, a senior policy analyst at The Heartland Institute, writes, “The state employee pension system in Illinois is broke, both financially and structurally. Without an overhaul of the current, unsustainable system, Illinois taxpayers will continue to suffer substantially higher taxes to bail out the state for its imprudent policies.”
This pension issue has trickled down to the municipal level as well. In less than three years, there have been 33 municipal bankruptcy filings across the United States, the most recent one being in Stockton, California. The taxing districts within the Cook County area, the second-most-populous county in the United States and home to the city of Chicago, have a combined “financial burden” of almost $34 billion—an average of $17,147 per Cook County household.
There is no question that the politics of pension reform can be exceedingly difficult. With so many questions regarding the options surrounding pension reform, Heartland will address that issue during its monthly Emerging Issues Conference Call on Wednesday, July 3 at 1:00 p.m. EST. To RSVP, please email Robin Knox at [email protected] to make sure you receive all the information for the call.
This week’s edition of The Leaflet features research and commentary addressing the municipal government debt crisis, the “Farm Bill,” Oregon tobacco tax, Wireless Tax Fairness Act, Parent Trigger, Hydroelectric Power and Renewable Portfolio Standards.
Director of Government Relations
The Heartland Institute
The Municipal Government Debt Crisis
While many studies have examined the present federal debt crisis, and to a smaller degree the similar crises facing state governments, there has been little investigation on county and municipal debt. John Nothdurft, director of government relations at The Heartland Institute, and Sheila Weinberg, founder and CEO of the Institute for Truth in Accounting, teamed up to analyze the 518 primary taxing districts within Cook County.
Sheila Weinberg said, “This study is the first comprehensive analysis of Cook County’s taxing districts. It reveals how officials in many districts have been misrepresenting their financial conditions by telling citizens their budgets were ‘balanced,’ when in fact they have been accumulating an overwhelming amount of debt.”
After much research, they found that the taxing districts within the county have a combined “financial burden” of almost $34 billion—an average of $17,147 per Cook County household. Thirteen taxing districts in Cook County have a worse financial burden than Stockton, California, which is currently proceeding with bankruptcy.
Nothdurft cautioned, “The current fiscal state of many of the county’s municipalities is unsustainable, and citizens will continue to see more tax increases or municipal bankruptcies unless drastic pension and spending reforms are made.”
This policy brief notes the way out for states, counties and municipalities, what practices communities ought to adopt and how they can avoid the financial cliff.
Research & Commentary: 2013 Farm Bill Full of Wasteful Subsidies
On June 10 the U.S. Senate approved its version of the Federal Agriculture Reform and Risk Management Act of 2013, also known as the Farm Bill. The bill would fund food stamps, direct payments to farmers, crop insurance, disaster assistance, and various other subsidies. The Congressional Budget Office estimates it will cost $973 billion over the next 10 years.
In this Research & Commentary, Logan Pike examines the various proposals in the bill and argues that lawmakers should consider the needs of farmers and taxpayers. “The most expensive and indefensible subsidies should be eliminated, and lawmakers should take a market-based approach to these programs.”
Two proposals are being considered in Oregon to increase tobacco excise taxes at the state and local levels. One proposal would increase the statewide tobacco tax from $1.18 per pack to $2.18. Although the current rate is below the national average of $1.48, it is higher than all of Oregon’s neighbors’ (Idaho: 57 cents, Nevada: 80 cents, California: 87 cents) except Washington. The proposed tax hike would greatly increase this disparity.
The second proposal would add a further layer of tax on tobacco products by allowing counties to levy their own taxes in addition to the state and federal excise taxes. It would limit the additional county tobacco tax to the level of the statewide rate while requiring counties to dedicate 40 percent of the revenue raised by the taxes to tobacco prevention programs.
In this Research & Commentary, Matthew Glans contends that while discouraging smoking is a laudable goal, raising tobacco taxes rarely works as intended and has many negative effects. These effects can include pushing residents to buy untaxed or lower-taxed tobacco elsewhere, reducing revenues for retailers in the state, unduly burdening low and moderate-income families, and propping up spending with an unsustainable source of revenue.
Instead of raising particular taxes on Oregonians, lawmakers should advance pro-growth policies that strengthen the economy while controlling spending.
Heartland’s Director of Government Relations John Nothdurft and Senior Policy Analyst Matthew Glans talk about the Wireless Tax Fairness Act, which would protect wireless users from further tax hikes.
States and localities have gone after wireless users with high discriminatory taxes that average a staggering 17.1 percent across the nation. “About 90 percent of Americans have a cell phone, so they’re seeing this space increase in size, so they’re trying to tap the revenue … it’s a money-grab by states and localities,” Nothdurft said. These taxes threaten to damage innovation in the technology sector, which has been one of the few areas of growth in the economy over the past couple years.
Several states are taking second looks at the renewable portfolio standards (RPS) they passed in the late 1990s and early 2000s. States such as Connecticut and Montana have recently amended their RPS mandates by allowing more hydroelectric power to qualify as renewable. Missouri (HB 44), Oregon (SB 121), and Washington (SB 5431) are currently considering similar legislation.
Opponents say letting hydropower count toward RPS mandates will hurt development of wind and solar, which are significantly more expensive and thus less attractive to producers and consumers.
Policy Analyst Taylor Smith says, “Government should not pick winners and losers, especially in the energy arena. Barring outright repeal of RPS mandates, their negative effects can be reduced by making them more inclusive and flexible.”
Texas legislators are considering strengthening an education reform that has garnered significant national attention: the Parent Trigger. Texas’s current Parent Trigger law, one of seven in the nation, requires parents to wait at least six years through their children’s school being marked as failing before they can exercise their rights under the law. This makes it unlikely parents will use the law, and it reduces their influence over their children’s education.
Research Fellow Joy Pullmann says, “Being able to use the Parent Trigger more quickly would empower parents and increase competition among schools, thus holding educators and school systems directly accountable for