Kansas City and “Fraudulent” Crony Capitalism

Posted on by Patrick Tuohey

President-elect Trump has talked a great deal about the need for massive and widespread infrastructure spending. Many people agree that there is a need for such investment, and furthermore that it is a proper role of government to make such investments. Laura Bliss over at CityLab reminds us of Trump’s nondescript plans, writing,

Trump has said some traditionally infrastructure-y words when he talks about this. “We’re talking about a very large-scale infrastructure bill,” the president-elect said in a long-ranging interview with the New York Times published Wednesday. “… [a]nd we’re going to make sure it is spent on infrastructure and roads and highways.” A proposal to privatize infrastructure projects released by Trump’s economic advisors describes the “complex network of airports, bridges, highways, ports, tunnels, and waterways” that underpins private sector growth.

Bliss worries that Trump will be more inclined toward “major new property development,” rather than infrastructure. She even cites Paul Krugman’s column, where such spending is often boosted, in The New York Times where he writes,

And we already know enough about [Trump’s] infrastructure plan to suggest, strongly, that it’s basically fraudulent, that it would enrich a few well-connected people at taxpayers’ expense while doing very little to cure our investment shortfall. Progressives should not associate themselves with this exercise in crony capitalism.

The President Elect’s infrastructure plan may or may not amount to crony capitalism. As my colleague Patrick Ishmael recently wrote, the Carrier deal in Indiana invites the accusation. Yet this is exactly the sort of crony capitalism that progressives seem to love in Kansas City and St. Louis. Recall that we’ve redirected hundreds of millions of tax revenue into property developments for wealthy corporations such as Cordish, Burns & McDonnell, Cerner, and H&R Block.

Meanwhile, important infrastructure spending (read: roads, bridges, sewers, etc.) is squeezed, because the city cannot afford it. We’ve heard that the city wants to borrow $800 million for such spending—but we have as much detail about where that money will go as Trump has given on his plans. Hopefully, those funds won’t go toward  “fraudulent” infrastructure projects instead of those truly necessary for the public good.

Policy debate on infrastructure is welcome, as is skepticism toward government spending. But if you want to be critical of fraudulent public programs that appear only to enrich the well-connected, you don’t need to travel to Washington to find it—or even leave Kansas City.

Of Underfunding and Overpromising

Posted on by Michael Highsmith

Planning for retirement is no small task, and when news comes that a public pension plan is in financial trouble, both plan employees and local taxpayers should be concerned, because one of the two is going to have to pick up the tab.

Missouri’s State Auditor recently released an audit on the City of Bridgeton’s Employee Retirement Plan, and the picture painted was bleak. In addition to finding that the city’s Finance Commission failed to meet even once from 2012 to 2014, the report says the plan is only 67% funded and that the unfunded liability is approximately $14 million. The plan’s current funds will not be able to pay the benefits that retirees have been promised. The combination of insufficient contributions and lackluster investment returns has brought put the existing plan in its current condition.

Defined-benefit plans like Bridgeton’s typically involve a commitment to make monthly payments to employees for the remainder of their lives. In order to sufficiently fund the promised benefits, plans assume a rate of return on the contributions that they invest. Those assumptions are often too rosy; Bridgeton’s assumed rate has been 7.5%, while over the past ten years the time-weighted return has only been 4.16%.

Over time, the funding gap widens and the result is a large gap between the amount the city has promised retiring employees and the amount the city has set aside for that purpose. In Bridgeton’s case, no payments have been withheld from retirees, but in order for the city to meet its future obligations, contributions have to increase. Either funds must be allocated away from other public services, or taxes must go up.

This is exactly what has happened. In April 2015, Bridgeton increased its hotel service occupation tax from $0.85 to $3.00 per day. A portion of the additional revenue goes toward increasing the plan’s contributions by $200,000 each year.

Bridgeton is not alone. The Pew Charitable Trusts reports the shortfall between state-run promised pension benefits and available funding is nearly 1 trillion dollars nationwide. Defined-benefit plans are often legally binding, so when investment returns fall short of what was predicted for the plan years ago, taxpayers can be forced to foot the bill.

The good news is that Bridgeton’s defined-benefit plan was closed to future employees in 2012 and replaced with a defined-contribution plan. In a defined-contribution plan – think 401(k) – benefits are not paid out indefinitely to employees. Rather, upon retirement the funds that have been accrued are made available to the employee. The key difference between the two is that a defined-benefit plan makes a promise it may not be able to keep without taxpayer assistance, while a defined-contribution plan, by definition, cannot incur a funding gap.

Defined-contribution plans can protect taxpayers, municipalities, and employees from having to worry about underfunded pension plans or budget shortfalls. Bridgeton took the leap to defined-contribution in 2012 to avoid exacerbating its current funding problems; other defined-benefit plans in Missouri should consider doing the same.

Will Streetcar Funding Dry Up?

Posted on by Patrick Tuohey

Slate, a left-leaning news site, considers the implications for transit of Trump’s naming of Elaine Chao to head the Department of Transportation. It concludes,

the investments she favors may more quietly reflect conservative tenets like heavy highway spending, disregard for energy efficiency, and the denial of funds to transit and pedestrian projects in densely populated areas.

This should not be surprising, especially for streetcar proponents. But it should be alarming for them. As my former colleague Joe Miller wrote in 2014,

What streetcar advocates really have to fear is not the defunding of urban transit, but the defunding of streetcars in favor of other forms of transit. Past administrations favored transit projects that reduced congestion or improved mobility, so streetcars received few federal dollars. The Obama administration’s desire to use transit projects to create “livable communities” has made federal streetcar funding possible.

Mind you, overall Federal transit funding may not change much. But as Slate pointed out, the Obama Administration was an outlier on how the funding was spent:

Obama’s first transportation secretary, Ray LaHood, for example, was a major proponent of diverting DOT spending away from highways (many of which are boondoggles, the least of which costs many times as much as the hated streetcars) to other transportation and infrastructure projects. He supervised the creation of the TIGER grant program, which injected billions in federal money into local, multimodal projects, and was reauthorized repeatedly by Congress.

Recall that in 2013, TIGER funding provided $20 million toward the streetcar project in Kansas City. And according to the Kansas City Regional Transit Alliance (KCRTA), the proposed $227 million Main Street extension of the streetcar assumes up to $114 million in federal funding. Fourteen million of that is from designated regional funds (STP/CMAQ), which means other regional transportation projects would have to wait if streetcar expansion moves ahead. The remaining $100 million now may be pie-in-the-sky.

In July 2014, Mayor James campaigned for the first ill-fated streetcar extension line by saying, “We really have a once-in-a-lifetime opportunity here.” Considering the President-Elect’s Secretary choice, he may have been right. It remains to be seen if he and other streetcar supporters believed that rhetoric.

The Indiana Carrier Deal: State Cronyism Shouldn’t Be Nationalized

Posted on by Patrick Ishmael

This Tuesday Indiana state officials announced that a Carrier manufacturing plant located there would not shut down after all, despite months of threats from the company to do just that. Current Indiana governor (and vice president-elect) Mike Pence had made the company's retention a top priority, and as one might imagine, the final deal was cut with Pence's running mate, President Elect Donald Trump, waiting in the metaphorical wings. Instantly, it was heralded as good policy, and a policy victory, for the incoming administration.

That view is wrongheaded on both counts, and I certainly hope the Carrier "deal" doesn't presage future deals the President Elect will be cutting over the next four years. The reason is straightforward. In return for not following through on its threat to move, Carrier will receive $700,000 per year from the state of Indiana, for at least 10 years. If that kind of cronyistic deal sounds familiar to you, it should; the Carrier agreement is like many of the "deals" to "save or create jobs" that have been made, and that we have criticized for years, here in Missouri. As one economist observed after the Carrier deal was announced, "[e]very savvy CEO will now threaten to ship jobs to Mexico, and demand a payment to stay." Yup.

Even with the financial gift from Indiana, it doesn't sound like every job will be staying at the plant anyway, or at another nearby facility that was also slated to be closed. In return for the money, Carrier said it will keep about 1,000 jobs in Indiana, but that about 1,300 Indiana jobs were going to be sent to Mexico anyway, despite the public giveaway.

We have to reiterate: It is not the role of the government to pick winners and losers in the tax code, whether the tax code in question is at the local, state or federal level. More to the point, allowing powerful companies to issue threats as a way to compel public financial support for their private operations is a road policymakers should not go down. Most employers could never dream of getting such generous concessions, and if the tax burden needs to be reduced to make one big company profitable, policymakers, whatever their level of government, should instead work to reduce the tax burden for all companies—large and small, politically connected or not.

Indiana should not export its corporate welfare to Washington DC. If it does, it will be to the detriment of the American public and taxpayer interests.

Rationalizing a Downtown Soccer Stadium

Posted on by Graham Renz

Sometimes we want something so badly we’ll tell ourselves just about anything in order to get it. Psychologists and philosophers call thought patterns like this “rationalizing”—justifying actions or beliefs with questionable explanations. Rationalizing leads to poor public policymaking.

Pundits and boosters of a downtown Major League Soccer (MLS) stadium appear to be doing some serious rationalizing. Consider this: one potential ownership group, SC STL, wants taxpayers to cough up $80 million to help pay for a stadium. Another ownership group, City Foundry, has offered to cover the $80 million in public assistance if they can have some stake in team ownership. But soccer boosters are worried that discord between these two ownership groups might hurt Saint Louis’s chances of landing an MLS team. As a result, commenters have begun criticizing City Foundry, a group that’s willing to bear the massive burden SC STL wants to place on the public. MLS has publicly aligned itself with SC STL and plans to ask taxpayers to help pay for a stadium, thus providing soccer boosters a (very expensive) “bird in the hand.” But is this $80-million bird so precious that we should dismiss a proposal that could result in a stadium built without taxpayer money? Are we certain that City Foundry’s involvement would cause MLS to take its soccer ball and go home? City Foundry only made its proposal less than a week ago—isn’t their offer worth a serious look when $80 million is at stake?

Here are some facts that aren’t easy to rationalize away: Stadiums are not a good investment vehicle for public dollars. They don’t yield economic returns for local communities. They don’t help cities financially. At best, stadiums simply shift existing spending patterns, often at the cost of huge public expenditures. At worst, publicly-funded stadiums drain resources away from basic city services, and sometimes even bankrupt cities. The benefits of having a professional sports team are not economic; they are social or civic. Yet, some people badly want an MLS team, and see SC STL as the best way of getting one, so they’re willing to throw principles of good policy to the wind.

Choosing to fund a sports stadium with public dollars when private capital is available isn’t just bad public policy; it is taxing the public for the benefit of a wealthy few.

Public Welfare Spending Growth

Posted on by Michael Austin

Since the passage of the Affordable Care Act, public welfare and healthcare state spending have become the largest contributors to Missouri’s general expenditure growth.  Public welfare spending by itself, which includes Supplemental Security Income, Temporary Assistance for Needy Families, and Medicaid, now accounts for 34 percent of growth in Missouri’s general expenditure spending since the recession ended.

For most states, education remains as the biggest slice of pie for general expenditures, and for Missouri this is still the case. However, education is no longer the strong magnet of state dollars it once was.

The table below, from the U.S. Census Bureau, shows that while education still commands the largest share of Missouri’s general expenditures, spending on public welfare has increased at a faster pace than spending on education since the 2008 recession.

Some takeaways from this table:

  • Education expenses are almost 35% of total expenditures, but only grew (on average) by 0.3 percentage points annually from 2009 to 2014.
  • Public welfare expenses make up nearly 30 percent of total expenditures, but are the biggest culprit in the growth of total spending, with expenses rising at an annual rate of 0.9%.
  • If we combine public welfare spending with Hospitals and Health spending, then spending on healthcare and social assistance would account for 42 percent of general expenditures.

As we approach the 2017 legislative session, these trends in spending can inform policy decisions. If public welfare spending growth continues unabated, other services—like education, transportation, and public safety—might find dollars increasingly hard to obtain.

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