Archive for the ‘Pensions’ Category

The 2017 Tax Offender of the Year

Sunday, December 31st, 2017

It’s once again time for that most prestigious of prestigious awards, the Tax Offender of the Year. To win this award you need to do more than cheat on your taxes; it has to be a Bozo-like action or actions. As usual, we had plenty of nominees.

President Trump received a nomination. Now, I realize many do not like the President’s politics, and the tax reform bill that was signed into law isn’t tax simplification. However, it is tax reform, and it will lower taxes for most Americans. As for Democrats’ charges that it will kill millions and cause the world to end, please. President Trump may deserve criticism over other political issues, but not on taxes (today).

Finishing in third place was Joseph Cervone, CPA, of White Plains, New York. Mr. Cervone saw the tax credits available for energy and coal and thought, “I can get free money for my clients! Let’s just submit $23 million of phony credits!” Mr. Cervone is enjoying 22 months at ClubFed.

Finishing in second place was the California legislature. The Bronze Golden State had a flirting with single-payer health care; luckily for California taxpayers the projected $400 Billion cost caused even the ultra-liberals to get cold feet. California continues to waste money on the train to nowhere. The project originally had a cost of $33 billion; it’s now up to $68 billion. It’s probable, though, that the project will die as further funding from the federal government is unlikely. It would be nice for Sacramento to stop spending money on it; the $3 billion spent could be used for far better things.

I grew up just outside of Chicago. I’m a fan of Chicago sports teams (save the White Sox), and many of my relatives live in or near Chicago. Yet Illinois in general and Chicago in particular is now known for high and increasing taxes and out-migration. A search on Chicago taxes finds stories like, “Chicago Property Tax Bills Going up 10 Percent This Year,” “Increased taxes, fees on phones, ride-hailing and concert tickets approved in 2018 Chicago budget,” and “Chicago’s soda tax is repealed.” You can read an article about fed-up Illinois homeowners debating moving from Chicago.

The question, though, is why are taxes increasing in Illinois and Chicago? Is it just the politicians, or is there an underlying cause? There is an answer: Public Employee Pension Funds. These funds (generally on the state level) are the cause of the problem in Illinois, and are this year’s Tax Offender of the Year.

The Tax Foundation has a map showing the funding in various states. Here are the top ten (best) funded states as of 2015 (latest year that statistics are available):

1. South Dakota, 107%
2. Oregon, 104%
3. Wisconsin, 103%
4. North Carolina, 99%
4 (tie). Tennessee, 99%
6. New York, 98%
7. Idaho, 95%
8. Nebraska, 93%
9. Delaware, 92%
10. Florida, 91%

And here are the ten worst:

40. Arizona, 64%
40 (tie). Colorado, 64%
42. Hawaii, 61%
42 (tie). Rhode Island, 61%
42 (tie). South Carolina, 61%
45. Alaska, 60%
45 (tie) Pennsylvania, 60%
47. Connecticut, 51%
48. New Jersey, 48%
49. Illinois, 41%
49 (tie) Kentucky, 41%

The Tax Foundation’s closing paragraph explains the problem:

Pension obligations must be fulfilled eventually. Policymakers should consider that reform now may be less costly and less painful than coping with a larger crisis later.

As of 2015, both California and Nevada are about average (at 74% funded). Unfortunately, California is now at 64% and falling. So why has this happened and what can be done about it?

Pew has a report on the 2015 analysis, and the problems began in the early 2000s: Liabilities increased at the same basic rate while assets in pension funds didn’t. In many states the pension fund crisis hasn’t come (yet). In a few, it won’t come (pensions are properly funded). In at least one state, Illinois, the crisis exists today; in another, California, it’s coming very soon. Consider that California pensions aren’t well funded yet we’ve had a huge boon in the stock market over the last two years!

Some cities and counties are in even worse shape. A Hoover Institution report shows that both Chicago and Cook County (the county that Chicago is in) have massively underfunded pensions. So Chicago residents have a triple whammy: underfunded state, county, and city pensions.

As for the reasons why this crisis exists, there are a couple.

1. When rates of return increased in the late 1990s, that increase was built into new public employee contracts. The late 1990s featured the dot-com boom in the stock market. Those rates of returns, in the 7% range, aren’t seen today (they’re about 2% to 3%).

2. Politicians ignoring the issue. It’s always easiest to pass the buck to the next mayor, or the next governor, or the next state legislature. That’s what’s been done in Illinois, and the state is in severe crisis. The Democrats who control the state legislature are beholden to the public employee unions who, shockingly, don’t want to see pensions cut. Last time I looked, Illinois is nearly a year behind in paying its bills–all because of the pension crisis. So Democrats are only proposing tax increases rather. Residents who can move are doing so, and they can escape the pension crisis.

So what’s the answer to this crisis? There are a couple:

1. Pension reform is needed nearly everywhere in the US. Yes, pension benefits are going to decrease. That’s going to happen, either through negotiation or when the systems run out of money. It’s a certainty.

2. Reform for civil service/public employee unions. I am reminded of what President Franklin Roosevelt said:

All Government employees should realize that the process of collective bargaining, as usually understood, cannot be transplanted into the public service. It has its distinct and insurmountable limitations when applied to public personnel management. The very nature and purposes of Government make it impossible for administrative officials to represent fully or to bind the employer in mutual discussions with Government employee organizations. The employer is the whole people, who speak by means of laws enacted by their representatives in Congress. Accordingly, administrative officials and employees alike are governed and guided, and in many instances restricted, by laws which establish policies, procedures, or rules in personnel matters.

Meaningful reform means that public employee unions won’t have collective bargaining or massive reform of civil service (or both). Governor Scott Walker of Wisconsin noted this in a speech and implemented reforms. You will note that Wisconsin pensions are fully funded (one of only three such states).

Pain is coming in the world of pensions. Public employee unions can either recognize it, and live with change, or it will be forced upon them. Taxpayers stuck in bad states (e.g. Illinois) and bad cities (e.g. Chicago) will vote with their feet. Chicago politicians can’t tax John and Mary Smith who leave Chicago for places like Florida. Politicians also need to recognize reform is mandatory. Yes, it will be painful but the cost of kicking this can further down the road is even greater.

That’s a wrap on 2017. While I hope that 2018 will not provide me a lengthy list of candidates for Tax Offender of the Year, I suspect (as usual) that I’ll have plenty of choices.

I wish you and yours a happy, healthy, and prosperous New Year!

Illinois’ Pension Problems Get Worse; Lottery Checks Bounce

Wednesday, February 27th, 2013

Two stories out of Illinois that are, perhaps, linked. First, the Illinois Lottery forgot to send some money to their bank. While a spokesperson for the Illinois Lottery said it was a mistake, one would think that balancing the checkbook is a high priority. While only $159,000 of checks bounced, and the Illinois Lottery will make good on the bounced check fees, it certainly can’t be considered good planning. (I do believe that this was an oversight.)

A far more serious issue for the Land of Lincoln is the growing backlog of bills. The Chicago-based Civic Federation says that unless pensions and Medicaid are cut, Illinois’ backlog of bills will triple to $22 billion in five years. The annual budget in Illinois is currently $24.3 billion. To put this in perspective, the total budget for the most recent fiscal year for Nevada is $4.9 billion.

Unlike the federal government which can print money, states can’t. Sooner or later Illinois will have to balance its books. The pension costs are not sustainable. So, do you increase taxes further, which drives business out of state, or do you cut pensions? Democrats control most offices in Illinois, and they don’t want to cut pensions. Yet tax increases won’t work in the long run, so cuts to entitlements on the state level will occur…sooner or later.

In the end, spending more money than you take in is a good way to go broke. If I were offered a government contract by the state of Illinois, I’d turn them down unless they’d pay me up-front. That’s the level that I think Illinois has fallen to.

Squeezy and Illinois

Monday, November 19th, 2012

Sometimes you can’t make this stuff up. The video (below) is a real video from Governor Quinn of Illinois:

Governor Quinn gives an excellent history of pensions but I notice there’s something missing from the video: solutions. Perhaps it’s because Illinois legislators and Governor Quinn promised that the 66% tax increase of 2011 would solve the problem. It didn’t. Illinois had $8 billion of unpaid bills when the tax increase was passed; there are $8 billion of unpaid bills today. Pensions ate up the tax increase.

There’s an editorial in the Chicago Tribune that notes that some Illinois legislators want to borrow money to pay for pensions. That’s a great solution: Let’s eliminate one debt problem by substituting another debt problem!

There is only one solution: Fundamental reform of the pension system. It’s going to be politically ugly: Democrats’ major interest group, public employee unions, will not like the results (pensions will be cut; that’s the only way out of the problem). Governor Quinn likens pensions to promises, and that they can’t be changed. Here’s a helpful hint to Illinois politicians: The taxpayers and companies that are resident in your state can leave to a far more friendly tax location. Sure, your income taxes aren’t that high (yet), but you’re sure heading in the wrong direction. If I were an executive with an Illinois-based business, I would be looking at other states. As I noted yesterday, moving a business is disruptive. Unfortunately, if you’re on a ship that’s struck an iceberg it’s time to head to the lifeboats. Illinois struck an iceberg called pensions. There’s still time to fix the hole but it’s now a more than $90 billion problem.

Chicago is a great city, and Illinois was a great place for my childhood. However, there are fifty states in the United States and Illinois appears to be following California into a cycle that will cause businesses that can leave to leave and for taxpayers to be caught in a cycle of ever-increasing taxes.

Pensions for All? California Legislator Introduces Mandatory Pension Bill

Sunday, February 26th, 2012

Every time I think the Bronze Golden State has reached a new low, I have to remember that I should never overestimate the intelligence of the California legislature. Kevin De Leon (D-Los Angeles) has introduced a bill that requires any business with five or more employees to have a defined benefit pension plan. Employees would contribute around 3% of their wages into the plan; employers would be allowed to make voluntary contributions. The plans, though, would be mandatory to California businesses.

The unintended consequences of passage of this bill are simple. First, would employer contributions remain voluntary for long? I doubt it. And that leads to the second consequence: Fewer employers in California. Why would any business expand in high-cost California where regulation after regulation is put upon it when they can expand in a lower cost environment (such as Nevada or Texas). This leads to the final consequence: Fewer employees in California.

I also have to wonder if the Democrats in Sacramento have ever taken a course in basic economics.