Category: Public Finance

Americans Should Be Less Complacent About Social Security

Mary Pat Campbell

Link: https://www.discoursemagazine.com/p/americans-should-be-less-complacent

Excerpt:

In December 2023, Gallup released the results of its latest survey of Americans’ expectations of Social Security. Gallup has been conducting these surveys in essentially similar form for many years, and their latest results qualitatively resemble previous ones. They show a slight uptick in Americans’ optimism that Social Security will make good on future benefit promises, producing Gallup’s headline finding: “Americans More Upbeat About Future Social Security Benefits.”

Unfortunately, the optimism expressed by Gallup’s respondents is at odds with the reality of Social Security’s deteriorating finances, as evidenced by the worsening actuarial shortfall documented in its trustees’ annual reports. Never before have Americans had greater reason for concern that they will not receive the benefits Social Security is promising. The reason Americans are feeling blithe about Social Security’s future is not because of its actual condition, but because elected officials and media figures avoid a subject whose harsh realities contradict their preferred political narratives.

….

Another recurring feature of the Gallup surveys is to question respondents as to whether they would prefer that Social Security solvency be restored by raising taxes or by “cutting” or “curbing” benefits. Whenever the question is phrased in such a way, Americans express a preference for raising taxes, a preference that increased in the latest poll. The rising preference for raising taxes may partially reflect the bigger-government tilt of young adults, combined with the large number of baby boomers on the verge of claiming benefits. However, a portion of that expressed preference has been present in every survey, and it is worth understanding why.

All Social Security survey responses tend to be extremely sensitive to the wording of questions and to background understanding of the program. For example, a previous Gallup poll showing majority opposition to proposals to “curb” benefits for middle- to high-income workers was contradicted by a contemporaneous poll finding that 59% of respondents favored slowing the rate of benefit growth for middle- to high-income workers. When proposals to moderate future benefit growth are accurately described as such, they tend to draw much more support than when proposals are described as “cutting” or “curbing” benefits. Language such as “cut” or “curb” implants the mistaken notion that such proposals would reduce benefits from current levels.

Author(s): Charles Blahous

Publication Date: 9 Feb 2024

Publication Site: Discourse Magazine

Connecticut starts new year with better pension funding

Mary Pat Campbell

Link: https://insideinvestigator.org/connecticut-starts-new-year-with-better-pension-funding/

Excerpt:

According to the latest valuations, Connecticut’s State Employees Retirement System (SERS) increased its overall funded ratio from 48.5 percent in 2022 to 52 percent in 2023, and the Teachers Retirement System (TRS) increased its funded ratio from 57 percent to 59.8 percent.

Although neither is considered healthy in terms of pension funding, it does mark a turnaround following years of increasing unfunded liabilities and, therefore, increasing annual payments toward the debt, increased taxes and contract negotiations with state employees that increased their contributions and lowered benefits to make up the difference.

Former Gov. Dannel Malloy had stated that Connecticut’s tax increases in 2011 and 2015 went entirely to pay for the escalating cost of state employee and teacher pensions.

While the year-over-year change seems somewhat small, the change in funding ratio over the past eight years is much more substantial. In 2016, SERS was only 36 percent funded with $20.3 billion in unfunded liabilities. While SERS continues to have roughly $20 billion in unfunded liabilities, its assets have grown by $10 billion during that period, significantly increasing the funding ratio.

Meanwhile, the unfunded liability for TRS has increased by $3.3 billion over that same time frame, but assets increased by nearly $8 billion, increasing the funded ratio from 56 percent to nearly 60 percent. The total unfunded debt for TRS currently stands at $16.4 billion.

Author(s): Marc E. Fitch

Publication Date: 2 Jan 2024

Publication Site: CT Inside Investigator

Is There a “Pecking Order Theory” for US Government Debt?

Mary Pat Campbell

Link: https://govmoneynews.com/bills-blog/f/is-there-a-pecking-order-theory-for-us-government-debt

Video:

Excerpt:

I got a great question from a finance student today, asking whether the “pecking order” theory of corporate capital structure could be applied to the government. OK, let’s think this out. Who comes first, in the pecking order?

Author(s): Bill Bergman

Publication Date: 6 Dec 2023

Publication Site: GovMoneyNews, Bill’s Blog

Our Most Expensive Failure

Mary Pat Campbell

Link: https://www.governforcalifornia.org/news/2023/12/1/our-most-expensive-failure

Graphic:

Excerpt:

When launching GFC in 2011 it was my hope that we would see meaningful pension reform by 2020, but we have failed to achieve that objective and the negative consequences for public services and taxpayers have been enormous. As evidence, just look at the four-fold explosion in annual pension spending by the Los Angeles Unified School District this year compared to ten years ago:

Pension spending will keep exploding. That’s because California’s public pension funds still have inadequate ratios of assets to liabilities despite more than $200 billion of pension contributions and a doubling of the stock market since 2013-14.

Pension reform is not the only thing I got wrong. I thought it would be even easier to terminate California’s unnecessary spending on other post-employment benefits (OPEB), especially after the creation of Obamacare and that program’s generous federal healthcare subsidies, but LAUSD alone is spending $365 million on OPEB this school year. Together, pensions and OPEB consume one of every six LAUSD dollars, leaving that much less for classrooms and salaries. 

Author(s): David Crane

Publication Date: 1 Dec 2023

Publication Site: Govern for California

‘Worse Than People Can Imagine’: Medicaid ‘Unwinding’ Breeds Chaos in States

Mary Pat Campbell

Link: https://kffhealthnews.org/news/article/medicaid-unwinding-disenrollment-redetermination-state-delays/

Graphic:

Excerpt:

Seven months into what was predicted to be the biggest upheaval in the 58-year history of the government health insurance program for people with low incomes and disabilities, states have reviewed the eligibility of more than 28 million people and terminated coverage for over 10 million of them. Millions more are expected to lose Medicaid in the coming months.

The unprecedented enrollment drop comes after federal protections ended this spring that had prohibited states from removing people from Medicaid during the three pandemic years. Since March 2020, enrollment in Medicaid and the related Children’s Health Insurance Program had surged by more than 22 million to reach 94 million people.

The process of reviewing all recipients’ eligibility has been anything but smooth for many Medicaid enrollees. Some are losing coverage without understanding why. Some are struggling to prove they’re still eligible. Recipients and patient advocates say Medicaid officials sent mandatory renewal forms to outdated addresses, miscalculated income levels, and offered clumsy translations of the documents. Attempting to process the cases of tens of millions of people at the same time also has exacerbated long-standing weaknesses in the bureaucratic system. Some suspect particular states have used the confusing system to discourage enrollment.

Author(s): Phil Galewitz and Katheryn Houghton and Brett Kelman and Samantha Liss

Publication Date: 2 Nov 2023

Publication Site: Kaiser Health News

PREPA bond parties make offer and file suits

Mary Pat Campbell

Link: https://fixedincome.fidelity.com/ftgw/fi/FINewsArticle?id=202311131617SM______BNDBUYER_0000018b-ca27-d799-afbf-dbf739470092_110.1

Excerpt:

Puerto Rico Electric Power Authority bond parties that oppose the Oversight Board’s proposed debt deal filed suits challenging part of the deal, asked for compensation for Puerto Rico central government’s actions since March 2022 and proposed an alternate bond deal.

The parties filed the suits this weekend in the U.S. District Court for Puerto Rico and filed an informative motion Friday in the bankruptcy telling U.S. District Judge Laura Taylor Swain about their bond deal offer.

GoldenTree Asset Management and Syncora Guarantee sued Puerto Rico’s central government for actions taken since March 2022 to interfere with PREPA’s ability to pay bondholders. The court has yet to appoint a judge in that case.

The bond parties allege the commonwealth government has manipulated PREPA’s fiscal plans and budgets to deprive the bondholders of their claim on the authority’s revenues and depress the value of the bonds.

The board rejected former Oversight Board member Justin Peterson’s suggestion to use commonwealth financial surpluses for PREPA because the commonwealth didn’t owe the authority money.

Author(s): Robert Slavin

Publication Date: 13 Nov 2023

Publication Site: Fidelity Fixed Income/Bond Buyer

The Tax Prep Industry Doesn’t Want You to File Your Taxes for Free

Mary Pat Campbell

Link: https://jacobin.com/2023/11/irs-direct-file-free-tax-filing-intuit

Excerpt:

The tax preparation industry claims that current efforts to create a government-run system that would allow eligible Americans to file their taxes for free could be prohibitively expensive. But a new report reveals that the potential cost of such a free-file program could be less than the total tax subsidies scored last year by the biggest player in an industry that reaps billions from people using services that could be free.

In effect, government tax credits are subsidizing Intuit’s fight against a direct-file system that would let Americans avoid paying for the company’s tax filing services. In October, the Internal Revenue Service (IRS) announced it would pilot its free Direct File platform for select taxpayers in thirteen states during the 2024 tax season — potentially delivering a final blow to a twenty-year agreement with the tax preparation industry that prohibited the IRS from effectively becoming a competitor. That’s assuming Congress doesn’t eliminate funding for the free tax filing program as part of its new military aid bill for Israel, as Republicans have proposed.

In return for the IRS not launching its own e-filing product, private tax prep companies like Intuit and H&R Block were required to provide access to free filing services for qualified taxpayers. But only 3 percent of eligible taxpayers utilized these free services, largely due to roadblocks set up by companies that forced people into paying for their products instead. Both companies ended up pulling out of the free IRS program in recent years.

These deceptive strategies and hurdles have proven to be lucrative for the industry. In 2019, at least fourteen million Americans paid for tax prep services that should have been free, according to a Treasury Department audit spurred by a ProPublica investigation. This earned the industry around $1 billion in revenue.

Author(s): LAUREN LIEBHABER

Publication Date: 10 Nov 2023

Publication Site: Jacobin Magazine

Moody’s cuts D.C. rating outlook to match U.S.; holds steady on Florida, Maryland, Virginia

Mary Pat Campbell

Link: https://fixedincome.fidelity.com/ftgw/fi/FINewsArticle?id=202311131727SM______BNDBUYER_0000018b-c9ff-d00d-ad8b-ebff49580002_110.1

Excerpt:

Moody’s Investors Service (MCO) revised its rating outlook for the Aaa-rated District of Columbia to negative Monday, matching its Friday action on the United States government.

At the same time, the rating agency affirmed the Aaa issuer ratings and stable outlooks of Florida, Maryland and Virginia.

The actions follow Friday’s outlook revision on the United States to negative from stable by Moody’s while it affirmed the U.S. sovereign rating at Aaa.

Moody’s said the main reason for the negative outlook on the United States was its assessment that “the downside risks to the U.S.’ fiscal strength have increased and may no longer be fully offset by the sovereign’s unique credit strengths.

“In the context of higher interest rates, without effective fiscal policy measures to reduce government spending or increase revenues, Moody’s expects that the U.S.’ fiscal deficits will remain very large, significantly weakening debt affordability,” the rating agency said. “Continued political polarization within U.S. Congress raises the risk that successive governments will not be able to reach consensus on a fiscal plan to slow the decline in debt affordability.”

Author(s): Chip Barnett

Publication Date: 13 Nov 2023

Publication Site: Fidelity Fixed Income – Bond Buyer

SEC attempts to calm muni market over FDTA implementation

Mary Pat Campbell

Link: https://fixedincome.fidelity.com/ftgw/fi/FINewsArticle?id=202311101249SM______BNDBUYER_0000018b-ba22-dd16-addf-fb6af3660001_110.1

Excerpt:

As the timeline for implementing the Financial Data Transparency Act grows shorter, the Securities and Exchange Commission is teaming up with other federal regulators in an attempt to allay fears about implementation.

“There’s no new disclosure requirements, standards or timelines, it’s just about structured data,” said Dave Sanchez, director of the SEC’s Office of Municipal Securities.

The comments came during a panel discussion produced by XBRL US on Thursday. The FDTA was passed last year as a remedy for providing more transparency to the financial markets by introducing machine-readable formats into the Municipal Securities Rulemaking Board’s EMMA system, which tracks the muni market.

The SEC is in charge of developing the standards for how the data will be submitted to the MSRB. The upcoming deadlines include publishing proposed rules by June 2024, which will kick off the public comment period. Determining the standards is set for December 2024, with specific rulemaking to be in place by 2026.

Author(s): Scott Sowers

Publication Date: 10 Nov 2023

Publication Site: Bond Buyer at Fidelity Fixed Income

If Puerto Rico bankruptcy ruling stands, it could devastate municipal borrowing

Mary Pat Campbell

Link: https://www.foxbusiness.com/financials/puerto-rico-bankruptcy-ruling-stands-could-devastate-municipal-borrowing

Excerpt:

In the bankruptcy proceedings of the power utility, Swain sided with borrowers and concluded that special revenue bondholders do not hold a secured claim on current and future net revenues. As The Wall Street Journal explained in March, “A federal judge curbed Puerto Rico bondholders’ rights to the electric revenue generated by its public power utility.”

Furthermore, the ruling stated that the original legal obligation of the borrowers is not the face value of the debt, but rather what the borrower (in this case “PREPA”) can feasibly repay. This ruling raises concerns regarding its broader implications for the municipal bond market. 

Municipal bonds play a pivotal role in financing vital infrastructure projects across America. However, Swain’s decision poses a significant threat to the traditional free-market principles that underpin the structure and security of municipal bonds, particularly special revenue bonds.  

These bonds have provided investors with the assurance of repayment through revenue streams generated by specific projects or utilities. By eroding this sense of security, the ruling fundamentally alters the risk-reward dynamics of municipal bonds, disregarding the principles of free markets and limited-government intervention.  

Consequently, state and local governments may encounter elevated borrowing costs when issuing bonds for necessary public investments, hindering fiscal responsibility and the efficient allocation of resources. 

Author(s): Matthew Whitaker

Publication Date: 5 Sep 2023

Publication Site: Fox Business

The day the Social Security funding crisis became inevitable

Mary Pat Campbell

Link: https://thehill.com/opinion/finance/4258578-the-day-the-social-security-funding-crisis-became-inevitable/

Excerpt:

What wasn’t inevitable was a funding crisis. In fact, from 1950 to 1971, Congress was able to increase benefits nine times. That changed in 1977 when Social Security Amendments responded to a technical error in 1972 legislation which caused retirement benefits to skyrocket and threatened insolvency by 1979. 

The 1977 law sought to slow the rapid growth in benefits for future retirees. At the time, Congress considered two options. The first, recommended by an expert commission headed by Harvard economist William Hsiao, would link the growth of the initial benefits paid to new retirees to the rate of inflation. The second approach, favored by the Carter administration, would index initial benefits to national average wage growth. 

While differing only in seemingly technical ways, the two approaches had dramatically different effects on Social Security’s long-term finances. Simply put, the Hsiao Commission’s recommendation was fully sustainable under then-legislated tax rates. It would allow, as the commission wrote, “future generations to decide what benefit increases are appropriate and what tax rates to finance them are acceptable.” 

In contrast, the alternative approach of “wage-indexing” initial benefits could not be sustained without substantially higher future taxes. 

The Hsiao Commission bluntly criticized that policy, saying that it “gravely doubts the fairness and wisdom of now promising benefits at such a level that we must commit our sons and daughters to a higher tax rate than we ourselves are willing to pay.” Congress, nevertheless, opted for wage indexing.   

 

Author(s): ANDREW G. BIGGS, JOHN F. COGAN AND DANIEL HEIL

Publication Date: 17 Oct 2023

Publication Site: The Hill

Social Security’s 2024 COLA, While Modest, Could Still Trigger Higher Taxes

Mary Pat Campbell

Link: https://www.thinkadvisor.com/2023/10/13/social-securitys-2024-cola-while-modest-could-still-trigger-higher-taxes/

Excerpt:

And, as Mary Johnson, the league’s Social Security and Medicare policy analyst, highlighted in a call with ThinkAdvisor, there is also widespread concern about what the relatively modest 2024 COLA could mean for the taxes seniors pay on their federal government benefits.

As many as 26% of survey participants who have received Social Security for more than three years reported paying taxes on a portion of their benefits for the first time during the 2023 tax season — i.e., for tax year 2022.

“Because Social Security recipients received an even higher COLA of 8.7% in 2023, we expect more beneficiaries to become liable for federal income taxes on their Social Security benefits for the first time in the upcoming 2024 tax season,” Johnson warned.

….

“Up to 85% of Social Security benefits can be taxable when income exceeds certain thresholds,” Johnson explains. “Unlike other parts of the federal income tax code, though, the income thresholds that subject Social Security benefits to taxation have never been adjusted for inflation.”

Author(s): John Manganaro

Publication Date: 13 Oct 2023

Publication Site: Think Advisor