At the same time, late last month, the latest Trustees’ Report for Medicare determined that the Medicare Part A Trust Fund will be exhausted in the year 2026, which, if you do the math, is a mere five years from now. At that point, Medicare would have to cut reimbursement rates for doctors by 9%, increasing to 20% in 2045, or even more if the report’s assumptions don’t pan out.
How will the new dental benefits — assuming they remain in the bill — affect Medicare Part A and its trust fund? Strictly speaking, not at all. The new benefits would be a part of Part B of the program, that is, doctors’ charges, rather than Part A, which covers hospital charges. In one respect, it would be its own benefit structure entirely, since, unlike “regular Part B” Medicare, the proposal would have the federal government pay 100% of the benefit’s costs, rather than requiring participants to pay a 25% cost-share premium. It would, in a way, become Medicare Part E.
States are permitted to replenish their unemployment compensation (UC) trust funds using the $195.3 billion they received in Fiscal Recovery Funds under the American Rescue Plan Act (ARPA)—and they need the help, having paid out $175 billion in state-funded benefits since the start of the pandemic, in addition to the $661 billion shelled out by the federal government in extended and expanded benefits, for a total of about $836 billion between January 27, 2020 and September 11, 2021.
Pre-pandemic trust fund balances stood at $72.5 billion. Today, aggregate trust fund balances are negative, at -$11.1 billion, reflecting $44.8 billion in indebtedness currently incurred by 10 states and the U.S. Virgin Islands. By federal standards, 34 state accounts are currently insolvent, with $114.6 billion needed to bring them all up to what the federal government regards as minimum adequate levels.
It is bad Illinois has the nation’s worst pension crisis, but state politicians have made it worse by using risky debt to delay the day of reckoning, and done so to the point that Illinois now owes 30% of the nation’s pension obligation bonds.
Pension obligation bonds are a form of debt used by state or local governments to fund their pension deficits. Illinois holds $21.6 billion of the nation’s $72 billion pension obligation bond debt.
The theory behind the bonds is that if a pension system can borrow money at a lower rate by selling bonds and earn a higher percentage from investing those funds, then it has realized a net gain using them. The issue is the gamble rarely works out that way, as the Government Finance Officers’ Association points out. Pension obligation bonds place taxpayer money at risk and often leave governments saddled with more debt rather than less. They often do not achieve a high enough return to justify their use.
Illinois’ five statewide retirement systems hold $144 billion in debt, according to official state reporting based on optimistic investment estimates. But Moody’s Investors Service says the true debt is $317 billion, which it calculates using more accurate methods common in the private sector.
Illinois missed the September deadline to repay a $4.2 billion federal unemployment loan. Employers warn inaction by state lawmakers could ‘cripple’ businesses and the COVID-19 economic recovery.
Illinois state leaders missed the Sept. 6 deadline to repay a $4.2 billion federal loan to the state’s unemployment insurance fund, which leaves Illinois taxpayers on the hook to pay $60 million in annual interest on that loan.
The unemployment fund has been depleted during the COVID-19 economic downturn. Between the loan and failure of state leaders to replenish the fund, potentially by using federal COVID-19 bailout funds, the deficit stands at $5.8 billion.
Business leaders warn a failure to repay the debt would result in automatic tax hikes on Illinois’ employers starting at $500 million, further waylaying the state’s stagnant job recovery. There would also be automatic benefit cuts of the same amount. Employers could be subjected to further, discretionary tax hikes by the state legislature if those automatic solvency measures fail to fill the hole.
Author(s): Adam Schuster, Patrick Andriesen, Perry Zhao
The Garden State Initiative released a report on the state of New Jersey finances. You have heard it all before but what keeps being left out of these ivory tower pronouncements is the systemic corruption at all levels and in all corners of officialdom here that makes even the slightest improvement in our general fiscal situation a pipe dream. Here are some excerpts along with a few charts on the pension system, the last of which makes my point. ….. Focus on that last chart. Liabilities actually decreased over the last two years. Significantly decreased against all logic and reason. Did everybody take a pay cut? Did 30% of plan participants disappear? No. The actuaries just got told to lower liability values and like dutiful apparatchiks they complied.
NJ’s revenue is being produced by higher rates on a smaller tax base: New Jersey needs to ensure that the outmigration of high-income residents does not continue. Between 2008 and 2017, New Jersey experienced growth in the number of tax filers of 4.2%; however, growth in those making $500,000 or more annually was only 2.5% during the same time.
NJ’s public spending is growing faster than inflation, our population or job creation: Our state will continue to see specific needs increase, especially in public health, health insurance, and public safety. New Jersey already taxes residents and businesses more than most other states. The problem is not too little revenue; rather, it is that the state’s spending is growing at a faster pace than inflation and the state’s population
The cost of NJ’s public workforce retirement and healthcare is the key driver of escalating spending and taxes: What New Jersey owes employees and retirees is growing significantly faster than the underlying economy that must support this liability. This is not sustainable. Pension liabilities are growing faster than assets
The graphic “Settlement Bet” shows options that policyholders have to choose from in the Settlement. The graphic “Settlement Happens??” shows the consequences of the “Settlement Bets” if the Settlement happens or not.
Policyholders not wanting to terminate their CalPERS policies will select not to participate (“opt out”) in the Settlement (as participation will end policyholders’ policies if the Settlement is approved).
Policyholders whose preference in light of announced rate increases would be to terminate because of the new CalPERS rate increases can be divided into two groups in light of the Settlement options: (1) those that wish simply to terminate and stop paying premiums; and (2) those who wish to terminate but are prepared to gamble with CalPERS to get a refund.
In making these choices, all policyholders are being forced to gamble a lot of money. Why the Settlement is structured as a gamble is unclear, but it is. That seems incredibly unfair to policyholders who can ill afford more financial losses after their losses already caused by CalPERS LTC.
A new report shows Illinois holds 30% of the nation’s pension obligation bond debt.
A pension obligation bond is a form of debt that some states use to make payments to state-run pension funds. A pension obligation bond gets paid out by a third party and the state then pays back that loan with interest. Financial experts often advise against the use of pension obligation bonds, said Adam Schuster of the Illinois Policy Institute.
The interest on the pension obligation bonds continues to climb and is leaving Illinois in a worse spot than it was previously in. The state has borrowed a total of $17.2 billion since 2003, but repayment cost is now $31 billion. Pension obligation bonds can save taxpayers money if the interest rates on the bonds is lower than the rate of return on the pension investments. If the rate of return drops below the interest rate on the bonds, then taxpayers are on the hook for the difference. This is a strategy that Schuster said is the same as gambling with the state’s money.
According to the Tax Foundation, just 13.7 percent of filers itemize their deductions — a prerequisite for deducting state and local taxes. Only at the top 10 percent of the income distribution do even a majority of taxpayers itemize. But among the top 1 percent of taxpayers, 92 percent do, and of course, their higher marginal tax rates make each deduction more valuable.
So it is these taxpayers whom the SALT deduction primarily benefits. According to Maya MacGuineas of the Committee for a Responsible Federal Budget, households in the top 0.1 percent of earners would receive an average benefit of about $150,000, while those in the middle would get closer to $15. Repealing the caps would cost about $350 billion by 2026, and an estimated 85 percent of that revenue would end up in the pockets of the richest 5 percent of Americans.
You can probably think of many better uses of taxpayer money than giving a tax break to the most affluent people in the most affluent parts of the most affluent states in the country. Unless, of course, you are someone who would benefit from a larger SALT deduction. As, I admit, I would.
I am no billionaire. But like Mr. Buffett, I am willing to take one for the team. So as Democrats in Congress come under pressure to roll back the $10,000 cap on the federal tax deduction for state and local taxes, or SALT, this long-suffering resident of New Jersey offers his own Buffett-like message:
Don’t do it. Make me and people like me — those who choose to live in high-tax states — pay our full, fair share of federal taxes.
Such an approach accords well with what Mr. Biden has been saying about taxes and the wealthy. In his most recent remarks about his Build Back Better plan, the president said he’s “tired” of the rich not paying their “fair share.” And he attacked the 2017 tax cuts passed under Donald Trump as a “giant giveaway to the largest corporations and the top 1%.”
But that’s exactly who would benefit most from any expansion of the SALT deduction. According to the Tax Policy Center, 57% of the benefits of eliminating the cap on the SALT deduction would go to the top 1% of filers. The same researchers likewise reckon that the top 1% would get an average tax cut of more than $35,000 — against just $37 for middle-class taxpayers.
Less well known is the nearly $75 billion of pension debt held by local governments in Illinois, which is the primary reason for Illinois’ second-highest in the nation property taxes. Combined with the state’s pension debt, politicians who mismanaged the pension system dug a $219 billion hole.
In Danville, the average household owns nearly $40,000 in state and local pension debt, with over $10,000 of that debt stemming from local systems for police, firefighters and municipal workers. To pay off that pension debt, a Danville household would have to give up 110% of an entire year’s $36,172 median annual income.
The 80 percent mark long has been considered the minimum threshold for a pension fund. However, that’s actually still too low. An Issue Brief by the American Academy of Actuaries called it, “The 80% Pension Funding Standard Myth” (pdf).
It said, “An 80 percent funded ratio often has been cited in recent years as a basis for whether a pension plan is financially or ‘actuarially’ sound. Left unchallenged, this misinformation can gain undue credibility with the observer, who may accept and in turn rely on it as fact, thereby establishing a mythic standard. … Pension plans should have a strategy in place to attain or maintain a funded status of 100 percent or greater over a reasonable period of time.”