In this eight-minute Podcast, Maureen Bader discusses the problems with the Wyoming government's attempt to tax Internet sales in Wyoming, with Glenn Woods on KGAB Radio 650 am in Cheyenne. Politicians use two excuses to justify this tax grab. First, they say they need the money. But the revenue they expect from this tax will in no way cover the shortfall in state funds--the government has a spending problem, not a revenue problem.
Second, they say they want to level the playing field between Main Street and the Internet. If politicians really wanted to help Main Street, they would lower the burden of regulations and taxation on Main Street sellers, not extend the dead hand of government to innovative sellers using technology to assist their sales efforts.
Thursday, February 23, 2017
Wednesday, January 25, 2017
[This article was first published by Maureen Bader on December 22, 2011. And the amusing thing is that the Illinois policy group didn't make the Conference of Public Employees Retirement System's Naughty list.]
Illinois' government pension plan disaster provides a lesson for Wyoming.
Companies were talking about leaving the state of Illinois. Chicago Mercantile Exchange and Sears’ corporate headquarters were among the companies looking to head to states farther away — from fiscal collapse that is. Indiana governor Mitch Daniels is busy promoting his state as a place with an attractive business climate. Wyoming is likely doing the same. However, Wyoming suffers from the same problem that is tanking the Illinois state budget – an unsustainable pension plan for bureaucrats.
Wyoming’s bureaucrats have it made – for now. When they retire, they’ve been promised a pension most people in the private sector can only dream about. Bureaucrats get a defined-benefit pension plan, one that pays a sum of money defined by the bureaucrat’s last five-year-average salary and the length of time in government, whether there is enough money in the pension fund or not.
Neither the Illinois nor the Wyoming pension plans have enough money to pay their promised benefits. Wyoming’s public sector pension plan is 84 per cent funded. That means, should it close down today, the government would have enough money to pay for 84 per cent of its promised benefits.
Technically, these types of funds are considered beyond recovery when they fall below 71 per cent funded. Illinois’ public sector pension plans are 51 per cent funded. Illinois’s pension plans do not have enough money to pay the promised benefits and are too far gone to recover.
The Illinois government is in a state of denial. Instead of reforming its pension plan it hiked corporate income tax rates from 7.3 per cent to 9.5 per cent and personal income tax rates from three per cent to five per cent to try to Band-Aid over the problem. These tax hikes were sold to businesses and individuals as a temporary tax measure, but with an aging bureaucrat population, the drag on the state’s budget will only get worse.
Businesses, not wanting to get stuck paying for politician’s unaffordable promises, responded by looking for greener pastures until the governor backed off and cut the tax hike. Of course, none of this changes the reality that Illinois’ pension plan is bankrupt so these cuts will likely only keep business in the state until the next budget crisis.
Wyoming has no corporate or personal income tax so would be a good place for these companies to relocate to, on the surface. That’s because Wyoming’s bureaucrats enjoy the same type of pension plan as those in Illinois. Some Wyoming legislators have faced reality and a bill is heading to the Wyoming legislature to reform the Wyoming bureaucrat pension plan before the state has the same problems now sinking Illinois. But will enough Wyoming legislators take the necessary steps to reform the plan? All Wyoming legislators must face reality now and reform this pension plan.
These defined benefit pension plans are a relic of bygone times. That’s why almost all companies in the private sector have moved employees to the type of plan outlined in the new Wyoming bill — a defined contribution pension plan. In this type of plan, retirees’ pensions are determined by how well their investments did over time. The money is in an account a person owns and controls. People don’t depend on false promises and taxpayers aren’t on the hook to support pensions far grander than anything they could ever hope for.
Businesses and private-sector taxpayers, many who do not even have a pension, cannot be expected to fund the retirement bliss, even if illusory, of bureaucrats. As defined benefit plans become a bigger ball and chain on the economy, they drive taxes up which drives business out of the state. By empowering all people to control their own retirement future, Wyoming can avoid this fate.Let’s not be Illinoyed!
Posted by Maureen Bader at 6:30 AM
Labels: American Spectator, National Conference of Public Employees Retirement System, public sector pension, Wyoming
Monday, January 23, 2017
[This article was first published by Maureen Bader on October 13, 2014]
Imagine living in a place where anyone can have anything they want by just wishing for it. If one wants a house, one imagines a house—and poof—it appears. But scarcity is the basis for an economic system, thus in a place with no scarcity, people have no needs. In a place where people have what looks like every material need by just wishing for it, they have no need to work, no need to cooperate with other people, and as a result, being naturally quarrelsome, people tend to live farther and farther apart.
Imagine a person living in this place deciding to do something about this situation. He decides he will go back to Earth where he can get real materials and bring them back to build real houses. That would create a community, bring people together and that would mean safety in numbers.
Someone foreign to this place asks, “Safety from what?”
The man doesn’t answer.
Undeterred, the new person asks, "But if people can get a house by just imagining it, why would they want a real house?"
The logical fellow tilts his head and says, "To keep the rain out, for instance."
"These imaginary ones don’t?"
"Well of course not, how could they?"
“Then why build them?”
“For safety, or at least, the illusion of safety.”
Then a new person asks, "Just where are we?"
"We don’t have a name for it here," the would-be builder says, "but back on Earth, some people call it Hell."
So living in a place where you can have whatever you want, except it is not real, it is just an illusion. Worse still, a place where safety is just an illusion is not such a great place to be.
Often, government promises create nothing but the illusion of safety. Pension promises are a good example. Government has promised to support government workers in their retirement, but because of the fundamental flaws in the government pension system, this promise is an illusion.
For example, one day the City of Central Falls in Rhode Island simply stopped sending pension checks to pensioners because its pension fund ran out of money. The same thing happened in Pritchard, Alabama even though state law required it to pay pension benefits in full.
Although in both cases, pensioners eventually started receiving at least part of their pension payments again, a retired fire marshal in Pritchard died while waiting for that pension check. Imagine being 89 years old, standing by your mailbox, waiting for a pension check that never arrives. That is not a very nice place to be.
When pension funds run out of money, there is no tree from which to pluck pension checks. And if you think this couldn’t happen in Wyoming, think again.
Wyoming provides the same type of pension promise to government workers that Central Falls and Pritchard do, and it suffers from the same fundamental flaws. In fact, Wyoming has a pension plan that will run out of money in about 15 years—Fireman Pension A. This is a closed plan with 292 members, and three current employees in who can retire at 75 percent of their final salary and receive a 3-percent compounded cost of living increase every year. Making this situation worse is that neither current employees nor the taxpayer contribute to the plan, and it is $68 million in the hole.
Speaking of the illusion of security, reform attempts are met with resistance by the very people who would be affected most direly should the system collapse. In the case of Fireman Pension A, its representative objected to a joint Wyoming Liberty Group and Reason Foundation seminar which sought to solve Wyoming's looming pension debt problem. Closing one’s eyes and ears to reality won’t change it.
So how does Wyoming ensure pensioners are not left waiting at the mailbox and future taxpayers are not left with a massive pension debt? The first step is to get real.
Real Pension Reform
When we talk about pension reform, what are we talking about?
Let’s start with an overview of the principles of real pension reform.
First, we must understand that both government workers and taxpayers deserve a retirement system that places people on the path to retirement security and is fiscally sound, transparent and accountable. Legislators must establish a government sector retirement system that is affordable, sustainable and secure. With almost $2 billion in pension debt that won’t just go away, legislators must create a program that pays down this debt as quickly as possible. All this is good, but processes must also be established that ensure future legislators adequately fund retirement promises.
On Monday, former Utah state senator Dan Liljenquist described his experience reforming the pension system in his state. The Utah story is a good example for Wyoming because the state was not in crisis mode before the 2008 downturn. In fact, Utah’s pension system was 100 percent funded. After the market crash, it lost 22.3 percent of its value and leaders realized that without fundamental reform, more and more of the state’s general fund would go to pay down the pension debt, the debt would take years to grow out of, if ever, and should another downturn hit, they would be in an even worse position.
It was time for fundamental reform.
This meant putting new employees into a different type of plan, one that lowered contribution costs and protected taxpayers from market downturns. Utah closed the existing defined benefit program to new employees, taxpayer contributions to the new retirement program were capped by statute at 10 percent of base salary, and new employees had a choice between a straight 401(k) plan or a hybrid plan.
While new employees and taxpayers would still be on the hook to pay down the pension debt created under the old system, the cost of the retirement system for new employees was less than half that of the old, meaning that as the current program came to its end (as retired employees died), resources would be freed up for other programs.
The key for Utah was to gradually reduce pension-related bankruptcy risk until that risk is eliminated.
This is the direction Wyoming must take so pensioners have a pension once they retire and taxpayers are not left with a legacy of debt and higher taxes.
Thursday, January 19, 2017
[This article by Maureen Bader was published in the Casper Star Tribune on September 9, 2014]
Government pension plans promise to pay current and future retirees a benefit based on a defined formula. To make good on its promise, government contributes tax dollars to a pension fund and invests them to generate income. But what happens when contributions and investment returns fall short? Will government raise taxes, cut spending, or reduce the promised defined benefit to retirees when the pension bill comes due?
The Wyoming Retirement System (WRS) manages the money to pay the state of Wyoming’s retirees. The state employee pension plan, the largest of the eight plans managed by the WRS, held $6.5 billion to pay benefits as of December 31, 2013—about $2 billion less than what it needs to pay these benefits over the life of the plan.
Pension contributions are no small sum. More tax dollars go into the plan than the tax paid into the general fund by the minerals industry—the severance tax. For calendar year 2013, employee and employer contributions to the plan totaled $244.7 million, while severance tax revenue going into the state’s general fund totaled $210 million.
It’s getting worse. Pension contributions went up in 2013 and 2014 in recognition of the plan’s continued unsustainability. In fact, between 2004 and 2013, contributions to the state employee’s retirement fund more than doubled, from $121 million to $244 million.
But here’s the rub. State employees contribute only a small portion of their pay to the so-called employee contribution, making the employer (read—taxpayer) pick up approximately 90 percent of the total contribution. This means that taxpayers in fact paid $220 million towards the retirement of someone else.
Although a stealth bailout via higher contributions might make it appear as though the pension plan is well managed, there is yet more bad news. The plan pays out more than it collects in contributions. For example, it took in $244 million in contributions in 2013 and paid out $387 million in benefits. This happens every year and means the fund depends on investment returns to ensure pensioners will receive a pension and taxpayers won’t be on the hook for a massive future bailout. However, in a year when the market declines and investment returns fall, such 2008 when the plan lost $1.6 billion, and again in 2011 when the investments lost $63.5 million, the amount of money available to pay promised pensions plummets. Hence the $2 billion shortage in the fund.
But never fear. Government can always raise taxes or lower services to taxpayers to make up the difference. So, if you thought you were paying enough in taxes in return for services, think again.
Which taxes will go up or worse, which new taxes will be imposed on unsuspecting Wyomingites? Can you say—income and marijuana tax?
And which services will likely disappear?
We already have an idea. According to a New York Times article, when pension and health care costs in San Jose, CA ate up 20 percent of its general fund, the city closed libraries and community centers. It also cut back staff and reduced salaries. Some cities, such as Stockton and San Bernardino CA, and the granddaddy of them all—so far at least—Detroit, have declared bankruptcy in part to reduce their pension liability. As a result, pensioners are seeing a reduction in their pension checks. Technically, states can’t declare bankruptcy, but if taxpayers are forced to fund pensions, there will be less money for roads, schools and crucial state spending priorities such as snowmobile trail grooming.
If contributions double every 10 years, forcing taxpayers to put additional funds into state employees’ pension accounts, that means government has less for priorities at the core of the function of government, such as the court system—or to leave in the pockets of taxpayers to fund their own retirement. It is time for substantive reform. To provide security to government retirees, and to ensure that taxpayers are also able to save for their own retirements, the state must move to a pension plan in parity with private sector pension benefits.
Tuesday, January 17, 2017
[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.
Posted by Maureen Bader at 5:28 AM
Labels: American Spectator, National Conference of Public Employees Retirement System, naughty list, public sector pension