TIA uses full accrual accounting, which tracks not just current bills but also long-term promises such as pensions and retiree healthcare. Unlike state budget reports that can hide liabilities, TIA’s numbers tell the fuller (and often less flattering) story.

This year, Missouri reported a Taxpayer Surplus™ of $200 per taxpayer, meaning the state had enough money on hand to pay all its current bills with a small cushion left over. By TIA’s definition, that just clears the bar for a “B” grade, which applies to states with a surplus between $1 and $9,999 per taxpayer.

The grade reflects a genuine, if modest, improvement. In 2023, Missouri’s shortfall stood at $700 per taxpayer. That was enough to earn a “C” and a middling 25th-place finish nationally. In years prior, the story was worse: in 2020, the state’s Taxpayer Burden™ was $4,400.

So what’s behind the jump from “C” to “B”? Mostly, factors outside the state’s control. According to TIA’s report (page 83): “Missouri may lose $6.5 billion in federal funding (16 percent of expenses) if allocations return to 2019 levels, adjusted only for inflation.” That funding came largely through pandemic-era support, and it helped cover immediate costs. But it isn’t permanent.

Meanwhile, strong stock market returns—especially in 2022—helped reduce Missouri’s reported pension liabilities. Yet these gains are fragile. They can quickly disappear in volatile markets, as TIA’s report explains, and they don’t fix structural imbalances in how pension systems are funded.

Those structural issues remain. As Sheila Weinberg, founder and CEO of TIA, put it in a recent correspondence: “even with a 26% investment return in 2022 and an additional $1.1 billion contribution in 2023 . . . the state’s contributions and investment income are not enough to keep pace with the interest and new benefits accruing on the pension debt.”

That’s a concern taxpayers should take seriously. Missouri’s pension systems, especially the Missouri State Employees’ Retirement System (MOSERS), have long carried unfunded obligations. The surplus reported today is in part a reflection of how those liabilities are calculated—not a signal that they’ve been resolved.

That brings us back to the bigger issue: standards. Missouri, like nearly every other state, follows Governmental Accounting Standards Board (GASB) rules, which permit states to understate liabilities and delay recognizing certain costs. TIA recommends moving instead to the standards used by publicly traded companies: full accrual accounting and ERISA (Employee Retirement Income and Security Act)-like funding requirements for pensions.

Judi Willard, TIA’s communications director, summarized the case for changing standards plainly: “[these reforms] will create long-term stability for the states, create transparency in government spending and protect the taxpayers from unscrupulous elected officials who would rather spend now and pay later, which sadly the current accounting standards allow.”

There’s merit to that argument. Missouri’s improved ranking may be encouraging, but it is not a sign that long-term fiscal problems have been solved. The gains are largely circumstantial. Without broader reform in how the state budgets and reports its obligations, today’s surplus could just as easily become tomorrow’s deficit.

So yes—credit where it’s due. Missouri’s “B” grade reflects careful budgeting, a resilient economy, and a short-term boost from federal aid. But structural pension pressures remain. Federal dollars are fading. And the state’s accounting standards still obscure the true cost of government.

A budget that only looks balanced on paper won’t protect taxpayers in the long run.

The post Missouri Earns a “B” in New Fiscal Report—but Don’t Pop the Champagne Yet appeared first on Show-Me Institute.

The immediate aftermath of Amazon’s announcement featured the kind of Democratic recriminations that are the thing of Republican fever dreams. On one side were establishment Democrats like Andrew Cuomo and Bill de Blasio, who like many politicians are conventional when it comes to tax incentive–laden economic development strategies; on the other side were Democrats like Alexandria Ocasio-Cortez, who viewed the tax incentives as denying revenue to state and local government services.

At first, conservatives on Twitter were “rooting for injuries” and joking about the Left’s internecine conflicts. But eventually the conventional wisdom on the Right seemed to coalesce around the Cuomo and de Blasio perspective on tax incentives. It’s crazy, they said, that AOC would have come out against a tax incentive package that would have brought (more) Amazon jobs to New York! Think of the jobs!

But while conservatives delighted in the aftermath of Amazon’s exit as an opportunity to proclaim Ocasio-Cortez’s economic ignorance, Ocasio-Cortez is more correct about the Amazon deal than she is wrong, and far closer to the path of good tax policy than many conservatives.

In fact, there is a larger seen vs. unseen consideration in the Amazon debate that centers not only on whether the average “economic development” project would go forward even without a tax incentive, but also on the overall impact of profligate tax incentive policies on governance objectives generally.

First, we cannot know for sure whether Amazon would have come to New York without, or with reduced, tax incentives, but we do know that the bookies who handicapped Amazon’s search always had Virginia and New York among the favorites for the HQ2s, in no small part because both already had highly skilled workforces, to say nothing of their preexisting proximities to power. In fact, many tax incentive offers to Amazon from other states far exceeded the value of New York’s. Amazon’s statement on its HQ2 withdrawal from New York can easily be read not as one ultimately about the cash, but about the public relations fiasco Amazon was about to endure at the hands of New York’s activist class.

The question of whether, or to what extent, incentives are necessary isn’t just an issue in the case of Amazon, either, and research into the incentives that include or imply “but for” language— “but for the incentive, the project won’t happen” —are helpful here. For example, a study by the W.E. Upjohn Institute published last year reveals that the vast majority of businesses that receive tax incentives under a “but-for” rubric likely would have pursued their projects even without the incentive: that many of these projects are getting tax incentives not because the project wouldn’t happen without them, but because business interests have become accustomed to receiving them and know how to work the system to get them. The result? As local tax incentives proliferate, fewer and fewer taxpayers become responsible for greater and greater portions of local government funding.

This failure of stewardship on the part of governments across the country costs state and local taxpayers billions of dollars annually. That impacts not only government services, including roads and education, but also the ability of a government to reduce taxes for everyone, if it so desired. The city of Kansas City, Missouri, where I’m from, redirects $90 million annually from its budget through tax incentives, but that doesn’t include the additional $45 million that those decisions also redirect from the city’s public schools and other taxing districts, who rely on these tax streams but have relatively little say in their diversions.

Joining this concern with Upjohn’s findings, it’s clear in the case of Kansas City that tens of millions of dollars every year aren’t going to kids, to roads, or to other necessary projects simply because some connected businesses want special taxing treatment for projects they would undertake even if they did not receive the incentives.

In some respects these revenue diversions are only now coming into sharper focus with the promulgation of new GASB accounting standards requiring greater transparency about the money that governments across the country are forgoing in the name of “development.” If you haven’t looked up how much your local and state government is giving away, you probably should; it will reframe the financial picture the next time those governments come to you claiming to be cash poor and looking for tax hikes.

Would some tax incentivized projects be withdrawn if there was no tax incentive? Certainly. Would most others proceed as planned? Evidence suggests that they would.

I’m not arguing that Amazon specifically would have come to New York with no, or fewer, tax incentives, as no one really knows the answer to that question; I’m also not arguing that New York government “deserves” to be funded at a higher level and that Amazon’s HQ2 departure will allow that.

What I’m arguing is that Amazon and other private companies play state and local governments against each other for their own financial benefit, and that politicians are usually more than happy to be played for the sake of donning their hard hats and planting a spade in the ground in front of a bunch of cameras.

What’s mystifying to me is that while national conservative pundits (rightfully) guffaw at the idea of ethanol and sugar cane subsidies and all the rest, that they may not view state and local tax policy failures as similarly deserving of unambiguous and pointed criticism. Perhaps in the context of the players involved – Amazon, Jeff Bezos, Alexandria Ocasio-Cortez, Bill de Blasio and Andrew Cuomo – it is simply too delicious to watch the conflagration of cultural and economic trainwrecks, and comparatively disadvantageous to say, however plainly, that both Amazon and New York will be just fine, and that these tax incentive deals are rarely in the interest of the taxpayers who subsidize them.

More to the point, conservatives would do themselves a favor by recognizing clearly, and repeating loudly, that tax incentives are not indicative of healthy “tax competition,” and that deals like the one struck between Amazon and New York are instead a showcase of a national policy disease that rides the paychecks of individuals and small businesses across the country, to dole out money to the enterprises of the well-connected.

Milton Friedman was right:

You talk about preserving the free market system. Who has been destroying it? The business community must take a large share of the responsibility. … You must separate out being pro-free enterprise from being pro-business.

New York was pro-Amazon; it wasn’t pro-market. And conservatives would do well to focus on the latter approach as their guiding principle on these and similar matters of local tax policy in the future, regardless of the state, and regardless of the players involved.

The post New York Shouldn’t Have Offered Amazon $3 Billion. No One Should Have. appeared first on Show-Me Institute.

A new government accounting standard known as GASB 77 theoretically requires public districts to disclose how much revenue they have foregone because of tax abatements. While GASB 77 provides a starting point, in the first year of reporting under this rule lost revenue was greatly understated—mostly because of carve-outs from the reporting requirements and misunderstanding of how to implement the rule.

Nonetheless, the numbers reported by the governments themselves show that the affected districts lose out on tens of millions of dollars every year. Instead of funding education, libraries, and other services, this money ends up in the bank accounts of private developers who in most cases don’t need subsidies to finance their projects.

About half of all public school budgets comes from local property taxes—so it matters that Missouri’s school districts lost out on nearly $100 million in fiscal year 2017 alone. St. Louis Public Schools missed out on at least $10.5 million, or nearly 3 percent of its annual operating budget, while Kansas City Public Schools lost out on at least $24 million, or nearly 10 percent of its annual budget.

The effect incentives have on other smaller districts, like Ste. Genevieve County R-II School District (1,858 students in 2018), can be even more significant than the larger ones. The amount forgone in fiscal year 2017 was $7.8 million. But with only about 4,500 students in the district, that’s equal to $4,172 per student.

Libraries also took a hit. According to the reports we examined, the 20 largest library districts across the state lost out on at least $6.8 million. A significant chunk of that foregone revenue came from the St. Louis Public Library, which missed out on $1.1 million (nearly 4 percent of its annual operating budget) and the Kansas City Public Library, which missed out on $2.5 million.

These numbers give taxpayers an idea of the cost when policymakers decide to put developers’ interests ahead of basic government services. But even the statistics above fail to capture a significant amount of the total revenue lost. GASB 77 is a step in the right direction, but more transparency is needed.

During a time of teacher protests and tax hikes, these figures give taxpayers an idea of how much money has been diverted from schools and other public services. The next time local officials stump for more revenue, ask them this: What did you do with the taxes we already sent you? Unfortunately, many have been giving them away through tax incentives.

The post Tallying the Costs of Development Subsidies appeared first on Show-Me Institute.

For us at the Show-Me Institute, the additional reporting requirements and transparency are a good thing. They largely confirm our assertion that Kansas City gives away far too much of its own money and the money of other taxing jurisdictions such as schools and libraries.

While the city diverts just under $90 million of money it would receive from sales, utility and income taxes to developers, this does not include the money from property taxes that would otherwise go to other taxing jurisdictions such as school districts. That amount, according to the Journal, is just under $42.5 million.

So taken all together, the city itself is reporting that the costs of economic development subsidies is $132,311,000. This does not include other costs, such as the $14 million the city allocates from the general fund to cover the debt incurred by the Power & Light District. (See FY 2018-19 budget, p 63.)

That brings the total up to at least $146 million every year.

Long-time followers of the Show-Me Institute will not be surprised by any of this. We have consistently pegged the cost to taxpayers of subsidies at, “north of $100 million a year.” This has garnered howls of denial from The Kansas City Star editorial board (read here and here) and dismissals from city leaders. GASB is requiring the city to account for its handouts in a more transparent manner, and for that we should all be grateful.

The post The Great GASB appeared first on Show-Me Institute.

For those unfamiliar with the current pension debate, here’s a crash course: A pension plan’s funding ratio is the value of its assets (contributions to date) divided by the present value of its liabilities (discounted sum of its future payments). Between today and when the future payments are due, contributions will be put in and investment returns will be realized on the plan’s assets. Of course, the future contributions necessary to ensure a fully funded plan depend on the returns that are realized. In other words, if a plan’s returns fall short then contributions will have to fill in the gap. Current General Accounting Standards Board practices allow a pension fund to discount its future payments at the rate that fund managers expect returns to achieve, but in recent years economists have argued against valuing a plan’s funding ratio this way due to the simple fact that while investments might reach the expected goal, the funds for retiring employees must be paid.

Many economists note that current estimations don’t guarantee goals will be met, and that the safer way to estimate how well-funded a plan is involves discounting future payments as if they came from risk-free investments (i.e., treasury bonds). Mercatus listed each state’s funding status, first according to the state’s assumed investment return rate and then according to the risk-free rate, revealing a staggering gap. The graph below shows the difference between the ratios using the assumed rate and the risk-free rate for each state.

When determining a state’s funding ratio, the two methods produce an average difference of 34%. Missouri’s funding ratio drops 38%, with a difference of 64.84 billion (yes, that’s billion with a B). To be clear, this chart does not mean taxpayers will have to make up all or part of the difference, but the discrepancy in valuation shows the drastic potential costs taxpayers could be burdened with if investment returns don’t live up to their current expectations.

The types of investments that pension plans hold are up to the discretion of their managers, but these numbers are no small chunk of change. If states are going to guarantee retirement funds, they may want to consider a risk free measurement system that will ensure they are prepared to pay employees what is promised.

The post What’s $65 Billion between Friends? appeared first on Show-Me Institute.

Last week, Bellwether Education Partners reported that Missouri is one of only 10 states currently spending more on public employee retirement programs than on higher education. You read that right. We spend more on pensions for public employees than we do for all of our state’s public colleges and universities.

Just a few days later, the St. Louis Post-Dispatch reported that the state treasurer was revising downward the expected rates of return for the money in the state’s pensions systems to adjust to slower growth in the stock market. This means the funds themselves are even more underfunded than we thought and may need huge infusions of tax dollars to meet their obligations to the state’s workers.

Add this news to what we already know about pensions, and the full, dismal picture emerges. Remember, teachers in PSRS, the state’s main teacher pension system, must spend at least 28 years paying into the system before their retirement earnings will exceed what they contributed while working. Sixty-five percent of Missouri teachers will not hit that mark and will be net losers in the system. In addition, state pension funds are investing in increasingly risky investments in order to chase higher returns.

What more do we need to know before we push for change?

Most public employees in Missouri belong to what are known as defined-benefit pension plans.
These guarantee a pensioner a specific amount of money every year for the duration of their retirement. In most cases, the amount these plans pay out to retirees is not based on how much money an employee has contributed, but rather on a formula that only takes into account a few years of service. For teachers in PSRS, only the three highest consecutive years’ salaries are used in retirement calculations. This allows individuals who get large pay increases in the final years of their careers to draw considerably more than they ever contributed into the retirement system.

In order to keep the promises Missouri makes to public employees through these plans, the state will face mounting pension obligations. In a recent paper for the Show-Me Institute, Andrew Biggs, resident scholar at the American Enterprise Institute, calculated Missouri’s unfunded pension liabilities. Using standard methods from the Government Accounting Standards Board, the unfunded liabilities are nearly $17 billion.  Using more conservative estimates,  the unfunded liabilities total between $57 and $89 billion depending on the means of calculation.

As liabilities grow, state support for pensions will have to grow as well, and funding for pensions has to come from somewhere. It may come from other public programs, such as higher education, or it may come from taxpayers. The debts we are incurring now will limit our ability to invest in the future of our students and our state. That is a recipe for neither growth nor prosperity.

The post Missouri’s Pension System Must Change appeared first on Show-Me Institute.

As it turns out, the error might have been in the system since 1991, making it older than all of the students in the Belton School District.  Pretty embarrassing.

But there is also a lesson we can learn from this.

In SMI’s 20 for 2020, we recommended requiring clear tax incentive reporting by cities on their financial statements. As we wrote:

“Consistent with recommendations from the Governing Accounting Standards Board, Missouri cities should clearly identify in their financial statements the projects that the city is, and will be, subsidizing.  Moreover, each city should be required to publish every tax incentive liability that it has incurred, proving this information either as a part of a city’s financial statement or as an annually produced and readily available separate document. If local officials want to spend taxpayers’ money on other taxpayers, that money should be clearly and regularly disclosed.”

Perhaps if the city and county had made these figures easier to access, such an error—that over time cost the children of the Belton School District a huge sum of money—would have been caught earlier.

The post Belton Schools have been getting shorted $500,000 per year. There is a lesson here. appeared first on Show-Me Institute.

I don't share his policy view on this matter, but I would like to see the same "naming and shaming" program applied to corporations who accept public subsidies from municipal government. And I am not alone. My colleague Patrick Ishmael recently wrote about new standards from the Government Accounting Standards Board (GASB), In short, the new standards increase the amount of information that local governments have to publicly report about the number and type of tax abatements.

One shortcoming of the new standards is that they do not require localities to list the various subsidies by company. This would be an additional measure of government transparency that localities could adopt on their own through city ordinances. It would tell us which companies are the welfare queens of crony capitalism.

The post Naming and Shaming Corporate Welfare Queens appeared first on Show-Me Institute.

Well, earlier this month GASB issued long-awaited guidance on local tax abatement reporting, and it's a doozy for abatement-happy governments. From GASB's Statement:

This Statement requires governments that enter into tax abatement agreements to disclose the following information about the agreements:

• Brief descriptive information, such as the tax being abated, the authority under which tax abatements are provided, eligibility criteria, the mechanism by which taxes are abated, provisions for recapturing abated taxes, and the types of commitments made by tax abatement recipients

• The gross dollar amount of taxes abated during the period

• Commitments made by a government, other than to abate taxes, as part of a tax abatement agreement.

The accountants out there can find greater detail about the policy change at the link above.

Also, this story from American City & County magazine has an excellent rundown of the reactions to GASB's guidance seen in the policy sphere.  Greg LeRoy of Good Jobs First, while generally supportive of the change, notes that GASB's guidance doesn't necessarily require local governments to disaggregate tax abatements by company, and I do think that's a shortcoming of the reform. The other reservation I have is that many of these reforms won't become effective until later this year, with the first round of data becoming available sometime in 2017. I hope that in the interest of being proactie and transparent, local governments in Missouri will release a version of this data well before then.

Overall, GASB's reform is a significant improvement over the status quo. Tax abatement liabilities have long been a public policy concern; it's terrific that local governments, many of which have been less than forthcoming about them, will now have to reveal those costs annually.

The post Big News: Accounting Board Beefs Up Tax Abatement Disclosure Requirements appeared first on Show-Me Institute.

As reported in The Nerve,

. . . state and local governments for the first time would have to report, among other things, in their annual financial statements:

• General description of their tax abatement programs;
• The total number of tax abatement agreements entered into during the reporting period, and the total number of agreements in effect at the end of the period;
• The dollar amount by which the reporting government’s tax revenues were reduced during the reporting period because of tax abatement agreements; and
• A description of the types of commitments other than to reduce taxes—for example, tax dollars spent on purchasing land and installing utility lines—and the most “significant individual commitments other than to reduce taxes, if any, made by the reporting government in tax abatement agreements.”

Translation? Governments would have to disclose, in a standardized format, exactly how much money they give away. That’s a huge paradigm shift, both from the standpoints of government transparency and public research. Greg LeRoy of Good Jobs First, a Washington, D.C.-based think tank that looks at tax incentives, called the development “tectonic.” “These things (incentives) have gotten so out of control, so overgrown, so arcane—it’s been off the radar.”

LeRoy is right, of course. If local and state governments have to divulge all of the relevant details about the incentives they’re giving away, it could have a huge impact on how governments interact with tax incentive beneficiaries—and how taxpayers view the tax incentive programs themselves. As explained in the blog Next City,

Cold, hard numbers could soon settle the heated debates about whether tax incentives encourage regional growth and competitiveness or simply deplete public resources. LeRoy argues that any site location consultant for a corporation could tell you that tax breaks often don’t affect the bottom line: State and local taxes comprise less than two percent of a company’s total cost structure. Other environmental factors like labor, logistics and materials matter much more. But companies would never admit that to the governments offering them free money.

Like other places around the country, Missouri’s tax incentive programs are a mess. If GASB institutes robust accounting standards for these incentives—and it appears it might—it may go a long way to draining the cronyism swamp in this state. Cross your fingers.

The post Tax Incentives: How Much Money Do Governments Give Away? appeared first on Show-Me Institute.

These pension plans have come under increased scrutiny as funding levels have dropped and required contributions have risen. According to standard actuarial accounting, the average public pension funding fell to about 75 percent in 2011, versus 103 percent in 2000. The Annual Required Contributions that state and local governments make to public pensions have more than doubled in nominal terms since 2001, a period in which prices rose by only about 25 percent. Public sector pensions, as of mid-2011, were underfunded by approximately $885 billion, based on accounting rules that the Governmental Accounting Standards Board established and applied to a large sample of plans from the Public Plans Database.

A similar pattern holds for the Missouri public employee pensions, which serve state and local government employees. Annual required contributions have risen and measured funding health has declined. Most Missouri public employees participate in one of five retirement plans . . .

The post Public Employee Pensions in Missouri: A Looming Crisis appeared first on Show-Me Institute.

Unfortunately, many of the existing liabilities identified have already been deferred well into the future, and any asset losses will further increase costs just as recognized future asset gains will decrease costs. The assumed annual asset long-term expected return rates for the plans studied range from 8.0 percent to 8.5 percent.

This study serves as a primer, and analyzes the financial position of the major public pension systems in Missouri as of July 1, 2007. While the July 1, 2008, actuarial reports are being compiled, such reports will not reflect the more recent and significant widespread financial decline of assets. As such, the conclusions in this paper should be read with this fact in mind.

Retiree medical obligations are also examined, given the required changes in accounting treatment under Government Accounting Standards Board (GASB) Statements 43 and 45. This change effectively requires public entities to quantify and account for current and future benefits in a manner generally similar to pensions.

Given that, effectively, these employee benefits plans are highly political institutions, any reform efforts will prove difficult. Three important goals should be to have benefit costs that are current, predictable, and affordable.

When comparing the major Missouri public pension programs to the private pension programs of 18 major Missouri employers, three conclusions are evident. First, many employers, both in Missouri and nationwide, have reduced or eliminated defined benefit plans in favor of defined contribution plans. Second, Missouri’s pension benefits and retiree medical plans are on average much more generous than private-sector benefits in the state. Third, the major public pension programs currently have a funded ratio below the 100 percent level. This creates the potential burden of heavy legacy costs, which will almost certainly be borne primarily by a future generation of taxpayers. In contrast, private-sector pension plans are now required to be at least 100-percent funded over no more than a seven-year period.

The author hopes that this paper will educate and provide an increased public awareness for informed action about this important set of topics.

The post Missouri’s Challenge: Managing Long-Term Employee Benefit Costs appeared first on Show-Me Institute.