Tuesday, January 17, 2017

Public Sector Ponzi Plan

[This article, co-authored by Maureen Bader and Lance Christensen from the Reason Foundation, first appeared on September 23, 2014]

We shall all consider ourselves unauthorized to saddle posterity with our debts, and morally bound to pay them ourselves.
               Thomas Jefferson, 1813 
Pension misunderstanding and misinformation are alive and well in Wyoming. Talking about pension reform raises both hopes and hackles. While many worry about the legacy of pension debt, the resulting tax hikes and service reductions imperiling future generations, others drag out the litany of common, but incorrect, objections to reform. Presented below are a few of the favorite objections, to which we’ve responded. 
Claim: Offering new employees a defined contribution retirement plan (DC) instead of a defined benefit plan (DB) and raising their salary would not save taxpayers money.  You simply switch costs: salaries versus retirement.  
Fact: A widespread argument against moving new government employees from a defined benefit pension (DB) to a defined contribution pension (DC) plan is that little real savings would result because salaries would be increased to make up for reduced benefits. Salaries are already rising without the shift to a DB plan. The last thing taxpayers can afford are both higher salaries and the unknown future cost of unsustainable benefits. However, the fundamental principle forgotten here is that today’s taxpayers have a moral responsibility to pay for what they voted for. Higher salaries are paid by today’s taxpayers, who ratify the lawmakers’ decisions by voting for those who promise higher salaries. Separating salaries from egregious pension benefits – as happens in pension reform – ensures that higher pension debt is not offloaded to future generations. Our children and grandchildren – people who have no way to protect themselves from profligate politicians – should not be saddled with a future tax liability that they had no say in deciding.
Claim: If the Wyoming Retirement System (WRS) has to administer two totally different programs the administrative costs will skyrocket, so less goes to the retirees but more to run the system for little or no savings.  
Fact: The WRS already administers two entirely different programs: the defined benefit and the defined compensation program. True, adding a defined contribution plan would entail an additional cost because these types of plans are individualized according to the personal requirements of each member, however, according to a report by the Center for Retirement Research at Boston College, the average administrative and investment costs for DB plans and DC plans were 0.43 percent and 0.95 percent of assets, respectively. However, depending on the formation of the DC system, one way that these costs could be minimized is by requiring the use of indexed funds. More importantly, moving new employees to a DC plan would eliminate the possibility of billions of dollars of new unfunded liabilities. As an aside, the cost to run the WRS has already skyrocketed. Between 2004 and 2013 WRS administration costs rose by 300 percent. Skyrocketing costs at WRS are another issue entirely.
Claim: DC plans require each worker to become their own investment specialist and as a result, their retirement fund is significantly lower than what a DB plan would provide. Additionally, there is no protection should the retiree outlive his or her funds. These retirees would then become recipients of other welfare programs such as food stamps and Skilled Living Centers.
Fact: As the majority of private sector employees participate in DC plans, options in the market have increased tremendously and costs have declined. Looking at Wyoming’s colleges and universities, around 40 percent of the faculty and staff elect a defined contribution system (currently administered by TIAA-CREF) and it’s not evident that there is a problem in investments or retirement security for our educators. Indeed, only when one holds their own money in their own account can they be sure they will have an income in the future. 
Given that some cities, such as Central Falls, Rhode Island, Pritchard, Alabama and Detroit, Michigan, are reducing the pension benefit to existing retirees, and according to hedge fund Bridgewater Associates, 85 percent of public pension funds could go bankrupt in three decades, perhaps we should be more concerned about what state employees still in the plan will do should the state renege on its pension promises. 
Claim: We take out 30-year loans to buy a house.  Retirement system project in 30 year cycles too.  Wyoming has close to 80 percent of the funds necessary to get us through the tough times.  
Fact: Using the mortgage analogy, while simple, is not strictly comparable because investments in pension funds are not going to reduce liabilities on an actual asset, like a house. Paying into a pension system is more like paying off a credit card. The funding ratio of a pension plan, quite simply, is assets divided by liabilities. Currently, the funding ratio of Wyoming’s state pension plan is approximately 77 percent, meaning it does not have enough money to pay its promised benefits to those contributing into the system. But by not paying off the credit card bill consistently – even with a couple of large payments – means that lawmakers are consistently underfunding the system and it will be very difficult to account for all liabilities in the future. If all the funding assumptions were met and contributions made, the plan would not have an unfunded liability.
Again, thinking that this liability could be paid off in 30 years, much like a 30-year homeowner loan, might seem logical on the surface, however current taxpayers should be paying for the retirement of current government workers, not leaving the burden of payment to their children and grandchildren. 
Claim: The legislature has done a very good job of tweaking the system to improve its future and is projected to reach 100 percent funding in around four years if we can survive any significant downturns.
Fact: Making any fiscal plan contingent on surviving significant downturns is highly irresponsible and short-sighted. This also implies that pension funds are invested in riskier assets to provide for higher returns, which usually depend on economic bubbles. In a brief flurry of feigned fiscal responsibility, Wyoming’s legislature made a very significant tweak to the pension system when it eliminated the cost of living (COLA) adjustments in all but the Fireman A pension plans. While a step in the right direction, the main goal of this reform was to delay, but not eliminate, the collapse of the retirement system. Politicians are interested in ensuring the plan remains in place during their tenure in office. What happens once they are gone is of little concern.
In addition, COLA elimination and plan contribution increases mean the plan might, should all assumptions (AKA crystal ball gazing) pan out, be fully funded not in four years, but in 30 years—2043 according to the WRS.
A concerned Wyoming Public Employees Association member did make one good point after a recent expression of the above litany. He decried politicians’ proclivity for corporate welfare, the use of hundreds of thousands of dollars to create tens of jobs in the state. This misuse of tax dollars could potentially leave retired state employees waiting at their mailbox for a pension check that never comes.
If we want less political gamesmanship with our state’s pension funds, we should remove the temptations from elected officials to play with our money, and give the benefits our public servants deserve to them to manage, just like they manage all of their other bills. It is time for state bills to be paid for when they are incurred, not left for future taxpayers to fund. 

Sunday, January 15, 2017

Revenue Committee Supports Internet Sales Tax Grab

[This article was first published by Maureen Bader on May 17, 2016]

In Wyoming, some politicians are looking high and low for ways to take your money, especially if they can make it look like someone else is slipping his hand into your pocket. One way that popped up during a recent Revenue Committee meeting is a tax on Internet retail sales. 
Proponents justify this tax grab in two ways. First, the need for more tax revenue to fund the state budget shortfall and second, the notion that hard-pressed Main Street businesses can’t escape collecting the tax so taxing Internet sales would level the playing field. However, government has a spending problem, not a revenue problem.  An Internet sales tax won’t do much for the revenue shortfall and if government really cared about Main Street retailers, they would reduce their tax burden instead of extending the dead hand of government to the Internet.
Every state has a different, and sometimes complex, sales tax regime so in 1992 the Supreme Court ruled in Quill Corporation v. North Dakota that Internet and catalog retailers shouldn’t have to collect state sales taxes unless they had a physical presence in the buyer’s state.
But politicians just don’t like to see capitalist acts between consenting individuals go unpunished, so Senator Richard Durbin (D-Ill) sponsored the Main Street Fairness Act in August 2011. This went nowhere, so in November 2011, Wyoming’s own Senator Enzi introduced The Marketplace Fairness Act, to allow states to collect sales taxes from out-of-state retailers. This also went nowhere. The latest attempt to force Internet retailers to act as tax collectors was Senator Enzi’s Marketplace Fairness Act of 2015, which never made its way out of the senate. Although attempts to tax the Internet appear to be dead, it seems some Wyoming politicians hope the effort is merely on life support.
During the Revenue Committee meeting, Senator Ray Peterson asked director of the Revenue Department Dan Nobel how much the state was missing in Internet retail sales tax revenue.
According to Director Nobel, the state is missing between $23 million to $46 million per year in lost revenue. But according to a recent Consensus Revenue Estimating Group report, the state may have an additional shortfall of $130 million for fiscal year 2016 alone – and that fiscal year ends at the end of this June! Sorry Senator Patterson, the amount won’t fill state coffers.
Undeterred, Senator Patterson what more could Wyoming do to get an Internet retail sales tax passed.
Director Nobel said the state could work with congress to get it passed or also generate support for legislation.  
But no matter who takes the blame for a higher tax burden on families, higher taxes won’t fix Wyoming’s budget shortfall because state legislators have a spending problem, not a revenue problem.
But the tax grab is only one justification. The other involves a backwards attempt to help Main Street businesses by raising costs to Internet retailers.
However, forcing Internet retailers to be state tax collectors, like retailers on Main Street, just means even more businesses are hit with higher costs. Besides, many Main Street retailers use the Internet to increase their sales. So instead of dragging innovative retailers down into the high tax and regulatory regime now hurting Main Street, why not free Main Street from onerous taxes and regulations so they too have the resources to innovate and create jobs? 
The Wyoming state government has a spending problem, not a revenue problem, and burdening Internet and some Main Street retailers with more paperwork is unlikely to do much about Wyoming’s budget shortfall.  What it will do is burden innovative sellers with additional costs. Instead of expanding the dead hand of government into Internet retail sales, make the system less costly and burdensome for Main Street, and leave money in the pockets of the people who can spend it the wisest – the people who earned it. 

Thursday, January 12, 2017

Pensions – Objections to reform

[Published by Maureen Bader, September 2, 2014]

Few people understand how the state pension system works but objections to reform are legion. Even though the type of pension benefit state employees receive has virtually disappeared in the private sector, many politicians, bureaucrats and state pension managers seem to think the government sector is different, making reform unnecessary. However, government sector pension plans suffer from the same fundamental flaws as those now mostly purged from the private sector. For that reason, we must overcome these objections and start serious reform in the government sector.
Pension plans come in two basic types: defined benefit (DB) and defined contribution (DC). DB plans promise a defined payment when a person retires, whether the pension fund has the money to do so or not. DC plans pay a benefit depending on how much is contributed into the plan and how well the money is invested. In a DB plan, pension risk falls to the employer. In a DC plan, pension risk falls to the employee.
In the private sector, if a company has a pension plan at all, it is most likely a DC plan. According to the Bureau of Labor Statistics, in the Mountain geographical area to which Wyoming belongs, about 84 per cent of government workers have access to DB plans, while only about 20 per cent of private sector workers do. In fact, only 48 per cent of private sector employees have a company pension plan at all. If a private sector company has a plan, it is most likely a DC plan. That is because the liability created by DB plans is something private sector companies cannot afford.
For example, General Motors gave mostly unionized workers DB plans. In 2009, General Motors' pension debt equaled approximately $17 billion dollars. When the U.S. government bailed out General Motors, it saved the pensions of more than 120,000 retired salaried employees and 400,000 retired hourly workers with tax dollars. If the government hadn't bailed out General Motors, its pensioners would have been left without a pension. 
Even though the likelihood of insolvency creates financial risks for taxpayers and both current and future pensioners, Wyoming legislators have so far backed away from serious reform. 
Why might that be?
One of the main arguments against reform is that Wyoming’s pension system isn’t that bad.  
According to the Wyoming Retirement System’s (WRS) July 2014 report to Wyoming’s Joint Appropriations Committee, the Public Employee Plan (the largest of eight DB plans managed by WRS), as of January 1, 2014 was 77.62 percent funded, up from 72.80 percent in February 2013.
But even 100 percent funded is sometimes not good enough. According to former Utah State Senator Dan Liljenquist:
We had the best-funded pension system in the country going into the 2008 downturn, but during the downturn we lost about 22 percent of the value of our pension fund almost overnight. […] [E]ven though we were well-funded, that the 22 percent loss in value actually opened up a 30 percent gap in our pension funding ratio—our funding ratio dropped from about 100 percent in 2007 to a projected 70 percent by 2013—even though we had paid every penny that the actuary had asked us to over the previous several decades. […] [W]e realized that if this system was dependent on stock market returns with the legislature and taxpayers required to come back and cover any funding gaps if the markets do poorly—then we felt like it was a risky proposition and one that we wanted to try and mitigate moving forward.[1]
Another objection is that Wyoming has billions of dollars saved in special accounts so the plan could be bailed out without a problem.
Wyoming has six permanent funds, which, according to the state treasury’s 2013 annual report, as of July 2013, held assets worth $16.8 billion. The Wyoming Permanent Mineral Trust Fund, the largest of these funds, held $6.1 billion. With the unfunded pension debt totaling about $2 billion, it would appear there is plenty to bail it out when the time comes, right? Well, assets in the funds themselves are supposedly untouchable. Additionally, this over taxation been rationalized as a safety valve to cover state spending priorities during emergencies. Should this money be used to bail out bad management decisions instead? This is a question legislators must start asking of themselves and their colleagues.
Another objection heard, often from WRS employees, is: people just won’t save for their own retirement. But if people working in the private sector save, government workers can too. There are ways to ensure employees save even if they have a DC plan. For instance, new employees could be automatically enrolled in a DC plan with a choice to opt out. A new DC plan could be managed by the existing retirement system staff, which should assuage job-loss worries at WRS.
If new employees joined a defined contribution plan instead of the defined benefit plan, the unfunded liability in the old plan would still be there, say naysayers to reform. Yes, this is true, but more importantly, no new pension debt would be created. According to the Reason Foundation’s debt handbook. 
A DB plan’s total costs consist of two elements: (1) the normal costs of accruing benefits, and (2) the amortization costs for unfunded liabilities (akin to debt service). … the normal costs paid by government employers are used to prefund the pension system. Amortization costs—the cost component used to pay down pension debts—are separate, and the government will still be responsible for covering amortization costs, regardless of whether normal cost contributions flow to the old DB plan or to a new DC plan.[2]
The last objection to reform is easily debunked: that the benefit attracts employees. The workforce has changed and people no longer spend decades laboring away with the same employer. In fact, the mobility of young employables today means a portable pension such as a DC plan is more attractive than a plan that takes years to be eligible for. In addition, a better tool to attract the workforce of today is higher salaries, something a reduction in pension costs would allow to the state to offer. 
Let’s face it, companies in the private sector are eliminating the risks created by DB plans and so too should government. None of the arguments against reform stand up to careful analysis. To ensure retirees have a pension in the future without sacrificing the financial future of our children and grandchildren, Wyoming’s state pension plan must be reformed.

[1] Leonard Gilroy, “Closing the Gap: Designing and Implementing Pension Reform in
Utah—Interview with Dan Liljenquist, former Utah State Senator,” Reason
Foundation, September 17, 2013, http://goo.gl/fipGs6

[2] Lance Christensen, Adrian Moore, “Pension Reform Handbook: A Starter Guide for Reformers,” Reason Foundation, 2014, p. 97 

Wednesday, January 11, 2017

Wyomings pension plans -- reform, ruin or bail-out

[Published by Maureen Bader, August 26, 2014]

Pension contributions to rise.

          ▪   Taxpayers now contribute $6.71 for every $1 contributed by bureaucrats.
          ▪   Taxpayers soon to be gouged at $7.08:1 before improvement to $6.21:1. 

Wyoming’s last legislative session saw movement in the direction of more government sector pension reform, and not a moment too soon. With only 77.62 cents per dollar promised available to pay retired state workers should financial disaster strike, Wyoming’s legislators recognize that the state’s pension plan contributions must rise. Fortunately, legislators also recognize that government workers themselves must contribute more to their own retirement. Problems inherent to the government sector pension plans are augmented when employees contribute little or nothing to their own retirement. Taxpayer contribution equity is the first step towards a pension system fair to both retirees and taxpayers. 
In 1979, Wyoming legislators required the State of Wyoming (read – taxpayers) to fund a portion of its employee’s pension plan contributions. By 1991, the Wyoming Legislature authorized state agencies to pay all of the employee’s contribution. In 2010, however, fiscal realities forced a change and employees began contributing what amounted to a smidgen – 1.43 percent of their salary – to their own pension plans. Of the 14.12 percent total contribution, taxpayers pick up the remaining 12.69 percent, or about 90 percent of the contribution.
Government workers already benefit from a type of plan rarely enjoyed by the people forced to fund them. Most government workers enjoy defined benefit plans, a type of plan that has mostly disappeared from the private sector because businesses cannot afford the massive future liability they create.
According to the Wyoming Retirement System’s (WRS) July 2014 report to Wyoming’s Joint Appropriations Committee, the Public Employee Plan (the largest of eight plans WRS manages), as of January 1, 2014 was 77.62 percent funded, up from 72.8 percent in February 2013. Although an improvement, it still means that if the plan closed down today, pensioners would receive 77.62 cents for every dollar promised during retirement, or taxpayers would be on the hook to bail out the plan.
To ensure the plan is around to actually pay retirees once they retire and minimize the risk of a taxpayer-funded bailout in the future, pension contributions will continue to rise.
At the moment, total pension contributions will rise from 15.87 percent of a government worker’s salary, to 16.62 percent in July 2015. The employer’s (read – taxpayers) contribution share at the moment is 13.82 percent, while the bureaucrat picks up the remaining 2.055 percent. This means taxpayers $6.71 for every $1 contributed by bureaucrats.
Nothing is ever simple in governmentlandia, however. To help bureaucrats pay for their own contribution to their own retirement, the legislature gave them a 2.5 percent pay increase. This represented a $37.5 million dollar hit to the general fund over two years, not including the $2 million in bureaucrat bonus payments. Assuming all bureaucrats got the same pay increase (an unlikely assumption, but work with me here), the net result of the increased pension contribution is a pay increase of 2.07 percent. That’s money not going to roads, to schools or staying in your pocket for you to pay for the things you want.
It gets worse. In July 2015, the employer’s contribution increases to 14.6 percent, meaning that for every dollar paid by bureaucrats, taxpayers pay $7.08. This doesn’t improve until July 2017, when bureaucrats’ contributions increase to 2.3 percent of their own salary to their own pension, and taxpayer’s contributions actually fall a bit, to 14.32 percent.

The current government pension plan is a legacy from a bygone era, holding a gold-plated promise of retirement security that Bernie Madoff would have been proud of. These Ponzi Schemes create big financial risks for organizations, retirees and taxpayers. Pension contributions must increase, but treating taxpayers like cash cows is shameful. It is time for pension contribution fairness – bureaucrats must contribute more to their own retirement. 

Tuesday, January 10, 2017

Citizens aren't cash cows for government pensions

[Published by Maureen Bader in the Wyoming Tribune Eagle, January 2, 2014]

           Taxpayers contribute $7.70 for every $1 contributed by bureaucrats 

Governor Mead’s recent budget announcement is potential gold for government workers. In addition to a salary increase, the governor proposes to roll back modest pension reforms that provided some relief to taxpayers.

Instead of forcing taxpayers, many of whom do not even have a pension plan, to pay more towards the pensions of government workers, government workers must themselves contribute more to their own pension plans.

Legislation passed in 1979 required the State of Wyoming (read – taxpayers) to fund a portion of its employee’s pension plan contributions. By 1991, the Wyoming Legislature authorized state agencies to pay all of the employee’s contribution. In 2010, however, the employee-contribution myth came to an end when state employees began contributing what amounts to a smidgen – 1.43 percent of their salary – to their own pension plans. Taxpayers pick up the remaining 12.69 percent.

In 2012, the legislature further reformed this contribution inequity by increasing bureaucrat’s contributions by 0.25 percent, to 1.68 percent. Taxpayers, too, took a hit and now contribute 12.94 percent into these pension plans. This means that for every $7.70 contributed by taxpayers, bureaucrats contribute $1. This remains burdensome to taxpayers, but represents a big improvement from the time when bureaucrats contributed nothing to their own retirement. 

And yet the governor wants to claw back this taxpayer relief.

The Wyoming Retirement System manages eight pension plans for government workers. As of February 2013, the Public Employee Plan (the largest of the eight plans) was 72.8 percent funded. This means that if the plan closed down today, pensioners would receive 72.8 cents for every dollar promised or taxpayers would be on the hook to bail out the plan. To reach a 100 percent funding level by 2043, the Wyoming Retirement System says contributions must go up to 17.9 percent, instead of the currently legislated 15.12 percent.

But who will pay for this contribution increase? If the governor has his way, taxpayers will bear the burden of higher contributions.

The legislature is looking at increasing employee contributions to 1.93 percent and raising taxpayer contributions to 13.19 percent. This would reduce the inequity to 6.83:1, which is a move in the right direction. 

But in an election year things rarely move in the right direction for long. The governor wants taxpayers to pick up not only the bureaucrat’s current increase, but their previous increase as well.

Government workers already benefit from a type of plan rarely enjoyed by the people forced to fund them. Most government workers enjoy defined benefit plans, a type of plan that has mostly disappeared from the private sector because businesses cannot afford the massive future liability they create.

Pension plans come in two basic types: defined benefit and defined contribution. Defined benefit plans promise a defined payment when a person retires. Defined contribution plans, on the other hand, pay out depending on how much is contributed into the plan and how well the money is invested.

Defined benefit pension plans were the norm in days gone by. They were developed at a time when relatively few retirees took money out of the plan and many workers paid in and so are, in effect, Ponzi schemes creating big financial risks for organizations, retirees and taxpayers.
Today, defined benefit pension plans exist mainly in the government sector.

According to the Bureau of Labor Statistics, in the Mountain geographical area to which Wyoming belongs, only about 63 percent of private sector workers have access to any type of pension plan at all, while about 88 percent of government workers do.

While 83 percent of government workers have access to a defined benefit plan, only 12 percent of private sector workers do. If a company in the private sector has a plan, it is most likely a defined contribution plan.

It will take years to fully fund the state pension plan as it is currently structured. Pension contributions must increase, but treating taxpayers like cash cows is shameful. If Wyoming continues to offer government workers defined benefit plans, the governor must not turn back the clock but instead require government workers to contribute equally to their pension plans.