More money for education should require less money for administration

*First appeared in the September 19, 2013, edition of the Laurel Chronicle.

Legislative budget hearings are nearly complete. By the time you read this column, legislators will have already endured hours of hearings in which agencies ask for more of your tax dollars to pay for things like increased salaries and wireless radios.

Nonetheless, the biggest slice of the state's budgetary pie will go to education, specifically K-12. Within education, the largest line-item is the Mississippi Adequate Education Program, known by most as "MAEP." Around the State Capitol, MAEP has become something of a four-letter word (see what I did there?).

When the MAEP was adopted, it was heralded as a magic formula that would, based on district measures like student population and free or reduced lunches, spit out the amount of money needed to "adequately" fund schools. So then, what's the problem?

Some say the formula is bogus and should be revamped. Others note the Legislature rarely funds MAEP at its required amount. Some say we must ensure the accuracy of the data that's being used as part of the calculation, and yet another school of thought insists we keep the formula but recalculate it on a more regular basis.

On the MAEP spectrum, I think I fall into the category labeled "yes."

Yes, let's look at the formula and make changes if necessary. But let's not forget that study of education funding should run simultaneous to study of educational efficiencies. After all, the money we can save through efficiencies is money we can steer back to the classroom.

Recognizing the serious budget pressures faced by school districts, the Legislature has already taken steps to reduce administrative costs. Under the leadership of Lt. Gov. Tate Reeves and Senate Education Chairman Gray Tollison, Clay County and West Point school districts were merged to achieve efficiency without reducing educational quality.

Clay County, a K-6 school that had its own school district and superintendent, spent $16,795.38 per student in 2011-2012 - the highest in the state. Its consolidation with West Point along with the other six administrative consolidations implemented by this Legislature will save taxpayers millions of dollars that can be re-directed to the classroom.

Mississippi ranks ninth per capita on administrative costs, which means we must do even more to reduce spending. An aggressive shared services strategy focused on areas like transportation, purchasing, and technology could result in dramatic savings.

A Deloitte study looked more comprehensively at the issue, finding that shifting a quarter of the nation's school district tax dollars spent on non-instructional operations to shared services would save up to $9 billion. That's significantly larger than Mississippi's general fund budget and the equivalent of 900 new schools or more than 150,000 new school teachers.

The report notes a Canadian example where two school boards shared bus transportation across district lines, saving $8 million in three years. New Jersey's Middlesex County municipalities have saved five percent on electricity for public buildings through aggregate natural gas purchases.

In Pennsylvania, two school districts entered into an agreement to share the services of a food service director. After the first year, the program netted a profit of $100,000 compared to the previous year which had a combined $20,000 loss. The combined volume had increased the districts' purchasing power, thus reducing food costs.

I took great interest in the report's note about the California Charter Schools Association, which created a Joint Powers Authority to save members money on mandatory costs, such as worker's compensation insurance. The typical charter school over $20,000 per year on this expenditure.

In addition, the CCSA created "CharterBuy" - a program that taps into charter schools' collective buying power to provide them with the best deals on supplies and equipment. The CharterBuy program has saved as much as 50 percent on expected costs in these areas.

Shared services isn't a new concept and has been embraced across the country by both the private and public sectors. With a top ten listing in administrative costs, Mississippi can't afford to focus on increasing education spending without an equally serious focus on reducing money spent outside the classroom.

Pension reforms about math, not politics

*First appeared in the August 15, 2013, edition of the Laurel Chronicle.

This week, the American Legislative Exchange Council released its new report, “Keeping the Promise: State Solutions for Government Pension Reform.” I’m a bit of a pension nerd, so I combed through the report with great interest.

Pension obligations can wreak havoc on state and local budgets, as we’ve seen with some high-profile examples (Detroit, for instance, which recently filed bankruptcy). The pension crisis cities and states face arose from decades of bad decisions, including not setting aside enough money each year to pay for retirement costs as well as increasing plan benefits without a corresponding increase in plan revenues.

Couple this with the 2008 market crash in which many retirement plans lost 20 percent of their funds…and it’s not hard to see how we got to the point where pension liabilities across the nation total up to $4 trillion. According to ALEC estimates, that’s enough money to cover a $60,000 salary and benefits package for 625,000 to 1.2 million new elementary school teachers for 20 years.

What struck me as especially poignant in the pension study were the following statements: “[The] pension problem need not be a political debate over the size or scope of government; it is a problem of math. The numbers of today’s pension plans do not add up, and observers on the right, on the left, and in the center agree on this point.”

I couldn’t agree more.

A few years ago, Gov. Haley Barbour tasked a group of business leaders, pension experts, lawyers, retirees, and legislators with looking at Mississippi’s state retirement system. The commission reviewed the retirement system with an eye toward ensuring its long-term health and sustainability, making reasonable recommendations to trim costs without jeopardizing retiree benefits.

But to hear Democrats talk about it, you would have thought that mean old Republican governor was trying to take Grandma Suzie’s retirement check and leave her destitute on the street.

Hogwash.

Let’s examine the facts. The state’s retirement system is not on the verge of collapse, but the trends are worrisome. Because the Legislature increased benefits in the late 1990s and early 2000s but failed to pay for these new costs, the plan has become excessively expensive. The system is costing taxpayers close to $900 million this year (that’s more money than it takes to fund Medicaid), and plan actuaries forecast no taxpayer relief in the foreseeable future. The 2008 market crash only compounded the problem, meaning taxpayers are on the hook for skyrocketing pension costs unless changes are made.

That’s not my opinion; that’s just math.

Reining in the costs of a retirement system is one of the most important challenges facing lawmakers today because everyone has a stake in the problem. As the ALEC report notes, “workers and retirees have a stake. People who pay high taxes are affected, as are people who pay nothing at all. The problem touches all Americans…Why? Money that is obligated to pay for pensions cannot be used to reduce tax rates or fund public programs.”

That’s exactly how big-time Democrat and Rhode Island Treasurer Gina Raimondo sees it. She campaigned on pension reform, successfully pushed it through the state’s general assembly, and defended it as a moral imperative. When asked by a disgruntled employee about her views, she responded, “[Is] it morally right to do nothing and not provide services to the state’s most vulnerable citizens? Yes, sir, I think this [reform] is moral.”

(As an aside, I heard Treasurer Raimondo speak about pension reform during a Pew Center conference a few years ago. Her determination to put Rhode Island on solid financial footing was impressive, and I expect she’ll be on the political scene for quite some time.)

If we don’t rein in the costs of our own state retirement system, I fear we’ll be left without options. To paraphrase Mayor Rahm Emanuel, we’ll have to pick between pensions and police officers; pensions or paved streets; or pensions and public health. That’s not fair to taxpayers, and it certainly isn’t fair to retirees.

As the ALEC report indicates, fixing the problem of unfunded pension liabilities is a difficult task. Legislators must overcome both technical and political challenges; they must understand arcane financial concepts and respond to statutory law, case law, and even constitutional limits. But ultimately, the question of pensions is not just an “obscure topic of interest to actuaries and accountants. It is, rather, an issue with widespread consequences.”

I certainly hope Mississippians – legislators, retirees, state employees, businessmen and women, soccer moms, and even high school graduates – recognize the benefits and necessity of reining in the costs of the state’s retirement plan. Pension reform isn’t about cutting benefits, but rather ensuring retirees get the benefits they were promised. At the end of the day, keeping our promises means making tweaks to the existing program to ensure retirees, state employees, and taxpayers are treated fairly.

This isn’t about some conservative philosophy, nor is it aligned with Democrat principles. This is about protecting the financial security of our retirees, our taxpayers, and our state.

NOTE: Here is a link to the full ALEC report.

Detroit bankruptcy ignites discussions on affordable government pensions

*First appeared in the August 1, 2013 edition of the Laurel Chronicle.

News of Detroit filing for bankruptcy protections shook the financial and political worlds, but I felt their "surprise" at this revelation was hollow. After all, the Wall Street Journal re-affirmed what I had previously assumed: That Detroit's demise has been long-coming.

The Journal recounted that "nearly 70% of parks have been closed since 2008, and four in 10 street lights don't work. The city has cut its police force by 40% in a decade...Detroit residents pay the highest property and income taxes in the state...About 40% of revenues go toward retirement benefits and debt, much of which was issued in the last 10 years to finance pension contributions. Payments on $1.6 billion of pension-related certificates of participation consume nearly every dollar of property tax revenue."

How the Detroit fiasco plays out could have huge implications in how governments deal with unaffordable pension obligations. Forces like unions and creditors have driven governments to a borrow-tax-spend cycle at the expense of taxpayers. As the Journal notes, a Detroit "bankruptcy shows the party is over, as it may also soon be for many other cities."

Oakland, Cali. has the state's highest crime rate yet recently laid off upwards of 100 policemen to fund retirement benefits and pension-obligation bonds. On top of this, the city borrowed another $210 million to finance pensions, putting the municipality in even worse financial straits.

To make up for years of short-changing its retirement fund, Philadelphia, Penn. is currently spending about 20 percent of its budget on pensions. The Journal points out that Philly has raised sales, property, and business taxes, yet the city council is currently discussing using revenues from a one-percentage-point sales tax hike in 2009 intended for schools to finance pensions.

Former Obama White House Chief of Staff turned Chicago Mayor Rahm Emanuel declared recently that "the pension crisis is no longer around the corner; it has arrived at our schools" after the city's public schools announced 2,100 layoffs. Although Chicago (supposedly) is planning to transfer 30,000 retirees on Medicare and the Obamacare exchanges in 2017, all its savings will go toward pension payments which will triple in 2015. The Democrat mayor warned taxpayers that this could mean a 150% spike in property taxes.

According to groups like the Pew Center and Boston College's Center for Retirement Research, pension obligations run into the trillions of dollars (the last estimate I saw was roughly $3 trillion). This means that many governments "have more than likely promised their workers more than they can reasonably expect to deliver," according to the New York Times.

Clearly, pension obligations have the potential to bankrupt cities and states, both large and small. Mississippi, pay attention.

Our state retirement plan is in better condition than these examples, but the trends concern me. Although taxpayers have put significantly more money into the system, its funded status continues to decline. In 2003, the system had a funded status of 79 percent; today that number has dropped to 58 percent. Pension experts consider healthy plans to have a funded status of 80 percent or higher.

These numbers are particularly gloomy, since taxpayers have seen their contributions to the system increase more than 62 percent in the last decade. In Fiscal Year 2013, the state (taxpayers) contributed about $835 million to fund a portion of the retirement system; this level could jump above $900 million in Fiscal Year 2014. That's higher than state financial support for Medicaid!

I don't believe Mississippi's retirement system is on the verge of collapse, but there are warning signs within the system that should be addressed by policymakers, retirement board members, and taxpayers. The current plan is too costly (see above) and puts too large a fiscal burden on taxpayers who are trying to build their own non-government funded nest eggs. Small but important tweaks can be made now to ensure an affordable and sustainable future.

The Economist recently featured an insightful piece on pensions in America, writing that "it may take a financial crisis [like Detroit] for states and cities to face up to the scale of their pension shortfalls. When a crisis occurs, public-sector workers are more likely to accept the need to sacrifice."

In Mississippi, I hope we'd take actions to avoid a crisis rather than let pension obligations escalate to an unsustainable level.