California’s total estimated pension liability is something like $1 trillion. To balance its books, Sacramento had to get money from taxpayers in Florida, South Dakota, Utah and, other, better-managed states (through the COVID-19 stimulus) to close the gap.
Whether it will be enough to stop municipal fire departments from bringing private ambulance and medical services “in-house” is yet to be seen. Hopefully, it will — which would be a good thing for taxpayers and people in need.
Otherwise, the pattern of using federal reimbursements for services provided to cover the losses in underfunded public employee pension plans will continue, much to the determinant of taxpayers.
It’s getting harder for the Biden Administration to claim we’re in an economic crisis that demands more spending. It’s closer to the truth to say the economy is growing in a way that calls for spending and monetary restraint.
The latest evidence arrived Monday with the Institute for Supply Management’s news that its March survey for service businesses hit 63.7. That’s an all-time high, and it signifies rapid growth and optimism. The only problem is that many businesses say they can’t find enough workers or supplies to meet their order books.
That follows Friday’s blowout employment report for March, with a net total of 1.07 million new jobs including revisions from the previous two months. Wage gains were bigger than they looked at first glance, given that many returning workers were those in lower-wage services jobs hurt by the pandemic.
Most observers believe that the Treasury will interpret the law narrowly. Rather than seeking to claw back funds from any states passing tax cuts or credits, the feds are considered likely to challenge only those states that clearly use federal dollars to pay for them. “Nothing in the act prevents states from enacting a broad variety of tax cuts,” Treasury Secretary Janet Yellen wrote in a response to the AGs. “It simply provides that funding received under the act may not be used to offset a reduction in net tax revenue resulting from certain changes in state law.”
But the fact that the law blocks federal money from being used even indirectly to pay for tax cuts has state officials not just worried but angry. “Democrats in Washington and in the White House are not going to tell me, or the Georgia General Assembly, that we can’t cut taxes for hard-working Georgians,” Gov. Brian Kemp complained at a news conference last month.
That prohibition lasts as long as the stimulus dollars are spent, which will be into 2024. And there are limits, Walczak notes, on where and how states can spend federal aid. They can use the money to address pandemic and health needs, for example. While those are clearly ongoing, much of the cost of vaccine supply and distribution has been underwritten by the feds. Other costs in these areas have already been addressed by last year’s federal CARES Act, which some states struggled to spend.
If a state or local government’s public pension funds have large unfunded liabilities, those liabilities accrue at the assumed rate of return on the assets that should have been there to cover that liability.
The point is this: if it makes sense to pay down the pension unfunded liability with muni bonds, thus creating new liabilities and thus new leverage, it makes even more sense to take a “windfall” of cash and pay down the pension debt, which creates no new state/local government liabilities
While state and local governments cannot put their stimulus directly towards pensions, depending on how the federal government enforces this restriction, they will still have the leeway to free up money that can then go towards pensions (or be spent on budgetary items that have been cut in recent years due to growing pension obligations).
Public pensions will continue to use overly optimistic assumptions about how their investments will perform, accounting tricks that mask the true size of their pension liabilities, and underreport how much money is needed to fund them.
They will also continue to expose themselves to risky investments in order to attempt to shore up funding gaps. In fact, as the fiscal health of pensions plummeted following the 2008 financial crisis, pension plans only doubled down on the practice.
If you ask Korinek, this is really Economics 101. “It’s about providing insurance to spread out unequal impact,” he says. “Economists generally think that the government should provide such ‘crisis insurance’ whenever the private market can’t. One example is unemployment insurance.”
When we face risks that are individual-specific, notes Korinek, such as the risk that our house may burn down, it’s relatively easy to buy insurance in the marketplace. However, when we’re confronted with unforeseen, economy-wide risks, like pandemics, it is essentially impossible to be insured. “The way I view the hand of the government during a crisis,” says Korinek, “is not that it distorts markets. Rather, it makes up for missing markets. The market is incomplete, and the government is making it work better.”
The reliance on private plans — a hard-fought compromise in the 2010 health law that was designed to win over industry — already costs taxpayers tens of billions of dollars each year, as the federal government picks up a share of the insurance premiums for about 9 million Americans.
The ACA’s price tag will now rise higher because of the recently enacted $1.9 trillion covid relief bill. The legislation will direct some $20 billion more to insurance companies by making larger premium subsidies available to consumers who buy qualified plans.
Don’t think that might ease your state and local tax burden. The downpour of cash on cities and states, most of which don’t need it, is all tied to a provision in ARP that bans tax cuts. It’s a mandate for statism – big government – whether states with small government philosophies like it or not.
“Thou shalt be statists and big spenders” – that’s what ARP might as well say as a direct federal mandate.
Most of ARP commentary about cities and states has wrongly focused only on the $350 billion that’s will go directly to them. That’s a small part and entirely misses the bigger picture.
It is a miracle anyone ever listens to us. Honestly, sometimes they shouldn’t. Other than the theory of comparative advantage, I can’t think of any correct economic insights that defy common sense. Economists, or experts in any field, are meant to offer a framework to weigh costs and benefits, help us see risks, and understand how the economy and people respond to shocks and policy. This helps people make choices that are right for them. If someone is pushing something totally counterintuitive, whether in economics or public health, we should be skeptical.
The same goes for debt. I heard someone say MMT has become an accepted theory – that is simply not true. And there is nothing new here. If you look at the history of debt cycles and financial crisis, they often featured some convoluted justification for why taking on tons of leverage isn’t so risky after all because this time was different – we are so much more clever now. Guess what, you might use some big words that tell you otherwise, but debt is always risky. Sure, some of the time it works out and juices higher growth, but when it doesn’t, things get really nasty.
The federal stimulus package likely to be signed by President Biden this week will erase the majority of San Francisco’s projected $650 million budget deficit over the next two years, saving City Hall from having to make painful service cuts and layoffs — for now.
While the federal stimulus is a boon for the economy in the short term, it will not solve all of the city’s financial woes. San Francisco’s ultimate recovery heavily depends on how quickly parts of the local economy bounce back, from tourists visiting the city to employees returning to downtown offices.
Without a substantial comeback in hotel, sales and business taxes, City Controller Ben Rosenfield said that Mayor London Breed and the Board of Supervisors will likely grapple with a fragile budget over the next few years.
The city learned in December it had a $125 million surplus for the current year due to higher-than-expected property tax revenue, increased federal reimbursements and lower expenses. But that was only for the current year.
Breed ordered every city department to propose cuts to trim budgets by 10% over the next two years. Those cuts could have had noticeable impacts, from fewer 911 operators to fewer trial attorneys in the public defender’s office.
Illinois and Connecticut state governments don’t pay taxes to the federal government. In Illinois’ latest financial report, a report prepared by the department led by Mendoza (note that the latest report available is for fiscal 2019, for a fiscal year that ended more than 600 days ago), Illinois reported roughly $25 billion in grant “revenue,” most of it from the federal government. This doesn’t add up to Illinois contributing more in federal taxes than it receives from the federal government.
So how does their math work?
To claim that Illinois and Connecticut act as donor states, Mendoza and Lembo are “counting” on the money sent by their state’s taxpayers to the federal government, a very large amount.
But when they call for federal “relief,” they aren’t calling for federal money for state taxpayers. They are calling for federal “relief” to be sent to state governments.