Missouri’s Public Pension Plans Need to Be Reformed to Maintain Solvency

Posted on by John Payne

Public pension systems across the country are falling apart before our eyes. The California Public Employees Retirement Security System (CalPERS), the largest pension system in the country, lost 20 percent of its value during three particularly bad months in 2008. That same year, the city of Vallejo declared bankruptcy after spending 75 percent of its annual budget on pensions for its employees. It might be comforting to think of these problems as limited to California, but that is far from the truth. Citing an analysis from PricewaterhouseCoopers, a late 2009 Washington Post article reported that within 15 years, the average public pension will not possess even half the money required to pay the benefits that they owe. If these systems go bankrupt, either public employees will see dramatic cuts to their retirement benefits — which is a remote possibility, given the strength of public employee unions — or taxpayers will be forced to make up the shortfall.

Although Missouri does not have nearly the range of problems that fiscal basket cases like California have, our state is far from immune to pension woes. The Columbia Daily Tribune reports that its city’s pensions for police and firefighters are underfunded to the tune of $55 million. Earlier this year, budget pressures forced the legislature to enact reforms to Missouri’s pension system, including raising the retirement age to 67 and forcing workers to contribute to their pensions for the first time starting in January. These reforms are positive steps, but we must consider fundamental changes to our system if we want to avoid similar problems down the road.

According to a new Show-Me Institute study written by University of Missouri–Columbia finance professor John Howe, shifting public pensions from defined benefit plans to defined contribution plans could generate higher returns for pensioners while limiting the risk to the public when pensions do not perform well. Defined benefit systems pay out a guaranteed amount of money to pensioners based on a formula that typically uses criteria like years of service and annual salary. On the other hand, defined contribution plans, like the 401(k) and Roth IRA, focus on the amount of money that employees pay in over the course of their careers and give employees more control over how that money is invested.

During the last 20 years, private companies have shifted towards defined contribution plans, but public pensions are still dominated by the defined benefit model. Missouri’s new reforms make the public pension system into a hybrid of defined benefit and defined contribution plans, which is an improvement over a pure defined benefit plan, but still subject to paying more in benefits than it receives in contributions.

The primary benefit to society of a greater reliance on defined contribution plans is that individuals would be more directly responsible for their own retirement funds, as opposed to relying on taxpayers for support. Furthermore, although it is difficult to make direct comparisons between the returns of defined contribution and defined benefit plans, because there are numerous variations of each, Howe cites evidence that defined contribution plans typically outperform defined benefit plans. This can be attributed to the fact that individual employees are generally willing to take on a somewhat higher level of risk than most companies or government agencies.

The downside to this risk is that a few people using defined contribution plans end up with less money for their retirement than they might otherwise have had. However, a system in which a relatively small percentage of pensioners becomes dependent on a social safety net is better than a system in which almost every beneficiary collects more than he contributes — with the difference made up by tax dollars.

All pension systems run the danger of failing to meet employee expectations, but we are less likely to encounter a complete systemic failure if we give greater control of pensions to the people who must live off of them in the future. Public employees are as capable as the rest of the working public to provide for their retirements.

John Payne is a research assistant for the Show-Me Institute, an independent think tank promoting free-market solutions for Missouri public policy.

 

Striking Correlations Between Income Taxes and Congressional Reapportionment

Posted on by David Stokes

Only seven states levy absolutely no income tax. According to the U.S. Census data released today, only eight states will see increased congressional representation, which means they have been growing faster than the national average. Four states (Texas, Florida, Washington, and Nevada) are included in both of those lists.

The other three states — as well as New Hampshire and Tennessee, which tax only interest and dividend income — all stayed at the same number of seats. That means their growth was average, or near average.

All 10 states that lost representation have a state income tax.

According to the Tax Foundation, the eight states gaining seats in congress have an average total tax burden — including taxes on income, sales, and property — ranking of 28.3, on a scale where 1 is the state with the highest tax burden and 50 has the lowest. The 10 states losing seats have an average ranking of 20. If you remove Louisiana from the equation, because of its low tax burden and the fact that that state lost a number of residents after Hurricane Katrina, the remaining nine states have a more striking ranking of 16.7.

Another interesting note is that Washington, which gained a seat, has a high total tax burden but no income tax — and only a month ago, that state’s voters soundly defeated a proposal that would have instituted one.

I don’t claim to have demonstrated causation with this brief review of Census data for a blog post. But the noted examples show a striking correlation between lower taxes overall, and especially the lack of income taxation, for population growth. And when populations grow, economies often grow with them.

To read further Show-Me Institute research about to these topics, please visit the taxation section of our main website.

“But It’s the Thought That Counts, Right?”

Posted on by Christine Harbin

Last week, Freakonomics radio interviewed Steven Dubner about avoiding unwanted gifts and deadweight loss. He contends that when individuals give gifts just for the sake of giving gifts, they tend to destroy wealth and aggregate utility in the economy. Individuals are often focused more on the fact that they bought something (anything) for somebody else, and less on whether the gift will generate any real utility for the recipient. I bring this up because it’s a topic that we’ve previously discussed on Show-Me Daily. From the interview:

RYSSDAL: So anyway, it’s called “deadweight loss.” It’s that thing where my wife’s great-grandma buys me a sweater at $85 and to me it’s worth like $1.50. Because I don’t like it.

Most people enjoy finding gifts for others. I suspect that this negates a nonzero amount of dead-weight loss. However, this only occurs when the gift is well-fitted to the preferences of the recipient. Value is not added when you give your friend something that she hates. Additionally, she may have to endure the costs of storing and loathing the gift.

The act of searching for presents takes a lot of time and energy, and this increases their cost because individuals could be spending their time engaged in other activities. I’m one of those “clickers and gifters” described in the interview. Although I still experience high search costs, I find efficiency gains elsewhere (e.g., avoiding the mall).

Our staff recently did a Secret Santa exchange, and we instituted a $10 cap. I gave Jim a $10 bill. I find utility in the fact that I didn’t destroy any wealth in that transaction. I suspect that Jim finds utility in the fact that he may buy something that he actually wants.

Medical Licensing in Missouri

Posted on by David Stokes

The Post-Dispatch is currently publishing a thorough series about how the Missouri state medical board disciplines doctors for medical errors or other crimes in Missouri. I commend the Post for the detail that the series includes. I, like a lot of people, think that long-form investigative journalism is the type of content that will keep newspapers a part of our lives going forward. You can’t just replace a series like this with bloggers.

There is a lot of good information in the series, and there are some solid recommendations for improvement in medical care. There are also some suggestions that make no sense at all, and the articles take some harsh and inaccurate shots on people I have known for a long time. For example, I don’t think there is anything wrong with a lawyer who represents doctors in civil cases serving on the medical licensing board. However, should the board itself have more than one public member? That is another question, but a good one raised by this series. I think the answer is that it should, which is similar to what I recommended a while back for judicial appointment boards.

This is the first time that I have blogged about a story in which my own dad is quoted, although the quote itself is not germane to this post.

The heart of the story is that Missouri’s medical licensing system is not strict enough. There are some frightening stories here about how doctors who have harmed people can continue to practice, leading to greater harms. Closely related are stories about doctors who have committed crimes unrelated to practicing medicine, who also continue to practice.

Not surprisingly, the series has led to calls for the licensing board to toughen up the penalties for doctors. That is different and more defensible than calls to toughen up the licensing of doctors in the first place. However, I think that the best improvements are the ones that involve making more information about doctors available to the public so that patients — and hospitals who hire doctors — have better data available all along. As Sen. Bill Stouffer said, in a quote with which I entirely agree:

State Sen. Bill Stouffer, R-Napton, said changes to the state laws should start with making the letters of concern a public record and allowing patients to compare doctors’ performance.

“I think transparency would cure a lot of our problems in health care,” Stouffer said. “It’s amazing what the light of day cleans up.”

We do have a system in which doctors who harm patients can be held accountable. It is our very robust civil court system. I supported tort reform back in 2005, but even with those needed changes, doctors that irresponsibly treat patients can still be readily held accountable. Is that enough, though? Do we need tighter changes to state criminal penalties and licensing restrictions in order to monitor medical care?

If those changes involve improving the information available to everyone, then I support them, although I understand that concerns of doctors who would fear that some members of the public would not be able to tell the difference between a bogus malpractice suit and a legitimate claim.

If the changes involve restricting the license to practice medicine for those convicted of a crime related to medical care (i.e., sexual abuse of patients, or Medicare fraud), then I can also support that. If the changes involve restricting the license to practice for those convicted of a crime unrelated to medical care, then I have to question the benefit of stripping their license. If they commit a crime, they should receive the proper punishment for that crime. I fail to see why, after they have served the punishment for that crime, they should not be allowed to earn a living in their profession. A person who does not pay taxes on their rental property at the Lake of the Ozarks should be properly punished for that, but not prevented from filling my cavities or diagnosing the debilitating case of globophobia I currently suffer from.

So, don’t come after me and ask whether I think a child rapist should be allowed to practice medicine, because child rapists should receive prison terms long enough to make the practice of medicine moot.

Surprise! Freely Given Away Taxpayer Money Attracts Criminals

Posted on by Audrey Spalding

As my colleague Christine Harbin mentioned yesterday, the Associated Press reported on Friday that the president of Hometown Innovation Team, a Cape Girardeau development company and recipient of $2 million in state tax money, pleaded guilty to passing bad checks about three years ago worth more than $90,000.

Of course, this news came out after the state awarded the company $2 million in state tax credits and other subsidies and after Gov. Jay Nixon traveled to Cape Girardeau to promote the project.

From the AP:

Nixon spokesman Sam Murphey said Friday that the governor’s office was unaware of Dickerson’s criminal probation before Nixon traveled to Cape Girardeau last week for the news conference with Dickerson and other local officials to announce the state aid. At the time, Nixon, a Democrat, described the project as “wonderful news for Cape Girardeau’s downtown and the overall economy of this region.”

I hope the governor isn’t surprised. Former felons are surprisingly frequently awarded state credits. And in Missouri, the state Department of Economic Development is known for mis-recording numbers provided by tax credit recipients (those mistakes result in an overstatement of a tax credit program’s success).

Even better for dishonest (or careless) individuals and companies, the department will correct a tax credit application (even working during the holidays) if you happen to substantially overstate the amount of money the state should pay you. After all, there’s no state law that specifically prohibits fraud in tax credit applications, right?

This lack of oversight will tend to attract individuals excited by the prospect of money that can be obtained by making promises — with little to no obligation to deliver on those promises.

This is the problem of government subsidy for “economic development.” Not only are such tax credits and other subsidies generally awarded to the least successful businesses, and not only are these subsidies usually extraordinarily bad at producing tangible benefits remotely worth the taxpayer cost, but if government officials aren’t even bothering to do the basic legwork it takes to discover whether an applicant has a record of fraud, how can tax credit programs be anything other than an excuse for press conferences to announce “jobs” that likely will never materialize?

From the Southeast Missourian:

Mayor Harry Rediger said he was not aware of Dickerson’s criminal past until earlier this week and that Dickerson had been upfront with city officials, telling them he had personal financial problems in the past.

“We knew earlier on that he had a previous bankruptcy. We did not know about a probation,” Rediger said Friday.

He had a bankruptcy? That wasn’t enough to spend a little more time and care reviewing the tax credit application? Is that type of past really the kind that should be glossed over when awarding state money?

Rediger continues:

“We are not really concerned about his past record. What we are concerned about is that he and his entity meet the state standards required to receive this funding.”

Of course. With such stalwart watchdogs over taxpayer money, who needs theft, waste, or corruption? I know I am not the only Missouri taxpayer upset that the state spends money so carelessly. When the legislature reconvenes in January, I hope that legislators consider the bad track record of state credits in general and the recent failings of Missouri’s administering of tax credits specifically.

I’m Tempted to Spend My Day on Missouri Case Net to See What Else Can Be Uncovered

Posted on by Christine Harbin

The subsidized health care cooperative in Cape Girardeau that I recently discussed is back in the news. From an article at the Missouri Watchdog:

It turns out that the project is led by a man who is currently on probation after pleading guilty in 2007 to passing more than $90,000 in bad checks, according to court records obtained by The Associated Press, which reported the story Friday.

This is not an isolated case — Michigan has also had problems with issuing tax credits to convicted embezzlers, and Iowa has had particular difficulty with its film tax credit program, as I have discussed previously. A negative consequence of targeted tax credit programs is that they sometimes encourage crimes.

Perhaps this is an indication that the state is issuing targeted tax credits too quickly to keep track of them.

Because they are dealing with taxpayer monies, government officials in Missouri should take steps to ensure that the state’s resources are put toward their highest uses, and also that they are going toward their intended use.

A Market Failure in Outdoor Advertising?

Posted on by Thomas Duda

The Land Reutilization Authority (LRA) Commission held its final meeting of 2010 on Wednesday morning. One of the commissioners sported a festive, illuminated vest, but his shiny allusion to the holiday season was the only curiosity of note — the only curiosity, that is, until the commission started voting.

In one of its final actions of 2010, the LRA Commission voted — with two of its three members present — to approve a lease agreement with CBS Outdoor that will permit the LRA to capture revenue from billboards that recently entered the public corporation’s land holdings.

That’s right. In St. Louis city, government owns billboards.

Perhaps I’m old-fashioned, but I see no rationale for government ownership of billboards. Does a market failure really exist for outdoor advertising in St. Louis city?

Although the LRA nominally purports to represent the interests of the St. Louis mayor, comptroller, and Board of Education, little of the public corporation’s revenue ever seems to reach city taxing districts. Furthermore, billboard revenues are not the panacea for the city’s long-term fiscal problems.

Oddly enough, the LRA Commission’s action in 2010 directly contravenes the actions of the LRA Commission in 2001. During the April 25, 2001, meeting of the commission, a commissioner “asked that staff investigate the location and condition of [the LRA’s] billboards, so they can determine how the LRA can get out of the billboard business, in a reasonable amount of time.”

This is not the first case of “mission creep” for the LRA, and I doubt that it will be the last.

My hope for the new year is that the LRA will do right by the taxpayers of St. Louis city by selling its assets. Privatization broadens the tax base, which should lower marginal tax rates.

Major League Tradeoffs

Posted on by John Payne

Would you work one year for $1 million? Before you answer, you should know that your work would be playing Major League Baseball for the reigning champion San Francisco Giants. Most people would leap at the chance both for the money and the experience, but not Edgar Renteria. Renteria mostly played off the bench this season, but in years past he was a premier defensive shortstop and handy with the bat, hitting the walk-off single in game seven of the 1997 World Series for the Florida Marlins. (He returned to the Fall Classic as a Cardinal in 2004, where he also initiated the final play of the series — a ground out to finish off the awful four game sweep by the Red Sox — but that incident was not indicative of the quality of his play that year or in that series.) Despite struggling in the regular season this year, Renteria bounced back in the World Series with two home runs and earned the series MVP award, which might be why he was expecting a bit more than $1 million:

“To play for a million dollars, I’d rather stay with my private business and share more time with my family,” he said. “Thank God I’m well off financially and my money is well invested.”

Now, many people will look at this and see an example of an overpaid sports star, greedily seeking an ever larger pile of money, but I think it nicely illustrates two economic concepts: diminishing marginal utility and opportunity cost. Playing Major League Baseball is a major time commitment (162 regular season games per year, 81 of them on the road), and, according to his statement, his next-most-valued use of that time is spending time with his family in Colombia, so giving up family time was his opportunity cost to earn those huge salaries. However, Renteria has earned many millions of dollars over the years, and apparently he has invested it wisely, so each additional $1 million is worth far less to him than the first million he made. As his baseball salary dwindles, the amount of time he has left to spend with his family is also shrinking, so that good is becoming ever more valuable. Whereas $1 million was easily worth the opportunity cost for a childless and dramatically poorer Renteria in the early nineties, it’s simply not worth the effort now that he is financially comfortable with a family to tend to.

In a similar fashion, income taxes artificially encourage people with the means to opt out of the labor market to consume more leisure. There’s nothing wrong with that choice, but, as a consequence, society will be a little poorer without the wealth that this labor would have created. Consequently, we should minimize the distortionary effects of taxes by keeping them low and let markets signal what people need and want through prices.

Actions Speak Louder Than Words

Posted on by Christine Harbin

Not only is Gov. Jay Nixon communicating opposition to recommendations from the commission that he created (as I have discussed previously), he is continuing to issue targeted tax credits to companies. From an article in the Columbus Business Journal:

Incentives from the state of Missouri are helping Scotts Miracle-Gro Co. build a new production and distribution facility there.

The Marysville-based lawn and garden care company will receive more than $350,000 in tax credits and grants in exchange for investing $8 million in a new fertilizer production operation in Wright City, Mo., expected to employ 14 upon opening and 25 once fully operational.

Actions speak louder than words. Although the governor may vocalize opposition to tax credit programs in Missouri, his actions suggest otherwise.

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