Robbing Peter To Pay Paul’s Defined Benefit Pension

Posted on by James V. Shuls

After graduating from college, Peter and Paul began teaching in different Missouri public school districts. Feeling satisfied with their long, successful careers, they both retired after 30 years in the classroom. Little did the men know that for nearly three decades, the defined benefit pension system had been robbing Peter to pay for Paul’s retirement.

Though this story is fictional, the situation is a reality for many teachers in Missouri. Take, for example, the actual salary schedules of two public school districts, Jefferson City and Hickman Mills. Teachers in Jefferson City (Peter) start at a slightly higher salary than teachers in Hickman Mills (Paul), and they continue to earn a higher salary for 23 years. However, toward the end of their careers, Hickman Mills teachers receive larger pay raises and surpass their Jefferson City counterparts.

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Over the course of a 30-year career, a teacher in Jefferson City will earn $29,213 more than a Hickman Mills teacher. Each of these districts is part of the Public School Retirement System of Missouri (PSRS). This system requires 29 percent of a teacher’s salary to be contributed to the pension system, 14.5 percent each from the employee and the employer. Assuming a constant 29 percent contribution rate, a Jefferson City teacher will have $8,472 more deposited into the pension system than a Hickman Mills teacher.

Because he or she deposits more into the retirement system, it would make sense for the Jefferson City teacher to earn more in retirement; however, that is not the case. Pensions in the PSRS system are based on a teacher’s three highest consecutive salaries, usually his or her final three years. The spike at the end of their careers gives Hickman Mills teachers higher final average salaries, meaning they earn more in retirement than the Jefferson City teachers.

Despite paying $8,472 more into the pension system, the Jefferson City teacher will receive more than $55,080 less than the Hickman Mills retiree over the course of a 30-year retirement.

This may sound unfair, but this is just the tip of the iceberg regarding problems with defined benefit pension systems. In an effort to boost their final average salaries, teachers and administrators regularly game these systems, switching positions near retirement. The result of the various forms of gaming is escalating payments by states or declining benefits for pensioners.

Missouri teachers and schools have seen an increase in their contribution rate eight times since 2004, rising steadily from 21 percent to the current 29 percent. Contribution rate increases are necessary to combat growing pension liabilities. In a recent report for the Show-Me Institute, the American Enterprise Institute’s Andrew Biggs noted that Missouri’s five largest public pension systems have unfunded liabilities of nearly $54 billion. PSRS accounts for more than $31 billion of those unfunded liabilities.

Each of the problems mentioned here stems from the fact that Missouri’s defined benefit pension systems do not tie an individual’s contributions directly to his or her pension benefits. That is why a teacher who has paid considerably less into the system can earn more in retirement.

Missouri and other states should act quickly to reform public employee pension systems. In a recent report from the Manhattan Institute, Josh McGee and Marcus Winters laid out a plan that would allow states to reign in unwieldy pension liabilities and make the system fairer for pensioners. This can be accomplished by abandoning our current defined benefit plans and replacing them with a system that allows pension wealth to accrue smoothly based on an individual’s contributions. McGee and Winters note that in many cases, this would allow states to raise teachers’ salaries considerably.

This type of reform would ensure that individuals who pay less into the system do not get larger benefits than those who pay more. It would also make pensions portable. This would be attractive to individuals who would like to teach, but are unsure of making it a career.

Our current defined benefit pension system for Missouri teachers is unfair and unsustainable. It’s time to stop robbing Peter to pay Paul’s pension. It’s time to fix our pension problems.

New Missouri Educator Profile Test Tells Teachers…Something

Posted on by James V. Shuls

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As of this fall, prospective Missouri teachers are paying $22 to take a test that will tell them…something. Missouri’s Department of Elementary and Secondary Education (DESE) has revamped the teacher certification process. DESE has replaced the licensure exams we have used for many years with new exams that Pearson Education, Inc. designed. Among these new exams is the Missouri Educator Profile. The strange thing about this test is that it has “no right or wrong answers.”

It is somewhat strange to require a test (you actually have to take it twice) that has no right or wrong answers. How could this possibly be useful? Well, the test is supposed to help prospective teachers develop their “work habits.”

The fact of the matter is that this test does have right and wrong answers. According to a DESE official with whom I corresponded:

When building this assessment we had a number of exceptional teachers from the various areas (SPED, Elementary, Secondary, Principals, Counselors, and Librarians) take the assessment. They became our norming group. The student [pre-service teacher] responses will be compared to the norming groups.

Students’ answers will be “right” if they reflect the work habits of these exceptional teachers. They will be wrong if they don’t.

In designing this test, DESE and Pearson violated one of the basic tenants of good social science research — don’t select on the dependent variable. Let me explain. They selected “exceptional teachers” and then tried to see what traits those teachers had. Without a comparison group of unsuccessful teachers, we don’t really know if the traits are unique to the “successful teachers” or if they caused them to be successful. Essentially, DESE’s norming group for this test is meaningless.

Like I said, beginning this fall, prospective teachers will take a test that will tell them…something.

Why Should County Taxpayers Fund Private Medical Research?

Posted on by Caitlin Hartsell

Jackson County’s ballot proposal for a medical research tax to raise $800 million over 20 years has had a controversial reception. The proposed tax is intended to fund research on “translational medicine,” which turns existing scientific research into marketable drugs, medical devices, and diagnostic tools. The Pitch recently wrote an excellent summation of different viewpoints on the tax, including those of Show-Me Institute Chairman Crosby Kemper III.

Supporters of the tax leave a few questions unanswered: Why a county-level tax? Supporters cite lack of federal research funds as an impetus to look for more local funds, but sales taxes typically fund public assets such as parks or public safety projects. The half-cent tax would make Kansas City’s already high sales tax rate one of the highest in the country. Do other local governments fund this type of research with specific taxes?

I could only find two comparable taxes: one in Johnson County, Kan., and one in Rochester, Minn. (If anyone knows of other like taxes, please share them in the comments.) Even these two taxes have very important differences, however, from the Jackson County proposal.

Voters in Johnson County passed a one-eighth-cent sales tax in 2008 to fund the Johnson County Education Research Triangle. The money went toward building facilities at Kansas University and Kansas State, as well as to some researcher salaries. Jackson County’s proposal, however, would divert more than half of the revenue to private medical institutions: $20 million to Children’s Mercy and $8 million to St. Luke’s Hospital.

In 2012, voters in Rochester extended a half-cent sales tax that devotes $20 million in bonds (approximately one-seventh of the revenues) to the “Destination Medical Center” (DMC). The Destination Medical Center is the Mayo Clinic’s 20-year, $5 billion project to upgrade its own facilities and the surrounding area’s infrastructure and amenities.

Importantly, the Mayo Clinic initiative uses mostly private funds for the venture — more than $5 billion in Mayo Clinic’s own funds and those of private investors. The $500 million that the state, city, and county pledged over 27 years are primarily for infrastructure and transit improvements, which are the sorts of things public tax dollars typically fund. Additionally, state funds are contingent upon private investment occurring first. Mayo Clinic President and CEO John Noseworthy said in an interview:

We are not asking for a handout. We’re asking for nothing upfront. We’re not asking the state to fund the medical facilities, the science facilities and so on as other states are doing for our competitors, by the way. We’re simply asking for, once we have grown and proven that growth, to have some of that tax revenue infused into the public infrastructure.

Jackson County voters, unlike those in Rochester, are facing a different request. The translational medical research tax is a unique proposal that taxes citizens to fund buildings and salaries for researchers at primarily private institutions, in a field that private investment traditionally funds.

Being on the cutting edge of implementing new and higher taxes is not the right kind of innovation for Kansas City.

You Can’t Take The Public Out Of Public Airports

Posted on by Joseph Miller

In an Oct. 14 Kansas City Star article, Kansas City Aviation Department Director Mark Van Loh railed against government policy and local politics that are hampering his efforts to build a new $1.2 billion airport terminal. However, the legal and regulatory framework of Kansas City International Airport (MCI) is part and parcel of what it means to be a public airport, and the director cannot simply pick and choose the sections he likes.

The Aviation Department director appears to believe that Kansas City residents should not have to vote on whether MCI can issue revenue bonds, because they will not be responsible for those bonds. But those bonds he wants to issue are tax-exempt, special facility bonds, which MCI can issue because it is a public airport. Without that advantage, the capital costs of building a $1.2 billion new terminal might be too much for the airport to handle. But the Aviation Director only wants to forgo the government-mandated vote, not the government-mandated access to cheap capital.

And that’s only one of the many trade-offs the airport makes for being publicly owned. The truth is, Kansas City and the federal government provided the property and money to build the airport and constructed the framework for how the airport is run and how it is funded. Kansas City residents own the airport. They are going to have to pay most, if not all, of the cost of a new terminal, either directly or indirectly. It’s perfectly reasonable to allow the citizens to block a project that might be both wasteful and unnecessary.

Do Schools Really Want To Fix The Teacher Retention Problem?

Posted on by James V. Shuls

Like nearly half of all teachers, I did not last five years in the classroom. After four years, I went to graduate school. Many factors prompted me to leave the classroom; my salary was one factor. Most teachers are paid on a single salary schedule. These salary schedules aren’t inherently bad. They can be designed well or poorly. Unfortunately, most school districts do a poor job and design their salary schedules in a way that sacrifices young teachers at the expense of veteran teachers.

Take, for example, the salary schedule for a teacher with a master’s degree in the Parkway School District. In his or her first 10 years, a teacher in Parkway only receives a 17 percent pay raise. Between their 11th and 20th years, they receive a 51 percent pay raise. The difference is $20,000. It is no wonder we have difficulty retaining new teachers. The system is designed by veteran teachers for veteran teachers. After all, veteran teachers are usually the ones who serve on salary bargaining committees.

If we are serious about retaining new teachers, why do we design our pay schedules so poorly?

Parkway_2013_masters_schedule

Kansas City Next Last Giveaway

Posted on by David Stokes

This November, Jackson County voters will decide whether to impose a half-cent sales tax to support medical research. Officials predict the tax will generate $800 million for a handful of private groups over 20 years. We are all for investments in medical research, but should our limited local tax dollars be subsidizing it?

We have our reservations.

First, the research tax is an egregious misuse of the taxing authority. Missouri’s Constitution states (Article X, Section 3), “Taxes may be levied and collected for public purposes only….” Many benefits come from medical and academic research, but such benefits should not be misread as also satisfying the “public purpose” criteria that our Constitution sets forth.

Indeed, if this tax — explicitly intended to benefit private parties — qualifies as being “levied and collected for a public purpose,” does “public purpose” just mean anything for which we have enacted a tax? What would not be a tax for a “public purpose”? More specifically, if medical research deserves local tax support, how could anyone argue against tax subsidies for almost any other type of activity? Law firms, construction companies, and just about every other type of business provide a level of public service. Where do you draw the line on which businesses to subsidize with taxes?

Therein lies one of the core problems with top-down economic “plans” we see across Missouri today. Tax incentives and special tax deals are often, by their very nature, admissions that the overall tax system is broken and that taxes may be too high. Politicians do not have a special insight into what should and should not be subsidized with taxpayer money. Medical research is just the latest form of a long-running “public investment” scheme.

Simply because an industry may be supported by the federal government does not justify similar spending at the state and local levels. Should local sales taxes be used to make Department of Defense contracts more lucrative for aircraft manufacturers? Of course not. American government has very clear divisions of power and responsibility when it comes to spending issues. Instead of trying to emulate the spending of an oftentimes dysfunctional federal government, local governments should concentrate on not failing in their core responsibilities, including road maintenance, sewers and public safety.

Despite this, Kansas City officials have done that sort of “investment” planning for years, using taxpayer dollars to support all sorts of dubious developments. As a result, the city has some of the highest local sales taxes in the United States. The non-partisan Tax Foundation has found that Missouri has the sixth-highest average local sales tax in the country. Kansas Citians need not go far to find themselves in a shopping district with a sales tax already more than 10 percent. It is more than 12 percent at some restaurants. While a half-cent sales tax may not seem like much on its own, it is very real money as the taxes start to stack. And that is what we are seeing here.

The line needs to be drawn somewhere, and this is a good place to start. This particular sales tax will increase the price of everything you buy in Jackson County while sending the money directly to private organizations. It is as clear a case of spreading risk and privatizing gain — here through patents and profits — as you will see anywhere.

Local taxes should support public goods that the public uses each day — police, fire, streets, parks, and schools. The city and county should focus on getting it right with existing public services rather than play “investor” with other people’s money.

David Stokes and Patrick Ishmael are policy analysts at the Show-Me Institute, which promotes market solutions for Missouri public policy.

This commentary also appeared in the St. Louis Business Journal on 18 October, 2013: Kansas City mulls sales tax for research.

 

Louisiana Voucher Program Improves Desegregation Efforts

Posted on by James V. Shuls

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On the 50th anniversary of Martin Luther King Jr.’s March on Washington, the U.S. Department of Justice (DOJ) announced that it is suing to block the Louisiana school voucher program. The Louisiana program provides mostly poor, minority children with access to private schools. The DOJ claims the voucher program may be in violation of desegregation orders, essentially claiming that the voucher program is hurting desegregation efforts. This is an empirical claim, but the claim is false.

Using student-level data, Anna Egalite and Jonathan Mills, Doctoral Academy fellows at the University of Arkansas, examined the impact of each student’s “switch” on the racial composition of each school in a recent article in Education Next. They concluded:

Our analysis of the Louisiana Scholarship Program reveals that the vouchers used by the subset of recipients for whom information is available have supported public-school desegregation efforts. By leaving schools in which their racial group was overrepresented relative to the surrounding communities, voucher users have improved integration in Louisiana public schools….Based on this evidence, we conclude that the LSP is unlikely to have harmed desegregation efforts in Louisiana. To the contrary, the statewide school voucher program appears to have brought greater integration to Louisiana’s public schools.

In response to the DOJ lawsuit, Louisiana Gov. Bobby Jindal remarked, the “Department of Justice is attempting to use old rules designed to prevent discrimination against minority children to try and keep these children trapped in failing schools.” Egalite’s and Mills’ research demonstrates that those “old rules” most likely are not being violated, because the data actually show that the voucher program is improving racial integration.

Video: Is It Time To Leave Kansas City?

Posted on by Patrick Ishmael

Kansas has just enacted sweeping tax reforms, in some cases wiping out some forms of income tax altogether. For years, residents of Kansas City have been lured into Kansas due to issues such as crime, education, and taxes, but have Kansas’ recent moves brought us to a tipping point? Watch Show-Me Institute Policy Analyst Patrick Ishmael; President of Allen Financial, Greg Allen; and CFO of Tarsus, Paul Burns, discuss tax policy fixes for the greater Kansas City area.

 

The 100-Year Flood Of TIFs

Posted on by Joseph Miller

Is there anything the Missouri Legislature could do to both reduce the abuse of tax subsidies in Missouri AND improve the environment? Well, yes, there is. The legislature needs to strongly consider expanding RSMo 99.847, a state statute that prohibits the use of Tax Increment Financing (TIF) in floodplains in Saint Charles County. That law needs to be expanded to the entire state.

Many Missourians recall the flooding in the summer of 1993. (I don’t; I was 5 years old and lived in Chicago.) Enormous floods led to extensive levee failures along the Mississippi and Missouri Rivers, especially in eastern Saint Charles County. Homes and businesses were quickly inundated, leading to millions of dollars in damage. Continued development in flood plains and inadequate levees mean there is a threat of a repeat of 1993. That is a problem, but the fact that we subsidize the development with poorly designed national flood insurance policy and local TIF is even worse.

According to federal law, all construction within flood plains must buy flood insurance through the National Flood Insurance Program (NFIP). However, developments built behind a “100-year flood levee” are not required to own flood insurance, so most do not. (A “100-year flood levee” is designed to withstand flood levels with a 1 percent — or once in 100 years — chance of occurring in a given year.)

As everyone learned in 1993 in Chesterfield, Saint Charles, Jefferson City, and many more parts of Missouri, even levees we think are solid may be no match for nature’s power. To make matters worse, thanks to local TIF-supported development in proven floodways, there are now even more developments in areas that were flooded in 1993. Many do not have flood insurance.

Rather than waiting for a disaster to wipe out millions in investments and property, Missouri and localities should consider disincentivizing further construction in inadequately protected floodways. One good way to do that is to expand the prohibition against TIF in floodplains. If you want to build in a floodplain, fine, but you are going to pay for it, not taxpayers.

Otherwise, Missouri taxpayers will inevitably bear even higher future costs in disaster relief.

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