Budget hearings give glimpse of priorities, challenges faced by Legislature

*First appeared in the Sept. 12, 2013, edition of the Laurel Chronicle.

It's almost that time again. You know, the thing that only comes once a year. I'm not talking about Christmas; I'm talking about legislative budget hearings.

Starting Monday of next week, the Joint Legislative Budget Committee - known as the JLBC - will meet with select state agencies and commissions to hear about their needs, wants, and everything in-between…as long as it relates to money, of course.

And frankly, what doesn’t cost money these days?

Budget hearings may not sound very exciting. The truth is, they’re not. Agency presentations are focused on current spending, projected expenses, and specific budgetary line-items. Not exactly riveting material. But the staff of the Legislative Budget Office (LBO, pronounced “elbow”); lobbyists; researchers; journalists; and just plain old budget hacks like me lap this stuff up.

Hearings start off with an aggressive schedule: First, as usual, there will be an update from the State Personnel Board's executive director who will give lawmakers a briefing on state government employee trends, including demographic breakdowns and salary information.

Following this presentation, members of the JLBC will hear from multiple agencies, including five of which are headed by statewide elected officials (Depts. of Agriculture and Commerce; Treasury; Secretary of State; Attorney General; and Insurance Commission). In times past, these presentations had the potential to get a little testy, as statewide elected officials are not only agency managers but subject to the whims of Mississippi's electorate.

I expect the usual suspects to garner the most attention during these hearings. Major budgets like the Dept. of Education, Institutions of Higher Learning (the agency representing universities), State Community College Board, and Medicaid typically receive the most scrutiny. Together, these agencies account for roughly 70 percent of the state’s general fund budget.

As with every budget hearing cycle, however, other “budgets du jour” exist. For example, the State Dept. of Transportation has the potential to get tense, given the recent calls for increased gasoline taxes and subsequent calls for increased accountability of MDOT spending. It will be interesting to see how much more taxpayer funding, if any, the Public Employees’ Retirement System (PERS) is asking lawmakers to put into the pension plan. Another budget to watch is the Wireless Communication Commission, which was mandated by the Legislature to develop a long-term funding strategy.

Almost as a prelude to budget hearings, the Washington Post’s “GovBeat” blog this week featured a story on Mississippi’s Department of Revenue collecting a significant amount of back taxes – turning an extra $3.5 million appropriation from the Legislature into $80 million.

“By virtually any standard, a nearly 23-fold return on an investment in a year is really good. It’s so good, in fact, that it’s almost unbelievable. But in Mississippi that’s exactly what legislators got” when they gave DOR an extra $3.5 million to hire auditors and collection agents to target the state’s tax gap.

Of course, the increased revenue is attributable to more than additional manpower, but the new boots on the ground certainly helped those taxes find their way back to the state’s bank account.

Speaking of more money than we thought, I should remind you that Mississippi’s most recently completed fiscal year (Fiscal Year 2013) brought in millions more revenue than legislators expected. The current fiscal year which began in July (Fiscal Year 2014) is exceeding financial expectations, though it’s too early to tell if higher collections will continue.

As I’ve written before, higher-than-expected revenue is both a blessing (more money to spend on priorities) and a curse (more pressure to fund agencies and special interest projects) for state lawmakers.

While it’s unclear how legislative leaders will appropriate these extra dollars, one thing is certain: State agencies, lobbyists, special interest groups, and other capitol players will know just how much extra money there is to be spent, and they won’t take their eyes off the monetary prize (which kind of reminds you of that commercial featuring the eyes on the stack of dollars, right?).

The budget hearings only come once a year and officially mark the beginning of the new budget season. They truly are like Christmas to Mississippi’s budget nerds. Merry Hearings, y’all!

NOTE: For a full schedule of the budget hearings, visit www.lbo.ms.gov.

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.