The California Department of Transportation has been rebuilding parts of Interstate 80 between the city of Auburn and the Nevada state line. Part of this work was the elevation of bridges to 16 feet 6 inches above the road surface so they can accommodate larger trucks. The final project, completed in March, was the elevation of a bridge in Newcastle built way back in 1959. Larger trucks no longer have to exit the freeway for that stretch, and the entire project is a boon to California commerce. Some 170,000 commercial trucks and other travelers use the I-80 route daily, and as Tony Bizjak of the Sacramento Bee notes, “an estimated $4.7 million worth of consumer goods crosses the summit each hour, making it one of the busiest commercial corridors in the country,” one that “connects California commerce to the rest of the United States.” This vital artery, however, was not the only one in need of renovation.
As veteran observer Dan Walters notes, California motorists pay some of the nation’s highest fuel taxes, yet California highways are “among the nation’s worst.” Governor Brown says the state needs another $59 billion for maintenance and repair. Yet, as we noted, State Auditor Elaine Howle finds that Caltrans has “weak cost controls” that “create opportunities for fraud, waste and abuse.” This comes at a time when the number of highway lanes in need of maintenance has increased from 11,053 miles to 15,272 miles.
The $59 billion for road maintenance and repair approaches the estimated $68 billion the state’s high-speed rail project would cost. With 36 miles of tunnels through the mountains north of Los Angeles, the bullet train’s final cost would surely be much higher. Despite other obstacles, and fading demand, the state proceeds with the project. Politicians would do better to set aside this boondoggle and lift the bridge on improvement of the state’s roads and highways. In the manner of I-80, these arteries connect Californians to commerce and carry workers to their jobs.
Investor’s Business Daily editorializes on the biggest problem that state and local governments face across the United States:
A new report by Hoover Institution Senior Fellow Joshua Rauh shows that, unless action is taken soon, many local governments could face bankruptcy because they can’t meet their pension obligations.
“This study shows that unfunded pension liabilities are devastatingly widespread and only getting worse,” said Rauh. “With hundreds of state and local governments drowning in retiree benefit debt, the need for bold structural reform has never been so pertinent.”
The problem is surprisingly simple: States and cities overestimate returns on their pension fund investments, while systematically underfunding them. The result is a growing deficit that will require massive tax hikes or dramatic and painful cuts in government services and promised pensions to public workers.
The findings of the report, Hidden Debt, Hidden Deficits: How Pension Promises Are Consuming State And Local Budgets are summarized in the following synopsis – we’ve added the emphasis for the section that describes the scale and scope of the problem:
Despite the introduction of new accounting standards, the vast majority of state and local governments continue to understate their pension costs and liabilities by relying on investment return assumptions of 7-8 percent per year. This report applies market valuation to pension liabilities for 564 state and local pension funds, representing around 97 percent of the U.S. universe. Considering only already-earned benefits and treating those liabilities as the guaranteed government debt that they are, I find that as of FY 2014 accrued unfunded liabilities of U.S. state and local pension systems are at least $3.412 trillion, or around three times more than the value reflected in government disclosures. Furthermore, while total government contributions to pension systems were $109 billion in 2014, or 7.3 percent of state and local government revenue, the true annual cost of keeping pension liabilities from rising would be approximately $261 billion or 17.5 percent of revenue. Applying the principles of financial economics reveals that states have large hidden unfunded liabilities and continue to run substantial hidden deficits by means of their pension systems.
The need to keep the pension systems for government employees afloat is driving some anti-public service behavior among a number of state, local and territorial governments in the United States. For example, the most financially distressed government within the U.S., the territorial government of Puerto Rico, is acting to impose capital controls on its residents, preventing them from being able to take their money out of the territory.
Meanwhile, in New York City, the development of public infrastructure in the form of a much needed third tunnel to bring water to the city in case either of its two existing water tunnels fail is being indefinitely put on hold because of the city’s public employee pension liabilities, even though a critical part of it is almost finished:
Mayor Bill de Blasio has postponed work to finish New York’s third water tunnel, a project that for more than half a century has been regarded as essential to the survival of the city if either of the two existing, and now aged, tunnels should fail.
The new tunnel has already been completed and is carrying water into Manhattan and the Bronx. But segments that would supply Brooklyn and Queens, home to five million people, though also virtually finished, still await the building of two deep shafts.
If calamity or age forced the shutdown of City Water Tunnel No. 2, which is 80 years old, the primary water supply to much of Brooklyn and Queens would be lost for at least three months, city engineers said, the time it would take for an emergency activation of the sections of Tunnel No. 3 in Brooklyn and Queens that have already been finished.
The entire Brooklyn-Queens leg of the new tunnel was scheduled to be finished by 2021, with $336 million included in the capital budget in 2013 by Mr. de Blasio’s predecessor, Mayor Michael R. Bloomberg, for whom completion of the third tunnel was the most urgent and expensive undertaking of his tenure.
Scott Sumner identifies the real reason for Mayor DeBlasio’s bizarre decision to expose New York City to the increasing risk of structural failures from its aging public water supply infrastructure, which would impair the supply of water to over 60% of the city’s residents.
So the infrastructure that we supposedly need is started by a Republican, and abandoned by a progressive. The real “unmet need” is not infrastructure; it’s higher pay and fatter pensions for public employees.
Government is really all about priorities. In all these cases, the interests of government bureaucrats are being put ahead those of regular people. And because it is, their future failure is not being left to chance.
In recent years the Internal Revenue Service has been targeting groups for extra scrutiny and abuse based on their political views favoring limited government, lower taxes and accountability. According to the President of the United States “there were some boneheaded decisions,” but “not even a smidgen of corruption” was involved. As we noted, IRS boss Steve Miller shrugged off the targeting scandal as “horrible customer service.” There may be some truth to that, and as the April tax deadline approaches, Joe Davidson of the Washington Post has been keeping watch for signs of improvement.
By his count “nearly one-third” of U.S. taxpayers can’t get the IRS to answer their calls. The current 70 percent answer rate for this season, after a budget increase of $290 million, is up from a paltry 38 percent last year, so as Mr. Davidson has it, “mediocre starts to look good.” IRS Commissioner John Koskinen expects an answer rate of 47-50 percent. “That’s terrible service,” Davidson laments, yet an improvement over the “abysmal” 37 percent last year. Abysmal might also apply to IRS performance in other ways.
As we noted, in 2013 the IRS gave out more than $13 billion in improper payments. Between 2010 and 2012, the IRS handed out $2.8 million in bonuses to 2,800 employees with disciplinary issues and tax compliance problems of their own. The IRS also sent 23,994 tax refunds to a single address in Atlanta, including 8,393 refunds deposited to a single bank. On the other hand, back in the 1980s, the IRS promoted employees based on how much money they had seized. This was contrary to IRS policy but carried on at a high rate.
The Internal Revenue Service wields enormous power and by Mr. Davidson’s count, collects $3.3 trillion every year. The IRS has taken on mission creep, as in the targeting scandal, but in its duly appointed tasks provides taxpayers with mediocre service at best. As the tax deadline approaches, the IRS makes a strong case that government waste, fraud and abuse have been institutionalized.
John Mauldin is an investment advisor who often explores the big picture on economic matters in his thought-provoking weekly columns. In his March 30, 2016 column, he weighs a what if scenario: What will the next recession mean for the state of the U.S. federal government’s finances?
He starts by describing the U.S. government’s current fiscal reality:
Next year, the US national debt will top $20 trillion. The deficit is running close to $500 billion, and the Congressional Budget Office projects that figure to rise.
Add another $3 trillion or so in state and local debt. As you may imagine, the interest on that debt is beginning to add up, even at the extraordinarily low rates we have today.
Sometime in 2019, entitlement spending, defense, and interest will consume all the tax revenues collected by the US government. That means all spending for everything else will have to be borrowed.
The CBO projects the deficit will rise to over $1 trillion by 2023. By that point, entitlement spending and net interest will be consuming almost all tax revenues, and we will be borrowing to pay for our defense.
Let’s look at the following chart, which comes from CBO data:
By 2019, the deficit is projected to be $738 billion. There are only three ways to reduce that deficit: cut spending, raise taxes, or authorize the Federal Reserve to monetize the debt.
Make no mistake, these three things are already happening today. The incomes that some Americans born after 1954 can collect in Social Security benefits are being cut effective at the end of this month. The tax rate that Americans who don’t buy health insurance either on their own or earn through their employer is doubling to 2% of their annual taxable income on their IRS tax returns this year, and it will increase further when it comes time to file taxes next year. And who could have missed the Federal Reserve working overtime from 2009 through 2014 to become the largest single creditor to the U.S. government as a result of its funding of the national debt to support the U.S. government’s spending through its quantitative easing programs.
Mauldin notes one of the more incredible assumptions built into the Congressional Budget Office’s economic forecast for the next 10 years. The CBO assumes that there will be no recession in the U.S. economy at any time during those next 10 years.
He then worked with one of his colleagues to estimate how much the U.S. government’s current fiscal reality chart would change if another recession, the size of the 2008-09 recession, were to take hold in 2018. Here’s what he found:
Here’s a chart of what a recession in 2018 would do.
Entitlement spending and interest would greatly exceed revenue.
The deficit would balloon to $1.3 trillion. And if the recovery occurs along the lines of our last (ongoing) recovery, we will not see deficits below $1 trillion over the following 10 years—unless we reduce spending or raise revenues.
The last seven years have been one big lost opportunity to reign in spending to levels that would avoid the next recession from sparking another massive fiscal crisis.
California is hiking the minimum wage to $15 an hour by 2022, and governor Jerry Brown is hailing the boost as a matter of “economic justice.” As Dan Walters of the Sacramento Bee recalls, Brown had previously resisted this move and argued for a hike to $13 an hour. But then, “Brown not only agreed to the wage boost he had opposed, but essentially claimed ownership,” which reminded Walters of Brown’s classic flip-flop on Proposition 13, the 1978 measure that limited government’s power to increase property taxes.
Walters’ colleague Jon Ortiz examines what the hike to $15 will mean for government employees and taxpayers. With those at the bottom making more by government mandate, government employee unions are certain to press for raises. The ripple effect of higher minimum wages, one government union spokesman told Ortiz, “should flow all the way up the ladder.” Raising government pay, Ortiz observes, “increases cost to taxpayers.” The initial boost to $10.50 on January 1 will boost the state payroll by $6 million. The $15 figure in 2022 will raise the payroll by $235 million. Taxpayers will foot the bill and the unintended consequences extend to the workers themselves.
By hiking the minimum wage to $15, the state, in effect, paints itself into a corner. “If higher wages are law,” Mr. Ortiz notes, “there’s just one way to hold costs: fewer wage earners.” That is what opponents of the wage hike had been arguing all along. Those workers left on the short end, in government or the private sector, may find it hard to see the wage hike as a matter of economic justice. Low-income workers with children, meanwhile, may face additional hardship.
Last year Oakland hiked the minimum wage to $12.23 on the grounds that it would help the poor. But as Mary Theroux documented, “working poor parents will now be scrambling to find good, affordable child care.” Minimum wage hikes, as Abigail R. Hall Blanco contended, can indeed wind up a “nightmare.”
Shirley Hufstedler, the nation’s first federal Education Secretary, has passed away at 90. That news might surprise some, and not just the younger set, who imagined that the first federal education secretary appeared way back in 1776. There wasn’t one, because the Constitution gives states, not the federal government, domain over education. Under these conditions, however, education managed to thrive. Americans established Harvard, Yale, Cornell, Princeton, Northwestern, Stanford and other great independent universities, long before the federal government got involved. Michigan State, Ohio State, UCLA, LSU and countless others, along with countless primary and secondary schools, all arose before any federal involvement in education. Likewise, African Americans established historically black colleges such as Spelman, Howard and Morehouse, long before the federal government played a role.
The federal Department of Education has only existed since 1980 and was a payoff to the National Education Association, the massive teacher cartel that endorsed Jimmy Carter for president in 1976. On November 30, 1979, Shirley Hufstedler, a lawyer and judge, became head of the new education department, which Congress gave a budget of $14 billion. On the watch of the new federal department, student achievement failed to flourish.
As Vicki Alger noted, the NAEP reading performance of 17-year-olds has remained flat since 1978, despite increased spending, “so it appears the U.S. Department of Education has done little if anything to improve the bang-for-buck ratio with regard to federal education spending and student achievement.” But it remains a haven for overpaid bureaucrats, whose average salary exceeds $100,000. As we observed, the department deploys an enforcement division, armed with shotguns, to conduct raids on those suspected of bribery, fraud and embezzlement. On one raid they carted off a man and his three children over a student aid issue involving the man’s estranged wife, who was not even present. But remember, it’s all for the kids.
The budget of the U.S. Department of Education for 2016 is $70.7 billion, an increase of $3.6 billion, over the 2015 level. Based on what the nation achieved before and after the department’s debut in 1980, a ballpark figure for the ideal budget would be zero. Conservatives have threatened to eliminate the department but none, including Ronald Reagan, managed to do so. The federal government continues to get bigger, not smaller.
Last month, the Congressional Budget Office released a report examining the state of the subsidies that would be paid out to people who purchased health insurance through the government’s Affordable Care Act exchanges in each state over the years from 2016 through 2026.
CBO reports typically make for some pretty dry reading, so we’re happy to have come across the investing and financial analysis site The Motley Fool’s Sean Williams’ take on the report’s findings, in which he describes a mistake of “monstrous proportions” made by the federal government.
While most other news coverage of the report have focused on the CBO’s latest downward revision of its original forecast of 21 million Americans enrolling in Affordable Care Act health insurance down to its newest projection of just 12 million, a nearly 43% miss, Williams focuses in on the report’s latest projections for enrollment in the federal government’s Medicaid and Children’s Health Insurance Program (CHIP) welfare health insurance programs, where he finds that the government made a “monstrous forecasting boo-boo”:
Initial estimates from back in 2010 pegged Medicaid and CHIP combined enrollment at about 52 million in 2016. The actual figures? How about 68 million current enrollees in 2016, or a difference of 16 million. The report notes that total Medicaid/CHIP enrollment grew by 3 million last year, and it’s expected to swell to 74 million by 2026.
How did the federal government miss so badly? The CBO believes that fewer people than expected enrolled in employer-sponsored plans because they were eligible for free healthcare under the expanded Medicaid program. Traditional Medicaid fully covers consumers making up to 100% of the federal poverty level. Obamacare’s expanded Medicaid program, which 31 states and Washington, D.C., took advantage of, covers people earning up to 138% of the federal poverty level. The federal government appears to not have understood the magnitude of the lure to drop out of employer-sponsored care and be covered by Medicaid.
Those 16 million additional Medicare and CHIP enrollments represent nearly a 31% forecasting miss, but the impact is worse where the government’s finances are concerned because the number of Americans receiving benefits from these welfare programs is so much bigger.
But wait—the magnitude of the government’s forecasting error from when the Affordable Care Act was passed into law is even worse than it first appears, because when the federal government made its forecast, it expected that these welfare programs would be expanded in every state. Williams explains:
What’s even more egregious is that this estimate in 2010 was done before a Supreme Court decision in 2012 that allowed states the right to choose whether or not they wanted to expand their Medicaid program.
When President Obama initially signed the Affordable Care Act into law in March 2010, Medicaid expansion was mandatory. However, a ruling of 7-to-2 by the Supreme Court allowed individual states to make the decision of whether or not to expand. Ultimately, 19 states have chosen not to. Their reasoning? The federal government offered financial assistance to all expanding states between 2014 and 2016 but fully plans to pare back its assistance to just 90% from 100% between 2017 and 2020. The holdout states simply felt that they would be left on the hook for too much additional revenue generation to cover these new Medicaid members. If Medicaid expansion was mandatory, the CBO estimates another 4 million people would be enrolled.
This 16 million-person shortfall is far from insignificant. In fact, the CBO estimates that the federal government’s failure to accurately forecast how many people would be enrolled in Medicaid/CHIP to be $146 billion over the next decade. When taking into account factors like the estimated $46 billion the federal government will save by paying out less than expected in subsidies for marketplace exchange enrollees, as well as the $28 billion less it’s expected to collect in revenue because the Cadillac Tax will be suspended for an additional two years, Obamacare is now expected to cost $136 billion more than originally forecast over the long-term.
The magnitude of how badly the federal government messed up its forecasts of enrollments in both Affordable Care Act and Medicaid/CHIP welfare health insurance programs is a major reason why the CBO determined earlier this year that repealing Obamacare, as the Affordable Care Act is popularly known, would reduce the nation’s budget deficits and the growth of the national debt over the next 10 years.
Congressional Budget Office. Federal Subsidies for Health Insurance Coverage for People Under Age 65: 2016 to 2026. https://www.cbo.gov/sites/default/files/114th-congress-2015-2016/reports/51385-HealthInsuranceBaseline_OneCol.pdf. March 2016.
As we noted, California State Auditor Elaine Howle has been riding herd on Caltrans for shoddy maintenance practices that promote waste, fraud and abuse. Now the auditor turns attention to the University of California in a new report charging that UC admissions and financial decisions have disadvantaged California’s own resident students. Over the past few years, the university has “undermined its commitment to resident students,” and “in response to reduced state funding, the university made substantial efforts to enroll nonresident students who pay significantly more tuition than residents.” By the auditor’s count, nonresident enrollment is up 82 percent and resident enrollment down 1 percent. The report helpfully charts the back story to the numbers.
The UC had previously demanded that nonresidents’ academic qualifications equal the upper half of residents’ qualifications. In 2011, however, the UC relaxed this admission standard and in the following three years, admitted “nearly 16,000 nonresidents whose scores fell below the median scores for admitted residents at the same campus on every academic test score and grade point average.” At the same time, “the university denied admission to an increasing proportion of qualified residents at the campus to which they applied.”
The University of California used to play fast and loose with academic standards to get the requisite number of minorities, and that too resulted in the denial of admission to many qualified students. Voters put a stop to racial and ethnic preferences in 1996 by passing Proposition 209, the California Civil Rights Initiative, but diversity dogma still dominates.
In response to reduced state funding, the University of California could opt to dramatically reduce bureaucracy, heavy with highly paid vice chancellors, assistant vice chancellors and such. Their preference has been to hike tuition, and when students have engaged in peaceful protest, campus police pepper-sprayed them. Fair to say that the UC also disadvantaged those students, and the ensuing crisis wasted more taxpayer dollars.
We came across a really interesting example that exemplifies the difference in the way people in the private sector think versus how people who work for government think!
In the private sector, thanks to modern computing technologies, many businesses are able to automate a vital portion of their businesses: the taking of orders for their goods and services. The technology allows the businesses to serve the needs of their customers 24 hours a day, 7 days a week, even if their employees only work from 9:00 AM to 5:00 PM on Monday through Friday. Everybody wins in the process – customers can order what they want whenever it is convenient for them and the business can collect revenue generating orders even when its employees are off the clock.
But in the public sector, government bureaucrats apparently cannot tolerate providing that level of service, even when they use the same technologies. Warren Meyer came across what may be a classic example of how bureaucrats think such technology should be used from the IRS. The screen shot below is taken from the IRS’ site for applying for Employer Identification Numbers online.
You see that correctly – the IRS’ automated online application website for Employer Identification Numbers closes down on both weekends and from 10:00 PM to 7:00 AM Eastern time every weekday. The following screen shot shows the message an applicant receives when they attempt to “Apply Online Now” during the periods outside of the IRS’ hours of operation for the website.
The IRS operates the most popular U.S. government website.
What this state of affairs demonstrates is a certain amount of contempt that the IRS’ bureaucrats would appear to have not just for regular Americans, but very specifically for people who seek to create both businesses and jobs in the United States. After all, who else would ever need to apply for an Employer Identification Number to facilitate their ability to pay taxes to the U.S. government for both themselves and for the employees whose federal taxes they will act as the government’s agent to withhold?
By forcing such productive people to wait until 7:00 AM on Mondays through Fridays to apply for an Employer Identification Number, the IRS’ bureaucrats gain two main benefits for themselves.
We considered the possibility that limiting the Employer Identification Number application process to certain hours of operation might limit the potential for fraud, but clearly, the limited hours of operation are no barrier to that crime.
If you can think of any other benefits for the IRS’ bureaucrats, please add them in the comments!
“More bureaucracy isn’t a solution for homelessness.” That is the kind of headline readers would expect in a libertarian publication. It’s actually the headline of the lead editorial in the March 24 edition of The Sacramento Bee, the newspaper of record in California’s capital. Since this publication rarely criticizes bureaucracy, taxpayers will find the editorial worthy of attention.
Every year, the editorial notes, “tens of millions of dollars are spent trying to help people get off the streets – and, every year, the problem only seems to get worse.” So the spending is there, to the tune of about $40 million in Sacramento County, but with no solution in sight. The editorial board of the Bee wonders “whether any solution should involve yet another layer of bureaucracy,” noting that Sacramento County has just approved a new position for a director of homeless initiatives, with salary and benefits of $217,261 a year. The money is certainly there but “it’s a job with duties that are, at best, vague and, at worst, redundant.” The “stakeholders” in the homeless issue don’t agree on a solution and don’t recognize a chain of command. Therefore “adding a county director of homeless initiatives could complicate things even further.” So as they say, another layer of bureaucracy is no solution.
Meanwhile on the Bee’s op-ed page, on the same day, a headline reads: “California has too many small and stupid governments,” an opinion readers might expect from the Howard Jarvis Taxpayers Association. The author, however, is Zocalo Public Square columnist Joe Mathews, not known as a critic of government. By his count, California has more than 6,000 governments, with 480 cities and “thousands of special districts that few Californians know anything about.” Mathews wants to reduce the numbers through consolidation but, as with bureaucracy, it follows that more levels of government would not be the solution to anything. As taxpayers know, California also has too many big and stupid governments.
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