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The Problem with Mo’ Bigger Government


Monday August 8th, 2016   •   Posted by K. Lloyd Billingsley at 9:31am PDT   •  

11419595 - highway through california coastThe Sacramento Bee is disturbed that the Assembly has derailed SB 1190, which would ban lobbying of California Coastal Commission members. Lobbyists had set up meetings between commissioners and David “The Edge” Evans, a guitarist with U2, who sought to build a house in Malibu, and members of the Newport Banning Ranch Project in Orange County. Such activity is what happens when a state sets up a powerful unelected commission.

The Coastal Commission was supposed to be temporary, but before the end of the 1970s, legislators duly made it permanent. In practice, the Commission became the private domain of Peter Douglas, a regulatory zealot with little regard for property rights. On his watch the Commission was also known for Mafia-style corruption. During the 1990s, Coastal Commissioner Mark Nathanson attempted to shake down celebrities for bribes, and wound up serving a prison term.

As we noted last year, the Commission has been expanding its power into new areas. It remains a classic example of government becoming progressively more intrusive, more expensive, and less responsive to the people. When we last checked in, legislators were poised to add three new commissioners, appointed by the governor, the Assembly Speaker and the Senate Committee on Rules. The new appointees are to work with communities burdened by pollution and focus on “issues of environmental justice.”

In February the Commission fired executive director Charles Lester, a rare case of a bureaucrat getting the axe. Lester has yet to be replaced, and while the CCC searches for a new boss, complaints persist.

Banning ex-parte communications and lobbying would be good moves, but the state would do better to get rid of the entire Commission. The duly elected government in Malibu is fully capable of dealing with Mr. Evans’ new home. Elected governments in Orange County are competent to deal with the Newport Banning Ranch Project. Elected governments along the coastline are capable of preserving the coast for all Californians.

One Weird Trick to Restore Solvency to State Pensions


Monday August 8th, 2016   •   Posted by Craig Eyermann at 6:21am PDT   •  

top10wayscover-thumbnail How many times have you followed a link that began with the “One Weird Trick” clickbait meme?

Hopefully, a lot of state government elected officials and bureaucrats do this, which is why the title of this article is “One Weird Trick to Restore Solvency to State Pensions.” For the states that are so far behind in funding the pension plans for state and local government employees that they have almost no hope of ever making up the gap, such as Illinois and New Jersey, where the gloomy outlook has become even darker, there actually is hope from a highly unlikely source.

That highly unlikely source is the state that CNBC just defined as being the worst for business in 2016: Rhode Island. And the amazing thing is that even with being such a bad business environment by CNBC’s metrics, the state’s leaders have managed to effect a dramatic turnaround toward restoring the solvency of the state’s public pensions, using, you guessed it, one weird trick!

To be honest, it’s really not so weird, and it involves two basic steps. The first thing they’ve done is to move away from traditional defined benefit pension plans for government employees, the kind that guarantees that state government employees will get a steady pensions check from the state government after they retire, no matter if the state’s pension fund has the money to pay it or needs to make up the difference by raiding the state’s Treasury, even if that means taking money away from things that state residents thought they were really paying for with their state taxes, like schools.

The second step is to put state government employees onto defined contribution pension plans, much like the kind of 401K-type plans that are common in the private sector, where the state government instead guarantees that it will match a percentage of the money that their employees sock away for retirement into the plan out of their regular income.

The numbers for Rhode Island’s pension turnaround are dramatic.

Rhode Island ranks 45th in Economy in our study this year. State GDP grew just 1.7 percent last year, to around $50 billion. The state has a long history of financial woes, including a pension that was underfunded by nearly $9 billion as recently as 2011.

But by the end of last year, those unfunded liabilities had been cut nearly in half to around $4.8 billion, according to the state treasurer’s office. Raimondo points to sweeping reforms—she was state treasurer before she was elected governor—including switching from defined-benefit retirement plans to defined contribution plans.

That’s amazing progress from a state whose economy isn’t firing on all cylinders and hasn’t been for years. Governor Gina Raimondo (D), deserves a lot of credit for taking on the state’s pubic employee unions and making the transition to a more sustainable pension funding system that ensures that state government employees can have reasonable pensions without overly burdening the state’s citizens.

Four Federal Trust Funds Running Out of Time


Thursday August 4th, 2016   •   Posted by Craig Eyermann at 6:43am PDT   •  

Years ago, when the U.S. government spent far less money than it does today and currently plans to spend in the future, elected officials created several trust funds as a way to set aside the “extra” money collected for dedicated purposes, so that it could spend the money later when it would actually be needed.

A great example of such planning is Social Security’s Old Age and Survivors Insurance (OASI) trust fund, where back in 1982, the U.S. Congress increased Social Security’s payroll taxes to set aside extra money for the purpose of paying retirement benefits for the Baby Boom generation. Today, as they increasingly entering into retirement, Baby Boomers are benefiting from that long-ago action with larger monthly checks than they would otherwise receive from the program.

But at the same time, those generous retirement benefits are draining Social Security’s OASI trust fund. When that trust fund runs out of money, the amount of benefits that are paid out will, under current law, be automatically slashed to match the amount of money that Social Security collects through its payroll taxes.

Social Security’s OASI trust fund is just one of four major trust funds operated by the federal government to supplement spending on highways, Medicare, and also Social Security’s disability and retirement benefits. Each of these trust funds is projected by the Congressional Budget Office (CBO) to run out of money within the next 15 years. The Committee for a Responsible Federal Budget (CRFB) has created the following table to keep track of the latest projected dates for each.

CFRB_Major_Trust_Fund_Exhaustion_Dates_and_Deficits_JUL2016

The table lists: the year in which the CBO projects that each indicated trust fund will run out of money, the amount by which federal annual budget deficits would increase if the U.S. government tried to maintain its planned levels, and also the amount by which each program’s spending and benefits will have to be cut in order to match the amount of money that the government actually collects through taxes to directly support them.

The CFRB suggests that letting the trust funds run out of money and—then limiting spending on highways, Medicare’s hospital insurance, and Social Security’s disability and retirement benefits to just the money that the U.S. government collects—would provide some very surprising economic benefits:

... we estimate that limiting spending from all four trust funds to revenue at their exhaustion dates would increase real GNP per person by over 4 percent, or $3,000, in that year. These estimates don’t account for the particular policies chosen. For example, if Social Security’s and Medicare’s finances were improved in part by raising their various ages, CBO has estimated in the past that it would increase the size of the economy by another 3 percent after 50 years.

Clearly, making trust funds solvent would much improve the debt situation and halt its long-term upward path. Of course, actually doing so would require making choices that lawmakers have been unwilling to make so far (or have actively put off in the case of the Highway and Disability Insurance trust funds). It would mean reducing spending or increasing revenue for highways, SSDI, Medicare, and old-age Social Security. Lawmakers can greatly improve the long-term budget outlook by making trust funds whole, but they must consider the policies that must be undertaken to ensure that.

That lawmakers have instead repeatedly chosen to kick the can down the road, especially with the recent rescues of the highway trust fund in 2015 and Social Security’s disability insurance trust fund earlier this year (which both fail to permanently resolve their fiscal deterioration), indicates that they are far more concerned with doing what it takes to stay in power than they are with pursuing solutions that would avoid a fiscal crisis.

What kind of perverse incentives must be at work for politicians to take paths that will most certainly lead to a greater crisis in the future? The best thing that can be said about their current approach is that the federal trust funds run out of money would happen one at a time, instead of all at once.

The Truth About the Pension Crisis


Wednesday August 3rd, 2016   •   Posted by K. Lloyd Billingsley at 8:40am PDT   •  

CA Piggy Bank_MLRob Feckner, president of the CalPERS board of administration, has heard stories that all is not well with the massive pension fund, with assets of more than $301 billion. “Nothing could be further from the truth,” writes Feckner in the Sacramento Bee. “Let me tell you why.” Investment returns for fiscal year July 1, 2015 to June 30, 2016 were “just shy of 1 percent, a small but significant achievement in a year of extraordinarily turbulent and volatile global markets.” Last year CalPERS “put a policy in place to incrementally lower our discount rate, currently at 7.5 percent, in years of good investment returns.” It’s all working well and CalPERS retirement plans are “also a powerful financial engine,” generating “nearly $27 billion in economic activity every year, stimulating business growth, generating tax receipts and supporting more than 360,000 jobs in our local communities.”

For a different perspective, taxpayers might consider former San Jose mayor Chuck Reed. According to the latest numbers, CalPERS “failed to make enough money to meet its obligations in the last fiscal year,” and is “now more than $100 billion short of having enough money to pay pension obligations for government workers and retirees, despite massive increases in payments to CalPERS by state and local governments.” Reed traces this back to 1999, when the legislature granted retroactive pension increases to government employees, claiming this could be done “without it costing a dime of additional taxpayer money.” It couldn’t.

As Dan Walters of the Sacramento Bee notes, CalPERS and other pension funds have yet to recover from the recession “and they’re sharply raising mandatory ‘contributions’ from state and local governments to cover the gaps left by meager investment earnings.” Outlays will continue to outstrip inflow making pension funds “even more dependent on investment earnings or taxpayers to close the gaps.” Californian’s unfunded pension debt is “at least $300 billion now” and as much as $1 trillion with lower earnings assumptions, not counting “another $100 billion-plus in unfunded obligations for retiree health care.”

The pension crisis is getting worse, and taxpayers can’t trust CalPERS bosses to tell the truth.

 

Decorating the Department of Veterans Affairs


Monday August 1st, 2016   •   Posted by Craig Eyermann at 6:32am PDT   •  

Just when you think that the Department of Veterans Affairs might finally be starting to get its act together, along comes yet another example that demonstrates how far out of whack the priorities of its senior leadership and supervisors have been.

A joint investigation by Open the Books and WSB-TV News of Atlanta, GA, has turned up new examples of even more frivolous things that the VA’s leaders have chosen to spend money on instead of investing in resources that could provide timely medical care to the nation’s veterans.

The VA’s Palo Alto, CA, facility parking garage, featured in the news clip above, is an example of the agency’s wasteful spending on artwork that also made the 2015 Wastebook.

Neither of these new stories, however, communicates the scale at which the VA engaged in buying artwork for its facilities in recent years, which can be seen in the following chart.

VA_artwork_spendingRCP_Chart

The artwork featured in the chart, titled “Aggregate”, cost $482,980 and is featured at the VA’s Palo Alto Medical Center. Like the colorful Morse-code pattern that added $285,000 to the cost of the facility’s parking garage, it too will not be seen by the 200 blind veterans receiving treatment each year at the Western Blind Rehabilitation Center based at the VA’s Palo Alto facility.

If the VA went back to its pre-2008 level of spending on artwork to decorate its facilities, it would have at least an additional $2 million per year to spend on providing care.

If only the VA’s bureaucrats didn’t have other priorities.

Learning from Spain’s Social Security Example


Friday July 29th, 2016   •   Posted by Craig Eyermann at 10:31am PDT   •  

SocialSecurity What should Americans expect to happen when Social Security’s Old Age and Survivors Insurance (OASI) trust fund runs out of money in 2034?

For many Americans, including those who are just starting to collect Social Security retirement benefits, that may seem like a long time away.

But if current projections hold, well before 2034 nearly all Americans living today will get to see what life in retirement will be like when insolvency happens. That’s because Spain’s Social Security program will become insolvent less than two years from now. Mike Shedlock translates the dour news from Spain’s El Confidencial newspaper:

The Social Security reserve fund will run out of money in 2018. The cause is bonus payments to pensioners, which consumes every six months (in December and July) over 8.5 billion euros. Revenue from social security contributions are not sufficient to meet the payment obligations.

Starting in 2018, only an extraordinary contribution by the State would make it possible for Social Security can meet its commitments.

The financial problems of Social Security are not a temporary problem. The government itself expects that this year the public pension system will register equivalent to 1.1 percent of GDP deficit (about 11 billion euros), while in 2017 planned is an imbalance equivalent to 0.9% of GDP.

In 2016, revenues from social security contributions recorded an accumulated a deficit of 12.24% compared to expectations. The deviation is even higher than the already recorded in 2015.

Right now, the 2016 Social Security’s Trustees Report on the state of the U.S. Social Security program’s finances is currently projecting that the U.S. OASI trust fund will be fully depleted in 18 years time, in 2034. When that occurs the amount of benefits projected to be paid to all Social Security recipients will automatically be cut by 21% across the board.

Unless Spain receives a massive bailout to forestall insolvency, the beneficiaries of its government’s Social Security program can expect to live through a similar scenario, but 16 years earlier. How that issue plays out in Spain then will be an early indication of how U.S. elected officials will act to cope with the same problem when it becomes a fact of life in the U.S. in 2034 and after. The political choices that will shape the future for America’s retirees are being made in Spain today.

Clinton and the Future U.S. Budget


Monday July 25th, 2016   •   Posted by Craig Eyermann at 6:10am PDT   •  

The Democratic National Convention is going on this week, and much like the Republican National Convention last week, I’m once again planning to avoid watching any part of it. Life is simply too short to waste valuable leisure time on the empty promises of politicians who either won’t keep their grandiose promises or worse, who will get everything they ask and still produce an ever expanding train wreck-like fiscal disaster.

What I am doing, however, is paying attention to the Committee for a Responsible Federal Budget’s analysis of what each 2016 major party presidential candidate’s budget proposals would mean for the future of the U.S. government’s fiscal situation. That situation is already not good, and with the DNC happening this week, it’s a good time to consider what the future would look like under a Hillary Clinton presidential administration.

10_Year_Budget_Projections_Current_Law_Versus_Clinton_Proposals_FY2017_through_FY2026

At this point of the 2016 political campaign, we find that the amount of spending that Hillary Clinton has proposed over the next 10 years would increase significantly from 22.1% to 22.7% of GDP. At the same time, federal tax revenues increase from 18.1% to 18.6% of GDP, as candidate Clinton has also proposed hiking income taxes on high income earners by a significant margin.

If Clinton’s fiscal plans were to go forward as currently outlined, the U.S. government’s budget deficits over the next 10 years will grow from a 4.0% gap to a 4.1% gap, which would cause the size of the national debt to grow at a rate that is slightly faster than is previously being projected based on current law.

While the CFRB predicts that the U.S. government’s budget deficits over the next 10 years will grow only slightly faster than under current law, Hillary Clinton’s proposals to date would nevertheless make the nation’s fiscal outlook considerably worse.

By loading up on federal spending so that it claims an even larger share of the U.S. economy and by becoming more reliant upon taxes imposed on high income earners for revenue, Clinton is proposing making the U.S. government’s fiscal system more like the state of California’s.

That kind of system is somewhat sustainable during periods of economic growth, but because the incomes of top income earners are much more volatile than those of typical income earners, the combination of higher government spending that is funded by top-heavy income taxes will increase the probability that the U.S. government will experience a major fiscal crisis during periods of recession because of plunging income tax revenues, just like California experienced during the Great Recession.

That toxic combination is a major contributing factor to why California today ranks among the bottom 10 of all states for fiscal health, even though it has the largest economy of all states, which would rank as the eighth largest economy in the world if California were an independent nation.

Like the future of the U.S. budget under a Trump administration, the potential future of the U.S. budget under a Clinton administration at this point of time should only be considered a first take of whatever proposals will be made during this 2016 election year. Between now and the elections in November, the main thing Americans should expect are even more promises and proposals that will bear little relationship to fiscal realities.

Trump and the Future U.S. Budget


Friday July 22nd, 2016   •   Posted by Craig Eyermann at 6:47am PDT   •  

If you’re anything like me, you’re doing everything you can to keep from having to watch any part of the major party political conventions this month.

That’s because these kinds of events are far too often long on political hyperbole and short on substance. Too many promises get made that have absolutely no chance of being kept, and in far too many cases, these are promises that the politicians who make them have absolutely no intention of ever keeping.

That makes analyzing the various tax and spending proposals of the various parties’ presidential candidates something of a fool’s game, because nobody really knows how seriously committed they are to achieving them. We don’t know which proposals are serious and which ones have been proposed to buy the votes of some special interest group that is going to be jilted later, nor do we know which have been advanced as negotiating positions and what the candidates are really willing to settle for if they do become the U.S. President.

So with all that in mind, and with the Republican national party convention going on this week, we’re going to look at how different the U.S. government’s spending and tax collections would be compared to current law over a 10-year period beginning with the 2017 fiscal year under a Donald Trump presidential administration.

10_Year_Budget_Projections_Current_Law_Versus_Trump_Proposals_FY2017_through_FY2026

The chart above is based on some yeoman analysis by the Committee for a Responsible Federal Budget, which has been doing an amazing job in keeping track of the spending and tax proposals of the major party presidential candidates for the 2016 election.

So far, coming into the Republican National Convention, we find that proposed spending over the next 10 years would be slightly increased, from 22.1% to 22.5% of GDP, but that federal tax revenues would plunge from 18.1% to 13.6% of GDP, where candidate Trump has proposed some very generous tax cuts.

If Trump’s fiscal plans were to go forward as currently outlined, the U.S. government’s budget deficits will grow from a 4.0% gap to a 9.0% gap, which would cause the size of the national debt to grow at a rate that is considerably faster than it did even during the Obama administration’s record-setting early years.

Now the question is whether we should believe that Trump’s fiscal policies will go forward as initially proposed. The answer to that question is no, they will not. The Wall Street Journal reports:

An updated version of Donald Trump’s tax cut will be about one-third the size of the previous $10 trillion version, two campaign advisers said on Wednesday.

Those pending changes mean the chart we just presented is already obsolete, so we’ll need to revisit the projections again once the details of candidate Trump’s new fiscal proposals are known. Until then, consider the chart above as “Take 1” of what will prove to be a series of ever evolving proposals.

Next week, when the Democratic National Committee gets under way, we’ll check to see how the current state of where “Take 1” of candidate Hillary Clinton’s fiscal proposals stand.

But if you want to know the truth, neither candidate’s budget proposals really matter because we’re starting from the scenario where no matter what, both the federal government’s annual budget deficits and its total public debt outstanding are set to grow each and every year, as far into the future as anyone dares to look.

Covered California Misery Mounts a Surge


Thursday July 21st, 2016   •   Posted by K. Lloyd Billingsley at 4:12am PDT   •  

36050459 - concept of national healthcare system - californiaWe have been tracking Covered California, the Golden State’s wholly-owned subsidiary of Obamacare. Emily Bazar of the Center for Health Reporting has exposed glitches in the system’s $454 million computer system, problems with cancelation of policies when people turn 65, and difficulties in enrollment for others. For Bazar, these and other problems resulted in “widespread consumer misery,” and the misery index has now mounted a surge. As Claudia Buck notes in the Sacramento Bee, Covered California health care premiums will increase 13.2 percent in 2017, more than three times the 4 percent hike in 2016. Covered California boss Peter Lee explained that 2017 was a “transition year” and others blamed the increase on the cost of prescription drugs.

Californians now forced to pay more might compare the current reality with the rhetoric when Obamacare was being imposed. They might also note the spending of $1.3 million on an absurd promotional video featuring exercise guru Richard Simmons, and $184 in contracts, without competitive bidding, to firms and people with ties to Covered California bosses. As we noted, California’s state auditor Elaine Howle slammed Covered California for that kind of cronyism. Meanwhile, the highly dysfunctional system will cost consumers 13.2 percent more now, but this is not only a California problem. According to Claudia Buck, the average increase of the 36 states that have posted rates for 2017 is 22.7 percent. On the other hand, if consumers don’t like their plan, they pretty much have to keep it.

Conventional Wisdom on Education?


Wednesday July 20th, 2016   •   Posted by K. Lloyd Billingsley at 10:12am PDT   •  

Trump and Sons_MLThe Republican National Convention in Cleveland this week has showcased plenty of hoopla and boilerplate rhetoric – some of it apparently plagiarized – but provided little enlightenment on key themes such as education. On Tuesday, House Speaker Paul Ryan and New Jersey governor Chris Christie bypassed the subject completely. Not so Donald Trump Jr., son of the Republican nominee, who is not running for office.

“Our schools used to be an elevator to the middle class, now they’re stalled on the ground floor,” he told the conventioneers. “They’re like Soviet-era department stores that are run for the benefit of the clerks and not the customers.” According to the nominee’s son, the reason other countries are besting the U.S. is that in other nations, “They let parents choose where they send their own children to school. It’s called competition. It’s called the free market.” In other countries, “They let parents choose where they send their own children to school. It’s called competition. It’s called the free market.” Trump Jr. said the free market is “what the other party fears,” and “They want to run everything, top-down from Washington. They tell us they’re the experts and they know what’s best.”

As Education Week noted, despite the speech, RNC delegates were “totally in the dark about what Trump stands for when it comes to K-12 policy.” The candidate is on record that “Our public schools have grown up in a competition-free zone, surrounded by a very high union wall,” and that teacher unions “take a strong stand against school choice.” He also said last year: “I may cut Department of Education.”

Ronald Reagan and other Republicans failed to cut the department and it has grown in power, with a budget of nearly $70 billion, up $1.3 billion over 2016. The federal department also deploys an armed enforcement division. For a wider assessment of federal education policy see Vicki Alger’s Failure: The Federal Misedukation of America’s Children.

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