"After all, if every American (or illegal alien, according to Nancy Pelosi) were able to earn their income from the government, there would be no need for urgency in opening the American economy. Who needs a dynamic, innovative, and thriving private marketplace, or the risks of encountering viral infections while enjoying commercial freedom of association, or even to work or produce anything of value at all, when our government apparently has endless “slugs of federal, direct cash payments” at our disposal?" WILLIAM SULLIVAN
Vermont's giant sucking sound: Residents flee government bloat
In 1992, Ross Perot famously stated that NAFTA would cause a "giant sucking sound" as jobs and industries fled the U.S. for Mexico. For years, progressive Vermont's bloated bureaucracy has increased regulations, social programs, and income and real estate taxes in the fantasy that the rich can just be taxed more to achieve every imagined social good. But the COVID-19 crisis has pulled aside the fiscal veil, and now the Green Mountain State is careening into the red. A "giant sucking sound" is heard from Vermonters fleeing the state.
Vermont has stubbornly avoided funding its state pension system. It "boasts" the second highest per-pupil school costs in America, the fourth highest health care costs, and the fourth highest welfare benefits. Unsurprisingly, it also distinguishes itself as the 49th worst business climate and the only state to have its credit rating downgraded in 2019 — when economic times were relatively good.
Liberals scoff at supply-side economics (the idea that cutting taxes causes a "trickle-down effect" that boosts investment, income, and ultimately tax receipts). But taxes do matter.
Vermont's state economists now caution that the state could lose $430 million in tax revenue next year due to this crisis, which is a lot of money when the population is merely 628,000 (the real number is likely much higher). As Vermont weighs how to fill in that gap, an analyst with the government warns, "[I]f lawmakers don't find another source to replace the lost revenue in the education fund, property taxes would have to go up dramatically in the next fiscal year."
Of course, that's just the education fund! And while Vermont wrangles to secure federal funds to bail itself out, blames the virus for its woes, and shelves its ambitious plans to implement new gasoline taxes and subsidies for electric vehicles (to save the planet!), it shuns the very concept of reduced government spending.
Many Vermonters have already packed up and fled. More are preparing to do so. If there is a mass exodus, property prices may plummet, allowing wealthy out-of-staters to buy up properties cheaply — that is, if they are prepared to shoulder those skyrocketing real estate taxes. (Vermont ranks sixth highest property taxes in the nation but 23rd in median income.)
According to that much-derided "trickle-down theory," raising taxes can at some point actually reduce tax receipts. The Laffer Curve represents the effect on behavior of rising tax rates. At some point, raising taxes decreases rather than increases government revenue:
A business is more likely to find ways to protect its capital from taxation or to relocate all or a part of its operations overseas. Investors are less likely to risk their capital if a larger percentage of their profits are taken. When workers see an increasing portion of their paychecks taken due to increased efforts on their part, they will lose the incentive to work harder. Put together these could all mean less total revenue coming in if tax rates were raised.
The Laffer Curve predicts that at some point, increased taxes do cause people to change behaviors in a way that undermines tax revenue. Vermont is well past that point by every standard — and people are leaving. It's not the wealthy fleeing, but the common workers and businesspeople who see greener tax pastures over most all neighboring state fences. Reducing taxes in Vermont by reducing expenditures would help these residents, not imaginary tycoons who don't reside here.
As workers and retirees are compelled to tighten their belts to endure the COVID-19 impacts on the economy, the shocking idea might occur to Vermont legislators that some belt-tightening by government is in order. Otherwise, that giant sucking sound of Vermont homeowners fleeing for friendlier tax climates will increase in volume.
The Next Looming Economic Contagion: Pensions Collapse
Democrats to seek aid for troubled union
pensions in next relief package
Report: States Face $1
Trillion in Unfunded Liabilities
The Next Looming Economic Contagion: Pensions Collapse
By John Klar
As
the stock market implodes in response to COVID-19, there is an underlying economic virus
that will soon be evident: America's grossly underfunded
pensions. With the market down 40% in from its high point (before
rebounding March 24), many corporations may default on their pension
promises. consumption and thus gross sales will decline (further
dampening corporate profits), and the widespread weakness of pensions will be
exposed. This in turn will cause a vicious cycle in which retirees
and those planning retirement will have fewer disposable dollars and will
divert more money to retirement savings — further weakening consumption and
undermining the effectiveness of interest rate adjustments by the Federal
Reserve.
The
problem of underfunded pensions has been loudly proclaimed for
years. It is hard to ignore article titles like "The Coming
Pension Crisis Is So Big that It's a Problem for Everyone" (Forbes, 5/20/2019), "'Their house is
on fire': The pension crisis sweeping the world" (Financial Times, 11/17/2019), and "Pension
Plans for Millions of Americans Are on the Brink of Collapse" (NPR, 11/28/2018).
Yet
these warnings have been ignored. Now we must
face the consequences.
America
is on the brink of a realization of just how much corporations and legislatures
have "planned for the best, in denial of the worst." In
both corporate boardrooms and legislative budget-making, employees will look
back and see that what has been done is nothing short of fraud. But
it's too late now — we cannot roll back the investment clock.
Left unchecked, this crisis will decimate the
retirement future of millions. Over the years, the number of retirees has grown
dramatically, while the number of active participants and employers has decreased. This imbalance,
combined with the market decline from the Great Recession, has put many of
these vital pension plans on an unsustainable path[.] ... To make matters
worse, the Pension Benefit Guaranty Corporation (PBGC) multiemployer program,
the funding backstop for plans that have run out of money, is also projected to collapse by 2025. The
dissipation of the PBGC would leave retirees with about 2% of what they had
counted on for retirement[.] ... The collapse of the entire system would
further compound the pension crisis at hand and have a domino effect on our economy,
potentially leading to widescale business closures, layoffs and rising
unemployment.
The
current decline was foreseen — and the warnings ignored. The
imminent implosion will quickly exceed all municipal defaults in U.S. history
combined. Worse, state pensions are some of the greatest offenders
in playing "kick the can" with beneficiaries'
contributions. Legislators everywhere have played this game of
promising costly benefits to unionized state labor organizations (especially
teacher unions) and then diverting required contributions to other budgetary
preferences using unrealistic predictions of returns on existing investments,
accounting gimmicks, and absurdly low estimates of future benefits.
There is
no federal Pension Benefit Guarantee Corporation for state plans —
the PBGC insulates only private-sector defined benefit plans under ERISA. State workers
may perceive that the government will always pay, but states don't print
currency, and they are limited by reality:
When states and local governments reduced their
employer contributions to their public pension funds during the Great
Recession, they in effect borrowed from those pension funds. If
governments hope to meet their contractual obligations to their employees, they
must pay these delayed pension contributions back at some point.
But
most states did not pay them back. This analysis from the Federal
Reserve Bank of Cleveland addresses the legal recourse of pension beneficiaries
when the state lacks the financial resources to keep its word in a time of
crisis:
[O]ur legal system provides judges with the
flexibility to adapt broad constitutional principles to the extreme and exigent
necessities of their times. In such times, federal courts typically
defer to states' "police" (sovereign) powers, a decision which
essentially allows the state, as a sovereign entity, to resolve an issue as it
sees fit. The US Supreme Court has made a similar ruling, deciding
that "[t]he contract clause must be construed in harmony with the reserved
power of the State to safeguard the vital interests of her
people. Reservation of such essential sovereign power is read into
contracts." In other words, when "vital interests"
are at risk, defending contracts may be of secondary importance. [A]
state may have all the legal authority it needs to shed its insurmountable
liabilities and force its creditors to accept any deal it offers.
What
remains now is to ponder the extent of the federal bailout that will be granted
to employees whose pensions are evaporating before their
eyes. When Sears sought bankruptcy protection, the PBGC undertook to
step in for some 90,000 employees. How many can
it rescue now, even with a federal infusion of
cash? The present situation promises to be exponentially larger.
If
President Trump is the voice seeking aid for private pensions, Nancy Pelosi and the Democrats will likely
strangle a rescue plan or try to attach socialist conditions. But
how much money would be required for the federal government to also rescue
underfunded state pensions?
In
June 2019, the Pew Charitable Trusts provided a 2017 snapshot of state pension
shrotfalls:
[T]he pension funding gap — the difference
between a retirement system's assets and its liabilities — for all 50 states
remains more than $1 trillion, and the disparity between well-funded public
pension systems and those that are fiscally strained has never been greater[.]
... In 2017, the state pension funds in this study cumulatively reported a
$1.28 trillion funding gap[.] ... Even after nine years of economic recovery,
most state pension plans are not equipped to face the next downturn.
A
serious hurdle to a federal rescue is this moral hazard — states that had been
most neglectful in funding their pensions would have the most to gain.
Whichever
way this shrinking pie is sliced, there will be only crumbs for retirees and
workers. The coming economic whirlwind is going to pick up
this Dorothy's house of pensions
neglect, and no one knows where it will land.
Democrats to seek aid for troubled union
pensions in next relief package
|
April 01, 2020 12:01 AM
House Democrats
planning a new and sweeping economic relief package to respond to the coronavirus
say they’ll include federal aid for troubled union pensions.
Democrats have just
begun drafting the relief bill, which they said would include enhanced family
paid leave, more money for food stamps, and new worker safety requirements.
The pension bailout, if
included in the measure, could cost tens of billions of dollars if it matches a
pension relief package the House passed last year.
Speaker Nancy Pelosi, a
California Democrat, told reporters she believes President Trump has signaled
interest in aiding troubled pension programs but that it was excluded from the
$2.2 trillion package signed into law last week because Senate Republicans, led
by Majority Leader Mitch McConnell, did not want it in the bill.
“President Trump was
actually supportive, but Mitch McConnell was not,” Pelosi told reporters. “And
so, he said we'll save it for the next bill. Well, here's the next bill.”
House Democrats earlier
this month introduced an economic relief package, but it was rejected by Senate
lawmakers, who negotiated the $2.2 trillion bipartisan deal with the Trump
administration.
The sidelined House
proposal included the language in the House-passed Butch Lewis Act, a
multiemployer pension bailout measure with a nearly $100 billion price tag. It
would provide low-interest loans to the nation’s most underfunded union pension
plans to help them stave off looming insolvency, and it would provide an
additional $71 billion in direct cash assistance to those struggling pension
plans. The measure would help ensure pension benefits for 1.3 million workers.
Pelosi did not indicate
this week whether the draft of the new economic relief bill will include the
Butch Lewis Act, but a Democratic aide confirmed it, acknowledging the plan
would have to be bipartisan.
“Our proposal is the
Butch Lewis Act, but, more importantly, we need and want multiemployer pension
reform that works,” a senior Democratic aide told the Washington
Examiner. “We are not so committed to an approach that we can’t negotiate a
solution.”
The House-passed bill
won support from dozens of House Republicans, but it never received
consideration in the Senate.
The plan has generated
opposition from some economists who argue it does nothing to address the
underlying flaws in the pension programs that now threaten their solvency.
About 125 multiemployer
pension plans will become insolvent in the next two decades, and some will go
broke in the next few years, the Congressional Budget Office said.
“It’s a way to kick the
can down the road, and you are using a lot of taxpayer money,” Rachel Greszler,
a research fellow in economics, budget, and entitlements at the Heritage
Foundation, told the Washington Examiner.
Greszler pointed to a
Sept. 6 letter from the CBO that warned of the looming collapse of many union
pension plans, even if Congress passes a pension bailout.
“About one-quarter of
the affected pension plans would become insolvent in the 30-year loan period
and would not fully repay their loans,” the CBO wrote. “Most of the other plans
would become insolvent in the decade following their repayment of their loans.”
Greszler said it would
make more sense for the federal government to shore up the Pension Benefit
Guaranty Corporation, or the PBGC, which is also headed for insolvency, and to
put in place reforms to help pension plans survive, such as a slight reduction
in benefits.
Democrats and many
Republicans said Congress has no choice but to act to stop the pensions from
becoming insolvent.
The vast majority of
union pension plans are grossly underfunded and will have to cut benefits to
retired workers without federal help.
Congress last year
passed legislation to protect the pensions and healthcare for 92,000 mine
workers.
Senate Republicans also
introduced their own multiemployer pension reform plan they said is “designed
in a balanced way to avoid tipping more plans into a poorer-funded condition
and also to avoid exposing taxpayers to the full risks associated with the
largely underfunded multiemployer system and pushing the PBGC into insolvency.”
The measure was authored by
Senate Finance Committee Chairman Chuck Grassley, an Iowa Republican, and
Health, Education, Labor, and Pensions Committee Chairman Lamar Alexander, a
Tennessee Republican.
“We need to act
quickly, but we can’t just pour money into failing and mismanaged funds,”
Grassley said. “Our plan will provide relief and reform now. Without it, our
retirees will be left without the future they worked for.”
The AFL-CIO opposes the
Grassley-Alexander plan, arguing it puts too much of the responsibility on the
unions by requiring them to provide much higher premiums to the PBGC.
“This document contains
no federal financial assistance whatsoever,” AFL-CIO officials said in a
statement. “Contrast this to the over $700 billion that the government provided
to the banks and Wall Street in 2008 and other corporate tax giveaways in
recent years. It is punitive in nature, imposing hefty new costs that even
healthy plans will be unable to survive.”
Democrats will have to
negotiate a bipartisan solution with the Senate, which is run by Republicans.
They'll also have to convince McConnell, of Kentucky, that any pension bailout
belongs in a new coronavirus relief measure.
"I’m not going to
allow this to be an opportunity for the Democrats to achieve unrelated policy
items that they would not otherwise be able to pass," McConnell said
Tuesday on the Hugh Hewitt show.
Report: States Face $1
Trillion in Unfunded Liabilities
States are facing more than $1 trillion in
unfunded future liabilities related to health and life insurance benefits for
their retired employees, a growing shortfall that amounts to about $3,100 for
every person in the United States, according to a new report by the American
Legislative Exchange Council (ALEC).
ALEC, which has come under attack by
left-wing advocacy groups in recent years, describes itself as “the nation’s
largest nonpartisan, voluntary membership organization of state legislators,
with more than 2,000 members across the nation.”
Its mission is “to discuss, develop, and
disseminate model public policies that expand free markets, promote economic
growth, limit the size of government, and preserve individual liberty.”
The new study, the latest in an annual series from ALEC’s Center for State Fiscal
Reform, comes after critics have complained for years that cash-strapped states
don’t adequately fund their retiree-related obligations, which has allowed
those sums to accumulate.
Its authors say that, “in the end,
government must be held accountable for its actions.” Without policy changes,
these liabilities could lead to future tax increases or force cuts to core
public services in states.
Making governments use “more prudent
actuarial assumptions and increasing transparency prevents state governments
from making impossible promises and allowing unfunded liabilities to
accumulate,” the report states.
These unfunded benefit programs for retired
public employees fall under a category that fiscal analysts call “other
post-employment benefits,” or OPEB. OPEB excludes public pension plans but
includes benefits to retired workers such as health insurance, life insurance,
supplemental Medicare insurance, and more. The study examined 132 OPEB plans
from fiscal 2013 to 2017, drawing on the most current Comprehensive Annual
Financial Reports (CAFRs) and Actuarial Valuation Reports.
“While a trillion dollars is a rounding
error in Washington, D.C., at the state level, it’s a huge threat to government
programs and taxpayers,” Jonathan Williams, chief economist and executive vice
president of policy at ALEC, told The Epoch Times in an interview.
Jonathan Williams of the American
Legislative Exchange Council. (Courtesy American Legislative Exchange Council)
“Governments, if they want to spend more
money on new programs, need to view OPEB liabilities as a threat, so I think
there is something for both parties to like from tackling these liabilities.”
Public pensions have generally been
prefunded at 80 percent in order to be considered healthy, “but now a lot of us
are thinking 100 percent is better.” OPEB items, by contrast, have generally
not been prefunded at all, he said.
“OPEB liabilities have flown under the
radar, but they have become more visible as a result of federal accounting rule
changes that force states to list them on their balance sheets,” Williams said.
Even so, they have been “overshadowed” by fiscal problems in Detroit and Puerto
Rico.
“Unfortunately, this new transparency has
left us with these very huge liabilities,” he said.
The states with the largest OPEB
liabilities are California ($166.6 billion), New Jersey ($130.4 billion), New York ($129.3
billion), Texas ($115.7 billion), and Illinois ($64.4 billion), according to
the study. The states with the smallest OPEB liabilities are Nebraska and South
Dakota, which Williams said are tied at zero because they don’t pay for retired
employees’ health care, followed by Kansas ($285,000), Oklahoma ($9.1 million),
and Utah ($210.9 million).
“There is a lot of doom and gloom in the
report,” but there are also a handful of states that are doing a good job
getting a handle on their OPEB liabilities, Williams said.
A Modest Alternative to a Massive State Pension Bailout
Interviewed by Chris Wallace on Fox News Sunday, New Jersey governor Phil Murphy praises Donald Trump for having been supportive of New Jersey’s health care needs, but Wallace reminds him:
One area, however, Governor, where you haven’t gotten help, either from the president or from Senate Republicans, is on the question of state aid -- federal aid, passed by Congress, signed by the president -- to go to states like yours to pay for, uh, first responders, teachers, and all the services, with the huge revenue hit that you’ve taken because of the coronavirus. You’ve said this week -- your word -- that if you don’t get state aid, it’s gonna be “Armageddon.”
“That’s a fact,” says Murphy, continuing:
This isn’t about the old legacy stuff, we’ve been taking care of that. This is about firefighters, police, EMS, teachers at the point of attack, we’re already seeing some layoffs in New Jersey. We need a big slug of federal, direct cash assistance.
“The old legacy stuff.” That’s a pretty sly means of referencing New Jersey’s notoriously bloated pension promises that were negotiated and enshrined by generations of corrupt union bosses and state legislators.
Along with other deep-blue states like Illinois and New York that are also desperate for federal cash, New Jersey’s massive pension obligations have increased the state’s public debt and driven the massive spending deficits leading to the brink of insolvency -- and all of this was going on before the coronavirus pandemic. The fact that a “big slug of federal, direct cash assistance” might serve as a federal bailout for some states’ public pension systems is the entire crux of this debate, yet Wallace and Murphy managed to almost completely sidestep it, instead suggesting that Trump and Republicans would be heartless to not give states however much money they’d need to keep current public employees fully paid.
New Jersey is currently having no issues paying full benefits to its pensioners, Murphy says, but it simply doesn’t have the money to pay for its current public workforce without a “big slug of federal, direct cash assistance.” And why might that be? Obviously, because the state has legislated untenable pension liabilities that have long cannibalized the state’s revenue, leaving scant assets on the balance sheet to pay the public workers who are actually serving their communities today.
Only a fool could be duped by this shell game. Yes, of course this would amount to a federal bailout of mismanaged and bloated state pensions.
And it raises an important moral question. Why should a private worker in, say, Texas, be liable to pay for the horrible financial quagmire that New Jersey union bosses and politicians created in their own state? What should a taxpayer in Texas have to do with any of that? Shouldn’t payouts to pensioners in New Jersey be adjusted, or perhaps the salaries for current public workers adjusted to reflect reduced revenue, or furloughs at least be considered to address the state’s lack of liquidity, before demanding that taxpayers from other states pay for the problems that reckless unions and politicians in New Jersey created all by themselves?
What’s on display here is a vivid example of the two Americas that are engaged in an ideological battle that’s been softly raging for decades. It’s a peculiar battle, because it exists right under our nose, and is waged among more or less similar people who often have similar family makeups, religious beliefs, moral compasses, and social values.
Mark Steyn describes this conflict in his book, After America: Get Ready for Armageddon:
[C]onsider two sixtysomething white-bread Wasps living side-by-side in Yonkers, New York: At Number 27 is a lady who retired from teaching at the local school at the age of fifty-nine and lives on an annual pension of $78,255, exempt from state and local tax, with gold-plated health benefits, and everything inflation-proofed. At Number 29 is a guy exactly the same age who owns a hardware store, can’t afford to retire, has health issues and crummy provision for amelioration thereof, yet will be working until he dies, while his neighbor enjoys a lavish two-decade retirement that he pays for in taxes. This is a recipe for civil war…
This arrangement breeds animosity among neighbors living on the same street, much less miles apart within the same state, and it is utter insanity to imagine that this animosity wouldn’t be amplified when the arrangement crosses state lines. It should be understandable that an oil field worker in Texas who lost his job as a result of the government’s response to the coronavirus pandemic would be angry when he discovers that, not only are certain New York politicians celebrating his having lost his livelihood and his means of providing for his family, but they are demanding that his future tax dollars be spent today to ensure that no teachers (or retired teachers) in New York endure an interruption or a reduction in pay as a result of the government response to the coronavirus pandemic.
But opening the economy is unthinkable, says a gaggle of fully-compensated blue state politicians and media talking heads. We just need the federal government to come up with more money to pay public workers until our ruling-class betters say that it’s safe to resume our lives.
But here’s a modest alternative to more and larger “slugs of federal, direct cash spending” in order to keep public workers and pensioners in blue states fully paid as the economy continues to be crushed by the government response coronavirus fears.
Let’s stop pretending that American dollars are something we can endlessly confiscate from the future, for deployment in the present, without significant and potentially disastrous consequences. Doing that is precisely what got these states, with their catastrophically unfunded pension liabilities, in the trouble that they’re in. Let’s instead hold those broke states, that have recklessly legislated these massive pension liabilities and other “legacy stuff,” accountable, and demand that they manage their outlays in accordance with their local revenues. They can either work to reduce their expenditures, or they can work to increase revenues by tactically and rapidly opening up their economies, or any combination of those things. But it should go without saying that New Jersey’s current lack of liquidity, which is largely due to its own fiscal irresponsibility, shouldn’t burden taxpayers of other states with an unfathomable amount of liability.
Now, here’s the most important feature of that approach. Ask yourself -- if teachers, who are now being fully paid for not fully providing the services that our tax dollars pay them to perform, were asked to join the private sector in tightening their belts and enduring the practical results of an employers’ falling revenues (i.e., reduced hours and pay, lost jobs, etc.), wouldn’t they be more inclined to advocate ending the government’s illogically holistic shutdown of private commerce? If public-pensioners of these blue states were likewise asked to bear some of the financial burden created by the government’s policy via temporarily reduced benefits or increased taxation of benefits that might allow the state to live within its means, would they not join private business owners and working taxpayers in having a vested interest in opening up the economy as safely and quickly as is humanly possible?
I’m a realist, however, and I have every expectation that President Trump and Senate Republicans will make some provision to rescue these states and their bloated entitlement infrastructures, allocating incomprehensibly large sums of money that we do not have, and further compromising our nation’s fiscal solvency. If I had to guess, and if recent history serves as any template for the future, you can expect this bailout to be buried in a “fourth phase” of a trillion-dollar spending bill which will be meant to stimulate the markets, highlighting an additional cash payment to individuals, and probably some payroll tax shenanigans for good measure. As such, you can go ahead and expect this can to be thoroughly kicked down the road, and the socialists’ argument to have every American on the government dole advanced.
After all, if every American (or illegal alien, according to Nancy Pelosi) were able to earn their income from the government, there would be no need for urgency in opening the American economy. Who needs a dynamic, innovative, and thriving private marketplace, or the risks of encountering viral infections while enjoying commercial freedom of association, or even to work or produce anything of value at all, when our government apparently has endless “slugs of federal, direct cash payments” at our disposal?
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