Why Are Public Pensions Often Underfunded?

Posted on by James V. Shuls

Defined-benefit pension systems are essentially promises. The government promises a specific benefit to beneficiaries when they retire. You would think that these plan participants would want their pension system to be fully funded (that it would have enough money to cover the anticipated future benefits). Why then are public pensions so often underfunded?  This occurs even when pension plan participants serve on the governing boards. This suggests that plan managers and beneficiaries want to keep the plans underfunded. But why?

In a recent article in the journal Perspectives on Politics, Sarah Anzia and Terry Moe examine whether pension plans that have pension beneficiaries serving on the board are more likely to underfund their pension systems. In the paper, they explain the logic behind underfunded pensions:

Another basic feature of pension politics is that public workers and their unions have incentives to support the chronic underfunding of their own pensions. Due to state statutes, constitutions, and judicial decisions, pensions promised by state politicians are backed by strong legal protections almost everywhere; and public workers thus know they will eventually get what they are promised even if their pension plans are currently underfunded. Indeed, because full funding on a regular schedule would be tremendously costly for state (and local) budgets— crowding out other services, forcing higher taxes, making the true costs of pensions painfully transparent to citizens —public workers and their unions have incentives to prefer that their pension plans be underfunded. Underfunding enables the fiscal illusion that pension benefits are much less expensive than they really are. If public workers and their unions want increasingly generous benefits in future years, they need to convince the public that these benefits are not costly to provide. At the same time, underfunding keeps employee contributions to their own pension funds at low levels; and by keeping contributions by their employers down, they are freeing up public money for other government services, keeping public workers employed—and providing funds for their own salaries and raises.

Each of Missouri’s three teacher pension systems (Kansas City, St. Louis, and Public School & Education Employee Retirement Systems of Missouri (PSRS)) have board members who are also members of the pension system. In St. Louis, the system is currently funded at 78.1%, the lowest funded ratio since 1992. Kansas City’s funded ratio is just 66.2%. PSRS, the system which covers teachers throughout the rest of the state, has the highest-funded ratio, 84.4%. These figures, of course, rely on the pension plan’s rosy assumptions. More conservative (and arguably more realistic) estimates put the funded ratios for each of the plans below 60%.

Overall, support among teachers for Missouri’s teacher pension systems is high. But would teachers continue to support the pension plan if they had to increase their contributions to fully fund their plan? 

 

Are Government Unions Adequately Informing Workers of Their Rights?

Posted on by Patrick Ishmael

Following the Supreme Court’s 2018 ruling in Janus v. American Federation of State, County, and Municipal Employees (AFSCME), there was renewed interest nationwide—by workers and by policymakers—to reconsider the relationship between government unions and governments themselves. Trey Kovacs over at the Competitive Enterprise Institute has done yeoman’s work in this area, and as he noted earlier this summer, the consequences of the Janus case were so far-reaching that many labor unions were hemorrhaging tens of thousands of fee payers in the case’s immediate aftermath:

In the aftermath of the decision, government unions were unable to convince many non-members to become full-fledged members and pay dues. As I discussed in a previous post, union financial reports submitted to the Department of Labor show the National Education Association lost the 88,000 non-member agency fee payers it had in 2017. And the Americans Federation of State, County, and Municipal Employees union lost 110,000 agency fee payers. The financial reporting of another large public-sector union, the American Federation of Teachers, does not reflect the impact of Janus because its reporting period ended in the same month as the decision. However, a new report from the Freedom Foundation states that “union spokespeople indicate the union lost nearly all 85,000 agency fee-payers it had at the time of the decision.”

As Kovacs notes later in the piece, the Janus decision doesn’t only affect non-member fee payers, who in many states were the primary beneficiaries of the case, but also union members themselves. As the ruling notes, “Unless employees clearly and affirmatively consent before any money is taken from them, this standard [for waiving one’s First Amendment rights] cannot be met.”

But are union members aware of these rights? Kovacs persuasively suggest that the answer is no, and that state law can still act as a barrier to securing these rights.

Prior to the Janus decision, workers who wished to opt-out of union membership were restricted by what are known as window periods. For example, in Michigan, many public employees could only leave their union once a year during a short period of time in August. Other window periods only permitted members to leave the union for a brief time period around the anniversary of their hiring.

Despite the text of the decision that allows workers to resign union membership nearly at any time, labor unions are still blocking workers who want to leave by enforcing these invalid window periods. In a recent case, Hendrickson v. AFSCME, New Mexico public employee Brett Hendrickson, represented by the Liberty Justice Center, was prohibited from exercising his Janus rights to resign from union membership. Hendrickson, a quality control specialist for the New Mexico Human Services Department, attempted to leave AFSCME Council 18 and stop dues from being deducted from his paycheck, but was told he could only opt-out during a narrow window period. This is just one of many examples of unions coercing worker to continue paying dues and undermining their First amendment rights.

To what extent Missouri government workers are having their rights curtailed is the subject of rigorous debate. For instance, a court injunction against House Bill (HB) 1413, which reformed much of Missouri’s labor law framework, has created uncertainty as to what the law is on basic issues like union membership and representation. Also, collective bargaining agreements in the state were (to be generous) lightly overseen by the state even before HB 1413 became law, meaning that violations of workers’ rights could be ongoing—and hardly anyone would know about it. Fortunately, Missouri did not technically allow for “fair share fees” of the sort that Janus put an end to nationwide, so many Missouri workers had at least incidental knowledge of their labor rights in the Show-Me State. Unfortunately, that isn’t always the case.

The better educated workers are about their rights, the better off they will be. Especially in this post-Janus legal environment, that educational process is more important than ever.

 

The Show-Me Institute Is Hiring

Posted on by Show-Me Institute Staff

Show-Me Opportunity (SMO), in conjunction with the Show-Me Institute (SMI), promotes liberty and free-market solutions to the problems facing Missouri, and hosts regular lectures and events throughout this state. SMO is seeking a dynamic and skilled individual for the position of Events and Outreach Coordinator.

Find more details and apply here: https://talentmarket.org/events-show-me/

 

Short-Term Medical Insurance Makes the News Again

Posted on by Patrick Ishmael

Jim Spencer at the Minneapolis Star-Tribune recently wrote about U.S. Senate opponents of short-term medical (STM) plans attempting yet again to overturn the STM rule changes enacted in February of last year. The battle lines on this policy issue are the same as always: one side supporting greater choice in health care, and the other highlighting its concerns about the quality of the STM plans themselves, particularly relative to Affordable Care Act plans with broader coverage.

Spencer boils down the issues succinctly:

The White House says extending the length of these policies from 90 days to up to three years offers an affordable alternative for Americans who do not qualify for premium subsidies under the Affordable Care Act and cannot afford the premiums that come with the ACA’s mandatory coverages. The Trump rule allows ACA subsidies to be used to promote sales of short-term policies.

Those who want to curb the expansion say it will undermine the nation’s individual insurance market and health care reform by drawing away millions of the healthiest participants from the coverage pool.

It would be good news for consumers if these changes to STM plans last. I have said again and again that one of the main problems in American health care is the absence of price competition that would allow consumers to shop for health insurance products like they shop for other items—by comparing benefits, assessing costs, and making buying decisions that comport with their personal needs. More liberalized short-term medical insurance policies provide at least some of that flexibility in the insurance marketplace by providing less expensive coverage, albeit with fewer features.

Is short-term medical insurance for everyone? Of course not. But that decision should be for consumers to decide, not the U.S. Senate.

 

That Crazy CID Vote in Columbia Goes Back to Court

Posted on by Patrick Tuohey

Back in 2015, the Columbia Daily Tribune reported that a proposed Community Improvement District (CID) in Columbia was drawn to include a single registered voter. The controversy over this CID led to a court case. And just this week, an appeal was heard by the Missouri Court of Appeals, Western District. Each step of the story demonstrates why Missouri’s special taxing district statutes are in dire need of reform.

As Graham Renz and I discussed in our paper, “Overgrown and Noxious: The Abuse of Special Taxing Districts in Missouri,” CIDs allow business owners the ability to levy a sales tax on their customers—and sometimes spend the revenue generated on explicitly private purposes. CIDs are often unknown to shoppers and are notoriously easy to set up. What’s more, if business owners are clever, they can construct a district in a way that evades the need for any public vote.

This brings us back to the Columbia Business Loop CID. The businesses likely meant to draw a district without any residents, allowing only business owners to vote to approve. The Tribune reported on August 25, 2015 that a single resident, 23-year-old Jen Henderson, was living within the proposed district and would be the sole voter. Eventually 14 more voters living within the district were identified. The vote on the CID was 4 to 3 in favor, but Henderson filed a lawsuit claiming that Missouri election law was not followed.

The details of the case are themselves mystifying. The presiding judge decided to dismiss the case in March 2016, but refused to issue and sign an actual ruling—and in doing so denied Henderson the ability to appeal—until ordered by the Missouri Supreme Court in February 2019, over 1,000 days later. The CID has been collecting the sales tax all the while.

Henderson did appeal once the ruling was issued, and that was the case heard by the Missouri Court of Appeals, Western District on Wednesday. In short, Henderson alleges that the CID did not follow Missouri voting procedure requiring a secret ballot. The defendants argue that the statute setting up CIDs does not specify any election guidelines, so they can do as they please.

Whatever the outcome of the case, any attention brought to Missouri’s permissive special taxing district laws is welcome. Voters and taxpayers ought to be better respected and those granted the power to tax should be held accountable.

 

It’s Time to Stop Making Excuses

Posted on by Susan Pendergrass

Missouri students have a college readiness problem. The Department of Elementary and Secondary Education (DESE) reports that in 2017, just 42 percent of graduating high school seniors were college or career ready. (Try as I might, I can’t find any more recent data.)  But it gets worse. In 2019, just 25 percent of Missouri high school seniors met all four college readiness benchmarks on the ACT college entrance exam. And one-third of test takers met zero of the four.

Some would argue that ACT scores were negatively affected when the state paid everyone’s testing fee and nearly every high school senior took the exam. That appears to be true. The state starting picking up the tab in 2015, but just 77 percent of seniors took the test that year. In 2016, nearly every student took the exam and scores dropped. Only 22 percent of students met all college readiness benchmarks that year. In 2018, the state stopped paying for the exam and participation dropped off. This past school year participation was down to 82 percent and college readiness had improved by three percentage points.

What’s troubling is when you compare 2015 to 2019. Participation rates were about the same. But college readiness was five points higher (30 percent met all four benchmarks) in 2015. And the percentage of students who met none of the benchmarks was eight points lower. The excuse that non-college bound seniors were taking the test and lowering the scores falls apart.

Let’s be honest. The ACT bar is not that high. In English, meeting the college readiness benchmark means that a student has a 50 percent chance of getting a B and a 75 percent chance of getting a C in a typical college freshman English class. If Missouri high school graduates can’t hit that mark, then I would say we have a problem.

 

Legislators Shouldn’t Neglect Health Care Reform Opportunities in 2020

Posted on by Patrick Ishmael

My colleague Elias Tsapelas has produced a lot of excellent research on Medicaid over the last few months. And this important work will continue: Medicaid spending already constitutes a third of Missouri’s budget and is growing rapidly, which will put mounting pressure on other state priorities. Missouri will eventually have to decide whether it’s a government that sometimes provide health care benefits or a health care provider that sometimes governs.

The existential risks of an unreformed Medicaid program are not, however, the only health care issues that Missouri should grapple with next year.

There will be many important items on policymakers’ legislative agendas in 2020. Medicaid reforms should be a high priority—not only as a health care priority, but as an issue that will affect the state’s financial health well into the future. But legislators should also not forget that great progress can be made for Missouri patients through other legislative changes, and I hope these largely modest reforms make their way onto the agenda.

 

It’s Time to Address Medicaid’s Costs

Posted on by Elias Tsapelas

The share of Missouri’s budget consumed by Medicaid just keeps growing. According to the state’s Medicaid agency (page 10), the program will need hundreds of millions in new funding just to maintain the status quo in the coming fiscal year. This news won’t surprise anyone who has been following the program’s continuous growth over the past decade. But it does raise the question of why state policymakers have been so hesitant to address this alarming trend.

It is doubtful that there’s ever been more information available for Missouri’s elected officials searching for ways to contain Medicaid’s cost growth. Beyond the recommendations that my colleagues and I have proposed, a report was completed earlier this year by McKinsey & Co. that outlined changes that could save Missouri taxpayers more than one billion dollars. The report delivers some harsh truths about the state of Missouri’s program and how dire the need for cost containment has become. At one point (see page 14) it estimates that if costs remain unchecked, the state’s next economic downturn could result in Medicaid consuming more than 50 percent of Missouri’s overall budget.

Additionally, the report identified the following problems with Missouri’s program (page 16):

•           Dollars spent in the program are not well aligned with value received from the delivery system;

•           Specifically, methods to pay providers lack incentives to contain costs or enhance quality;

•           Approaches to utilization management; eligibility management; fraud, waste, and abuse; and third-party liability are limited, partially due to limitations of the MMIS (Missouri Medicaid Information System);

•           Programs for special needs populations are fragmented;

•           There is no substantial measurement nor transparency of outcomes of care; and

•           Service levels to consumers and providers could be improved, including reductions in average wait times for handling questions, as well as increased service channels.

Many of these suggestions are complex and technical in nature, but they demonstrate the plethora of opportunities available for program improvement. There were discussions this past week of the conclusions from the McKinsey & Co. report at the state’s Medicaid Oversight Committee meeting. This is one of the first signs that cost containment may soon become a priority in Jefferson City, but it remains to be seen whether these discussions will result in substantial reforms being enacted in the upcoming legislative session.

At this point, two things are clear: Containing Missouri’s Medicaid costs has become a necessity, and there are many paths available for policymakers who are interested in taking on the challenge. For the sake of Missouri’s taxpayers, let’s hope that 2020 is finally the year of action.

 

Missouri’s Government Union Reforms Still Tied Up in the Courts

Posted on by Patrick Ishmael

It’s been more than a year since Missouri legislators passed House Bill (HB) 1413 into law, which at the time was arguably the most comprehensive government labor reform package passed in the United States in the last decade. Along with paycheck protection, HB 1413 included key transparency and certification reforms, any of which would have been momentous changes if passed separately.

Unfortunately, the legislation was held up almost from the beginning. On August 27, 2018, a cavalcade of labor interests, including the Missouri chapter of the National Education Association, filed suit against to state to block the implementation of the law, and on March 8, 2019, its motion for a preliminary injunction against the law was granted. This meant that even though the law had already been subject to enforcement for about six months, HB 1413’s reforms are no longer in effect, pending litigation. Currently, the court is considering an order of summary judgment in favor of the plaintiffs, meaning that the judge could soon conclude that the facts and law weigh so heavily in their favor that a full trial would be unnecessary. Your guess is as good as mine on how the judge will rule on that motion.

To be plain, it’s terribly disappointing that HB 1413’s reforms were blocked at all by the courts. As Show-Me Institute researchers have noted in the past, court rulings have made substantive reforms in this area nearly impossible. In the last 20 years, Missouri courts have established new constitutional rights for organized labor from old constitutional language, upending decades of precedent in favor of state judicial activism. That HB 1413’s credible reforms have been tied up in this legal environment at the lower court level is unfortunate for Missouri taxpayers and government employees alike.

Perhaps more disappointing, however, is the stasis that the litigation has imposed on legislative action in these areas, suffocating opportunities to tweak legislative language or otherwise accommodate the courts in effectuating the will of the people. Keep in mind that this was a law passed to protect taxpayers and workers alike by updating the state’s government labor framework. That litigation surrounding this case could continue for years, and will come at the cost of workers’ rights and taxpayers’ pocketbooks.

 

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