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New Jersey's General Assembly votes on toothless reforms today
So much for reform.
This afternoon, the New Jersey General Assembly will vote on Assembly Bill 3393, a measure that would make several changes to the process by which municipal governments and police and fire unions negotiate contracts. Among the changes in the bill is a new method for choosing an arbitrator, including new requirements for arbitrators and a new appeals process. Additionally, arbitrators will be required to consider the impact of their award amount on the governing authority, but there is nothing in the bill to require restrain the awards.
Although Assembly Bill 3393 is being called a "reform," it is a toothless reform at best.
New Jersey police officers and firefighters use arbitrators to settle disputes arising from their contracts. But over the years, the arbitration process has been abused. Over the past 30 years, the salaries of police officers and firefighters have risen faster than all others, according to the New Jersey League of Municipalities. These increases in salaries have been the primary driver of increased government costs, which have led to New Jersey's highest in the nation property taxes. Although New Jersey passed a historic 2% property tax cap earlier this year, those taxes will continue to rise unless the cost of government is brought under control. The only way to do that is to enact a cap on the arbitrators awards like the cap on property taxes.
Unfortunately, New Jersey's General Assembly seems more interested in protecting the union interests rather than the taxpayers interests. By moving toothless legislation, the General Assembly does not address the underlying problem of controlling the costs of government. What it does do is rob the effort to reform New Jersey of momentum, which is badly needed in Trenton given the unsustainable fiscal situation in the Garden State.
Hopefully, the State Senate will demonstrate that it has a better understanding of the problems facing New Jersey. Stay tuned...
Hopefully, the State Senate will demonstrate that it has a better understanding of the problems facing New Jersey. Stay tuned...
Got questions about ballot measures? NTU's Ballot Guide has answers
Voters face many important decisions in the upcoming elections, which are now less than three weeks away. But many of these critical decisions will not involve choosing between the names of candidates. Instead, voters will have to choose between letters and numbers identifiying hundreds of state and local ballot measures, many of which could have an especially profound impact on tax, spending, and other fiscal policies for years to come and regardless of which political party triumphs in the state houses. To help taxpayers better understand these measures, NTU has produced and made available on our website "The 2010 Ballot Guide: The Taxpayers Perspective."
Our Guide is more than just a list of measures. The Guide is an analysis of these measures on the state and local ballots across the country, providing evaluations of how these measures grow the size of government and increase the tax burden on hard-working families. Unfortunately, there are many such measures on the ballot according to the Guide. However, many other measures on the ballot will give taxpayers opportunities to exercise a greater degree of control over government tax, spending, and regulatory powers.
Here are some highlights from the pages of the Guide:
We hope you find the Guide useful in evaluating the choices awaiting you at the polls. Be sure to check back with NTU after the election for our report on how taxpayers fared.2 Comments | Post a Comment | Sign up for NTU Action Alerts
Overvalued and Underfunded: New Jersey’s Pension Time Bomb
“Trenton Makes, the World Takes” – the slogan that hangs from the trusses of the Lower Trenton Bridge between New Jersey to Pennsylvania serves as a reminder of New Jersey’s once robust economic history. However, nowadays “Trenton Takes More of what the Taxpayer Makes” is more befitting as New Jerseyans are on the hook for billions of dollars to finance the state’s seriously underfunded public worker pension system.
Public sector pension plans around the country face significant funding shortfalls, facilitated by accounting practices that understate true liabilities. New Jersey exemplifies this scenario as it faces billions of dollars in unfunded liabilities in its five public employee pension funds. The state’s current woes are a result of nearly 20 years of poor decisions based on the bad assumptions. And regrettably, those who will inevitably pay the tab will be New Jersey taxpayers. These are the same people who already face the highest property taxes in the nation: a whopping $7,045 per household for 2009.
The official state estimate in underfunded pension liabilities to New Jersey’s public workers stands at $46 billion. It is one of the highest liabilities in the nation, averaging $5,200 per capita. The estimate is based on an assumed rate of return on pension assets of 8.25 percent – a number determined by the State Treasurer. Herein lies the problem: the interest rate overvalues the pension and results in governments underfunding the plans. This approach – valuing pension liabilities according to what the assets are expected to return in the market is based on a standard set by the Government Accounting Standards Board (GASB) which is followed by all states. Financial economists argue GASB’s recommendation is flawed and that liabilities should be discounted according to the liability’s risk characteristics.
Eileen Norcross of the Mercatus Center highlights this issue in her recent working paper on pensions. She notes that the higher value of the pension from an assumed 8.25 rate of return has another outcome. It alters governments’ spending behavior. Legislators opt to defer payments into the system to pay for other priorities and/or extend benefits under a false assumption the pension is well funded, or that any shortfall can be recouped quickly through more aggressive investment strategies If the state had valued its pensions using methods required by the private sector, which value liabilities according to the likelihood of payment rather than the return expected on the asset, Norcross estimates the state’s unfunded liability at a staggering $176 billion, or $19,867 per capita. To determine this she used a 3.5 interest rate, the yield of a 15 year Treasury bond.
Let’s look at how a higher assumed rate has compounded New Jersey’s pension problem over the years. Starting in the 1990s New Jersey increased the interest rate assumption used to calculate plan liabilities from 7 to 8.75 percent. As a result of a higher assumed rate of return the state and localities reduced their pension contributions by millions of dollars. In addition, reductions in the Cost of Living Adjustment (COLA) assumption and average salary scale led the state to further reduce contributions. These deferrals allowed the state to balance the budget in FY 1995 and dedicate revenues meant for pensions into other areas. The state then proceeded to reduce the amount required for employees to contribute to their retirement. And lastly, adding insult to injury, benefits were extended in 1999 to surviving spouses and subsequently increased further for current and retired workers by 9.12 percent in 2001. The result of these actions: a fund that has consistently been underfunded for the last decade.
Recently, Governor Chris Christie unveiled his plan to address the problem during a series of town hall meetings. His plan, one of the most pro-active to date, calls for changes that would affect all current and future employees enrolled in any of New Jersey’s five pension plans. The plan would raise the retirement age, roll back the 9 percent benefit increase granted in 2001, require all public workers to contribute 8.5 percent of their salaries toward retirement and eliminate annual cost-of-living pension increases for all state and local retirees. Christie’s plan also calls for changing the anticipated rate of return used by the Pension Fund from its current 8.25 percent rate to 7.5 percent.
These reforms would have a significant effect on the liability - and will set a precedent for other states, if passed. Yet, the main driver of underfunding is not addressed: the metric used to value the plan. Calculating the value of the pension by using an assumed rate of return on pension assets of 8.25 (or even the newly proposed 7.5 percent rate) does not take into account the risk free nature of accrued benefits for public workers and is not in line with the average annualized 3.9 percent return for pension funds over the past 10 years. The current method of accounting allows public sector pensions to assume they can earn high investment returns without any risk. Corporate plans use a discount rate based on corporate bond yields. Pensions should adopt a similar measure by basing its expected rate of return on a similarly risk free investment: Treasury bonds. Currently, the discount rate is 3.5 percent on Treasury bonds with a maturity of 15 years.
This lower rate has substantial impacts for pension funding. Lower rates of return increase the unfunded liability of states by billons. For New Jersey it results in an increased liability of $130 billion more over state estimates. Big numbers are a major reason why many in government hesitate before cutting expected return rates. However, the decision over funding needs to be made. Either it’s the state that ponies up the doe or public employees through increased personal contributions.
Think like a Stakeholder, not like a Dependent A New Take on Unemployment Insurance
Paying people not to work will ease unemployment.
There is something wrong with this statement. Nevertheless, when it comes down to it this is exactly the rationale some have regarding the current state-sponsored unemployment insurance (UI) systems. They are programs that attempt to help people through difficult times after involuntary layoffs. The hope is to get people on their feet, by providing them an income as they look for a new and acceptable job. No argument there. However, study after study (even those conducted by economists in the Obama Administration) have shown that the current UI system actually prolongs unemployment, stalls economic growth, and discourages individual savings.
In an attempt to mitigate these problems, and preserve an unemployment insurance program, the Oregon-based Cascade Institute has proposed an interesting solution. It calls for a hybrid program consisting of tax-free Individual Asset Accounts (IAA) and a small federal common-pool fund. The idea is to make workers stakeholders in their own plans and use current tax dollars to increase private wealth.
Currently, the Social Security Act compels the states to operate Unemployment Insurance (UI) systems. The plans are predominantly run by the states and funded through payroll taxes paid by the employer based on their layoff history. Those who layoff more, pay a higher rate.
Overall, there are three problems in the current UI system worth noting.
First, studies show that unemployed workers who receive benefits take more than twice the time to find a job than those who are not eligible for benefits. Why? Alan Reynolds from the Cato Institute says it best: “When the government [in some cases] pays people 50 or 60 percent of their previous wage to stay home for a year or more, many of them do just that.” It’s the classic “when you subsidize something, you get more of it” routine. The promise of benefits discourages the unemployed from looking harder for new work. Reynolds cites a survey conducted by Bruce Meyers of the University of Chicago showing that the probability of a person leaving unemployment rises dramatically just prior to when benefits run out. For example, if benefits are extended to 79 weeks – as they were in the “stimulus” bill – there is a higher likelihood that many people will not accept work until the 76th or 78th week.
Second, the supposed economic benefits of unemployment insurance are balderdash. Spending money over a long period of time to sustain a person who is not working is not an investment in economic growth. As a matter of fact, research done by economist Sylvain Leduc shows that government spending produces a lower fiscal multiplier than do tax cuts. In other words, a dollar of added federal debt added as a result of increased spending added far less than a dollar to GDP.
Third, safety nets like UI discourage personal savings and responsibility. This occurs under the assumption the government will protect people in the event of job loss. Saving helps the economy by generating a greater supply of loanable funds, thus lowering interest rates and stimulating capital investments.
The Cascade Policy Institute has an interesting solution to the current problems of the UI system, which they hope to pilot in Oregon. Their plan calls for a hybrid system that features Individual Asset Accounts (IAA) and a small common-pool fund. Employers would still pay state payroll taxes but the funds would be put into the employee’s IAA, while the federal payroll tax would fund the common fund. The tax rate for employers to fund the IAA’s would be 1.6 percent of wages, while the federal common fund rate would remain at its current 0.8 percent of the first $7,000 of wages. This common fund would be used to subsidize qualified low balance accounts for a limited time.
The IAA would accumulate tax free for life and could be used at the discretion of each worker for unemployment insurance. At retirement, the accounts balance would be deposited into the worker’s IRA, turned into an annuity, given as a lump sum transfer, or passed onto heirs.
This innovative plan would encourage individuals to think like stakeholders, since they are the ones who own the account. In the event of layoff, individuals could draw from their account. At the same time they would be more cost conscious and encouraged to step up their job search efforts. In addition, the savings being built up with the IAA’s would have a positive effect on the economy by providing more capital for businesses to expand. And lastly, many who currently pay into the Oregon UI system but are not eligible for benefits (either because they have not worked the required minimum 500 hours or have not earned sufficient wages) would now be able to participate in the system.
At a time when the country faces high unemployment rates all options should be on the table for policymakers. Evidence shows that the current UI system actually prolongs unemployment and economic recovery. As such, reforms to this system should be front and center on the minds of those in state governments. IAA’s are a good start.1 Comments | Post a Comment | Sign up for NTU Action Alerts
States Ready to “Break the Glass” on Public Pensions
Several states want to "break the glass" to save their public pensions from fiscal ruin. The only question is, will the courts allow them to do so?
For decades, the defined-benefit retirement plans relied on by millions of government employees such as schoolteachers, police, and transit workers have been sacrosanct; few if any state lawmakers dared to suggest adjusting benefits promised to retirees as a way to save money and ensure the long-term viability of the pensions for fear of enraging the politically powerful public employees unions. The most any state has been willing to do is adjust benefits for new government employees, as Illinois and New Jersey did earlier this year.
But times have changed. A new study by the National Center for Policy Analysis shows that the public employee pensions are underfunded by an estimated $3.1 trillion – three times higher than reported previously. There are now whispers in some circles that the states, already overwhelmed by the recession and years of overspending, cannot afford the pensions and plan on seeking a federal bailout of the pensions. Besides the economic ramifications, a federal bailout of public pensions also has political, legal, and social aspects that we are only beginning to understand. In these extraordinary times, states must take extraordinary measures.
Now, some states are willing to adjust benefits for future and current retirees because no good alternative exists for shoring up the pensions. This year, Minnesota, Colorado, and South Dakota voted to limit cost-of-living adjustments (COLAs) enacted in previous years because they cannot afford to pay them. According to Stateline, Colorado, in the face of projections that the state's pensions will run out of money within 30 years eliminated the 3.5 percent COLA planned for this year. All future increases will be set at 2 percent, unless the funds investments experience another huge decline in value. Meanwhile, Minnesota eliminated a 2.5 percent COLA and set any future increase for its pension plans to between 1 and 2 percent. South Dakota reduced its COLA by 1 percent and tied future increases to the market.
Unsurprisingly, current retirees are challenging these decisions in court. The retirees argue that their pensions are contracts and, therefore, are protected against impairment by the contracts clause of the Constitution. Conversely, the states are arguing that the economic crisis is like nothing ever seen before and the states, out of “actuarial necessity,” need the ability to adjust pension benefits to save the plans from collapse. The Minnesota case shall be the first to be heard on September 15. If these states win, others may be emboldened to make the difficult choices necessary to protect the pensions from fiscal collapse. But if the retirees win, then the pressures on the plans will increase and the states will not have many options short of massive tax increases and borrowing. With all that is happening in pensions today, these cases are worth your time following.2 Comments | Post a Comment | Sign up for NTU Action Alerts
Buckeye Institute Releases New Report on Ohio Government Workers Compensation
The Ohio-based Buckeye Institute for Public Policy Solutionshas released an excellent report entitled The Grand Bargain is Dead, focusing on state government employee compensation packages and their effects on the state's financial solvency.
Author Matt Mayer notes that total compensation packages for state government workers far exceed their private sector neighbors by an average of 24.6 percent ($36, 858 v. $29, 586). This imbalance cannot be maintained by taxpayers. Mayer offers a list of cost savings that if enacted could save taxpayers billions, without laying off a single worker or cutting services.
Some of Mayer's noteworthy suggestions for savings are:
Ohio lawmakers must seriously consider making changes to goverment worker compensation packages as they attempt to close the state’s $8 billion deficit. Government workers have had a cushy ride over the past two years, essentially being immune from the pain of job losses, pay cuts and freezes and losses in retirement accounts endured by their private sector counterparts. It is time that these workers compensation packages were adjusted to reflect the current economic reality. Or else it is likely Ohio’s economy will continue to stagnate as more and more money is siphoned from he productive sector to support unsustainable wages and benefits.
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OH's Gov. Strickland wastes tax dollars, buys political support
Not content with an $8 billion budget deficit, Ohio's Governor Ted Strickland is trying to see how much money he can waste on his own reelection before taxpayers take notice. According to the Columbus Dispatch, Strickland's administration is pursuing a $37.1 million upgrade for the Ohio School for the Deaf and the Ohio State School for the Blind. What's interesting about this project is a directive by the Ohio School Facilities Commission, specifically from the executive director who was appointed by the governor, to require union scale wages on all project bids. The Commission's executive director is quoted in the Dispatch's editorial as saying that the schools are "where we have some of the most vulnerable kids imaginable" and the requirement is out of concern for workplace safety and the safety of the disabled children.
But, as the editorial correctly notes, workplace safety requirements apply regardless of the wage paid. The real reason why the wage requirement is in place - and why the project will cost as much as 15 percent more than it would without the wage requirement - is to force the government to hire union contractors, who will in turn put more money - provided by the taxpayers - into the coffers of the unions, whom the governor will be counting on in the fall election campaign. As the dispatch points out, instead of the millions of tax dollars going to refurbishing other schools, paying down the deficit, or even being returned to taxpayers, the money will go to phone banks, yard signs, and get out the vote operations to secure the governor's reelection.
A story like this illustrates the need for transparency in state government spending. For years, NTU has advocated for the creation of websites that allow taxpayers to track spending and scrutinize government programs at the state level. Such websites and more transparency will help promote an informed conversation about public policy and reduce waste and fraud, especially when tax dollars are used by political incumbents to retain office. Let's hope that Ohio's legislators take up more transparency measures in the near future to prevent blatantly political uses of taxpayer dollars like this one.0 Comments | Post a Comment | Sign up for NTU Action Alerts
Board Changes Unionization Rule
The National Mediation Board has changed a rule making it easier for labor unions to unionize a workplace. According to AP, the Board "would recognize a union if a simple majority of those voting approve organizing. The old rule -- in place for 76 years -- required a majority of the entire work force to favor unionizing. That meant workers who didn't vote were counted as 'no' votes." As in all things electoral, it's your vote. Make it count.4 Comments | Post a Comment | Sign up for NTU Action Alerts