Let Detroit’s Pension Problems Be An Example

Posted on by James V. Shuls

People’s eyes often start to glaze over when we at the Show-Me Institute start talking about public employee pensions. Actuarial tables, discount rates, pension obligations . . . boring. Sure, pensions may not be as exciting as predicting the royal baby’s name (George Alexander Louis, in case you missed it), but the impact public pensions can have on our lives are much more pronounced. A clear example of this is coming out of the now-defunct Detroit, a once mighty city that recently filed bankruptcy.

Many things led to Detroit’s decline, but pension obligations are almost certainly what broke the bank in recent years. Policymakers in Saint Louis, Kansas City, and Jefferson City would be wise to heed Detroit’s warning. As Mary Williams Walsh recently wrote in an article titled “Detroit Gap Reveals Industry Dispute on Pension Math”:

It may sound arcane, but the stakes for the country run into the trillions of dollars. Depending on which side ultimately wins the argument, every state, city, county and school district may find out that, like Detroit, it has promised more to its retirees than it ever intended or disclosed. That does not mean all those places will declare bankruptcy, but many have more than likely promised their workers more than they can reasonably expect to deliver.

This is something we have been saying for some time. In a recent policy study, we noted that when an appropriate discount rate is used, Missouri’s big five public pension systems have more than $53.9 billion in unfunded liabilities. Pension fund managers downplayed our findings and said we were using unrealistic expectations. As Walsh notes, however, it may be the pension managers who are using the unrealistic expectations:

Much of the theoretical argument for retaining current methods is based on the belief that states and cities, unlike companies, cannot go out of business. That means public pension systems have an infinite investment horizon and can pull out of down markets if given enough time.

As Detroit has shown, that time can run out.

We need to learn from Detroit’s example and act before time runs out on our pension systems.

For $1.5 Billion, What Do You Get?

Posted on by Patrick Tuohey

Merle Travis wrote “Sixteen Tons” in 1946 about the seeming futility of life as a coal miner, but there is something here for 2013 Kansas City. Travis’ chorus says:

You load sixteen tons, what do you get
Another day older and deeper in debt
Saint Peter don’t you call me ’cause I can’t go
I owe my soul to the company store

Currently, Kansas City International Airport uses 62 gates (sometimes) and services just less than 5 million passengers a year, well under airport projections made less than a decade ago. Based on those already wrong projections, the Kansas City Aviation Department wants to build a new terminal with at least $1.5 billion in bonds.

That new terminal, however, will only have 41 gates. It will be smaller than what we have now. In return, it will take longer to get to your flight, will increase ticket and parking prices, and will saddle the city with millions of dollars in debt payments each year. According to our calculations, no cost savings or increases in sales elsewhere will be enough to pay for the project.

You can determine for yourself exactly who is the company store in this metaphor, but this much is clear: Kansas City likely will get nothing in return from its new terminal except more debt.

Terminal Financing – Part 3

Posted on by Joseph Miller

In the Kansas City Star’s response to the Show-Me Institute’s latest post about the future of Kansas City International Airport (MCI), Dave Helling suggests that city officials indicate paying the bill for a new, $1.2 billion MCI terminal “would not be impossible.” Despite their confidence, Helling himself seems skeptical, and rightfully so. The details of how financing would work are highly contingent and require extensive costs for any prospective airport user. Far from saving costs, as officials with the Kansas City Aviation Department claim, the terminal plan endangers MCI’s financial sustainability and its competitiveness.

Helling outlined a number of ways that MCI could raise funds to repay $70 million in debt. These options include some out of the Aviation Department’s control, such as Congress raising the Passenger Facility Charge (PFC) from $4.50 to $7.50 or $8. Even then, the airport still needs to find an extra $40 million per year. As the Show-Me Institute stated, large increases in cost per passenger endanger bond ratings, and relying on airlines for the bulk of debt repayment exposes the airport to carrier bankruptcy. To make matters worse, MCI will need more capital improvement projects in the years after the airport is completed, which will add to the debt. In fact, the airport is still responsible for $274 million from its renovations in 2004. If the Aviation Department persists in consistently increasing its long-term debt, it will reduce its ability to borrow at lower interest rates and make MCI one of the most expensive airports in the country.

The terminal plan also will make MCI less competitive. Helling states that by increasing PFCs and raising parking fees, costs per passenger will only rise by an additional $8, not $14. This simply shifts part of the cost per passenger from the airlines to a government charge. No matter how the airport collects the fees, MCI will still go from one of the cheapest to one of the most expensive medium-sized airports in the country. This will increase costs for passengers, thereby reducing demand for MCI as people economize on tickets or choose other transportation options. As for parking fees, MCI’s current layout and rates facilitate parking. It would not be surprising if altering the configuration and increasing fees would force passengers to seek alternative transportation to and from the airport. This, in turn, would require much more than a 20 percent rate hike to generate 20 percent more revenue.

The Aviation Department’s plan decreases the sustainability of MCI, reduces its competitiveness, and raises prices for users. It does not save money or increase capacity. So why not consider a less ambitious plan, seek out private financing, or seriously consider a renovation of the current configuration? Indeed, it may be sensible simply to put the decision on the backburner. That would leave time for federal funding to become available, observe whether Congress raises the PFC, and give the Aviation Department time to reduce its current debt load. In any case, city government officials must explain how their plan would work and why any of this is a good idea in the first place.

The Show-Me Spend-O-Meter For A New Year

Posted on by Michael Rathbone

New Year? It’s the end of July! Yes, it is, but for the state, it actually is a new year. Missouri’s fiscal year (FY) 2014 began on July 1, and as a part of our mission to keep you informed about the state spending money, we have updated the Show-Me Spend-O-Meter.

Compared to last year, the state is set to spend almost a billion dollars more. For those who like these things broken down (as the Spend-o-meter does), that amounts to nearly $30 more every second ($766.53 per second in FY 13 vs. $796.40 per second in FY 2014). A huge chunk (nearly 40 percent) of that comes from increased spending on Medicaid. Medicaid has continued to take up a larger share of the state budget. Just 10 years ago, Medicaid took up a little more than 29 percent of the budget; now, it is more than 36 percent. And this is a program that the governor wants to expand.

Other Show-Me oldies are in the new budget. The Wine & Grape Board gets a cool $1.8 million. Biodiesel incentives are still seeing a nice $5.5 million, and the Missouri Agricultural and Small Business Development Authority gets $130,000. Eliminating these won’t lead to a massive windfall, but every little bit helps.

The goal of the Spend-o-Meter is to help break down state spending in order to make it more comprehensible. When people realize that the state is spending close to $800 a second, it could put things into perspective and hopefully make taxpayers care about how the state is spending their money.

Obamacare-Enforcing IRS Employees Don’t Want Obamacare Enforced Against Them

Posted on by Patrick Ishmael

If it’s “good enough” for us, why isn’t it good enough for them?

National Treasury Employees Union officials are urging members to write their congressional representatives in opposition to receiving coverage through President Obama’s health care law.

The union leaders are providing members with a form letter to send to the congressmen that says “I am very concerned about legislation that has been introduced by Congressman Dave Camp to push federal employees out of the Federal Employees Health Benefits Program and into the insurance exchanges established under the Affordable Care Act.” …

Like most other federal workers, IRS employees currently get their health insurance through the Federal Employees Health Benefits Program, which also covers members of Congress. House Ways and Means Committee Chairman Dave Camp offered the bill in response to reports of congressional negotiations that would exempt lawmakers and their staff from Obamacare.

The NTEU joins the roofers and food unions, the Teamsters, the AFL-CIO and other unions that don’t want to be subject to important provisions (for a variety of reasons) in a law they helped pass. If millions of supporters of the law’s passage don’t support even-handed enforcement and implementation of the law, why is it the law of the land at all? And why should it continue to be?

Entrepreneur vs. Government: Fashion Trucks

Posted on by Kacie Barnes (Galbraith)

Emily Ponath wants to bring high fashion to office workers on their lunch breaks in downtown St. Louis. However, Emily’s been unable to get a permit from the city to park her mobile boutique, Rack + Clutch, on public streets. She needs the permit because the regulations that govern other vendors, like food trucks, don’t apply to her fashion truck. St. Louis’s leaders should cut through the red tape and allow Emily and similar small businesses to expand the economic activity downtown through entrepreneurial innovation.

 

What Should Crestwood Do?

Posted on by David Stokes

The Crestwood Tax Increment Financing (TIF) proposal is dead, at least temporarily. Joining it in death is Crestwood Mall, also perhaps temporarily. City officials in Crestwood did the unthinkable and actually questioned the basis for giving large sums of public money to private developers. In return, the developer has reacted to not getting millions of dollars of other people’s money by closing Crestwood Mall (a.k.a. Crestwood Court), and pulling out of talks with the city. That is fine — it is what I would expect.

Perhaps more surprisingly, the city’s urban planning partner, PGAV, has stopped working with Crestwood because, for once, a city didn’t do exactly what PGAV told them to do. Here’s hoping that this example of a city listening to its residents and voters instead of its planning consultants gains a lot of traction.

From a municipal finance perspective, Crestwood’s solution to the closure of the mall is straightforward: join the sales tax pool. As of 2010, Crestwood was receiving $189 per capita for its general sales tax, while the pool cities received about $116 per capita. However, the $189 number has probably gone down a lot since then, and is certainly going to go down fast now that the mall has closed. Joining the sales tax pool is the answer for city finances, both short-term and long-term. Would some services have to be reduced and some taxes raised? Perhaps. But responding to this situation by trying to resuscitate a failed mall with a huge TIF would be insane. Just look at Northwest Plaza to see how that simply will not work.

From the perspective of what to do with the space, that is going to require a commitment to patience and a faith in free markets. Just look at our recent (and now very timely) video about the rejected TIF in Olivette as an example of how good things can and will come without huge incentives if you give it time.

I went to Crestwood Mall plenty when I was younger. I remember its glory days. Those days are not coming back. Reacting to the closure with some huge tax subsidy and more corporate welfare won’t work either. No matter how grandiose the planner’s dreams may be, it does not justify taking other people’s money to give out more corporate welfare. Crestwood officials deserve great credit for their judiciousness so far. Here’s hoping it holds.

For A Few Dollars More (Terminal Financing – Part 2)

Posted on by Joseph Miller

According to the Kansas City Star, adding $14 to every ticket will have little repercussion on Kansas City International Airport’s (MCI) financial position. Unfortunately, it does not accurately reflect how airports operate or the important negative impacts of higher fees at MCI.

The Show-Me Institute post that the Kansas City Star responded to showed that the claims from the Kansas City Aviation Department about the moneymaking potential of a new airport are incorrect. My post ended with the statement that MCI would have to find federal funding, use local taxpayer money, or increase landing fees. The Star rightfully points out that I used rounded-down debt payment estimations — to give the city the benefit of the doubt on finding construction savings.

However, the treatment of the $14 per passenger misrepresents the actual impact to the airport. First, an airport cannot legally place a per-head charge on passengers. Only the United States Congress can do that, and the current cap is $4.50 a person. If MCI requires $14 more per passenger to break even, it will have to pass that cost onto the airlines or find the revenue on its own. Given MCI’s current contracting model, the airport is responsible for terminal debt and needs to either raise fees on airlines or sell $40 million more in hot dogs. While MCI may be able to pass all $14 onto the airlines, it would affect MCI’s ability to find new tenants to increase or maintain passenger volume. In addition, the reliance on airlines for funds means MCI is highly exposed to airline bankruptcy, which in the past has allowed major airlines to push debt onto the airport.

Additionally, the idea that this is just “a day at the movies” is incorrect. Airports compete with each other and various transportation services for customers, and they do so based on market size and cost per enplanement (CPE, or cost per passenger). Having a high cost per passenger can mean fewer passengers, as the marginal leisure traveler chooses not to fly for vacation and businesses decide to economize on airline tickets. This, in turn, reduces airline profits and constricts service, which further pushes up CPE. This is precisely why that measure is a major point in airport bond ratings, and why MCI currently advertises the fact that its CPE is only $5. The Star seems to assume that $19 per passenger, far above the median CPE for peer airports, will have no effect on MCI’s bond ratings or competitiveness.

There is no way to predict the future, but moving from a low-cost, low-debt airport to an extremely high-cost, high-debt airport that has lost passengers over the last decade is risky for MCI and Kansas City taxpayers.

New Essay: Redefining Public Education

Posted on by James V. Shuls

What does it mean to support public education? To some, it means supporting the traditional system of education, whereby students are assigned to a local school based on where they live. In my new essay, “Redefining Public Education,” I discuss why this notion is completely and utterly wrong. Public education is not a system, it is the idea that all students should have access to a quality education at public expense.

For too long we have clung to a system, believing it defined public education. As I write in the essay:

It is time we redefine public education. It should no longer mean assigning students to a specific type of school, regardless of quality, but rather that we provide access to a quality education, regardless of the type of school delivering that education.

Essay: Redefining Public Education by James Shuls, PhD by Show-Me Institute

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