STUMP » Articles » When the Money Runs Out: Some Thoughts on Public Finance and Pensions » 14 October 2019, 19:56

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When the Money Runs Out: Some Thoughts on Public Finance and Pensions  


14 October 2019, 19:56

I’m still tweaking my update of my pension plan cash flow spreadsheet, so while I’m doing that, I’m thinking about the hard choices being made by politicians (and taxpayers) as money gets tighter.

First, I saw this at the Tax Prof blog: My University Is Dying; Soon Yours Will Be, Too

Starting in 2016, our state university system [North Dakota] endured three successive rounds of annual budget cuts, with average 10-percent reductions resulting in a loss of more than a third of the system’s overall funding. Additional cuts, even, were on the table this past year. And while our state legislators ultimately avoided taking yet one more stab at the dismembered body of higher education, there has been no discussion of restoring any of those funds.

The experience of living with the metastasizing effects of austerity grants me some insight into what has been going on in Alaska. In July, Alaska Gov. Mike Dunleavy announced a plan to strip the University of Alaska system of 41 percent of its operating budget. He has since tempered this plan, opting instead for a 20-percent cut to be meted out over a period of three years. After weathering three straight years of forced retirements, self-protective “pivots” to administration, and personal waterloos on my own campus, I cannot help but grieve for my colleagues in Alaska. Some of them, I know, will lose their jobs, or else be coerced into giving them up, as my own colleagues have been (my department lost 10 tenured/tenure-track faculty members — half of its roster — in four years and has not been permitted to rehire). But some of them, I know, will not, and I grieve for them, too. …

Then I saw this followup by Glenn Reynolds in USA Today: States are cutting university budgets. Taxpayers aren’t interested in funding campus kooks

There are lots of cuts in lots of places, and while some of them can be blamed on state budgets, that’s not really what’s going on. We’re in an economic boom — North Dakota is even a center of fracking — and states are still spending plenty. The ultimate reason for the cuts is that taxpayers in many states no longer think higher education is worth the money.
Years ago, in “The Higher Education Bubble,” I warned that universities were going to be squeezed by online competition, changing job markets and fears of excessive student loan debt. To survive, I said, they’d have to be leaner and more focused on what people actually want from universities, instead of the things that were popular mostly with university administrators. These warnings were largely unheeded.

So am I blaming the victims for these budget cuts? Basically, yes, with the proviso that the victims are also perpetrators. For decades, higher education has, often quite consciously and openly, set itself against the larger society in which it is embedded while still expecting support, much like a rebellious adolescent who still expects parents to cover the cellphone bill. Now much of the larger society is having second thoughts, and universities will have to decide whether they want to change or shrink. Sadly, I’m beginning to doubt that they’re smart enough to change.

Now, Reynolds is specifically saying the cuts are due to rhetorical excesses from academic loudmouths (with most of the actual university activity being ignored). I’ve worked at a few different colleges in my teaching career, and I gotta say, politics didn’t pop up much when I taught students calculus. At least, not the way I do it.

But even though Reynolds is talking about there being a boom in state budgets, that’s not exactly true.

Legacy costs, specifically pensions and retiree health care, are taking up more of state budgets… and that’s in good times.

What will happen in the next recession?


You can actually look at a history of state revenues, which is partly how I did past comparison of lottery revenue.

The data actually go all the way back to 1962, but I don’t feel like extracting numbers from scanned documents right now.

The oldest spreadsheet of the info seems to be from 1994 or so, and there is actually a handy tool for getting the info for all available years.

Let’s take a look at these state tax revenues, shall we?

You can see there’s a strong seasonal component — you get a spike in Q2, when people are doing their annual tax returns.

Given that, let’s combine amounts… but going from the usual fiscal year for governments, which tends to go from July 1 to June 30, not by calendar year. Let’s see what that gets us.

You see two recessions in this graph, which are hard to miss. From FY2001 (ending June 30, 2001) to FY2002, you saw state revenues drop 4.4%. There was some recovery from 2002 to 2003, but the revenues were still below what were seen in FY2001.

The Great Recession is really difficult to miss. From FY2008, you had two consecutive fiscal years of decreases, for a total decrease of 10% in state revenues. Think about a 10% decrease, while pension and retiree healthcare costs rise.

But it’s worse than just the two-year decreases — you still didn’t get state revenues up past the FY2008 mark until FY2012. There has been a 4.9% per year growth in state revenues from 2010 to 2019 — what if that growth didn’t keep up?

In the expansion before — from FY2002 to FY2008 — the growth rate had been 6.5% per year. From FY1995-FY2001, it had been 6.4% per year growth.

Maybe the revenues are slowing down (which I would expect from an aging population.)


I grabbed all the data from the Public Pensions Database. To make the comparison legit, I kept only plans that existed for all 18 years of the database – I ended up with 159 plans.

I took total plan contributions, because it doesn’t really matter if it’s officially an employer or employee contribution, it all comes from the taxpayer.

I mainly want to point out the growth rate — for the entire 18 years, the growth rate is 7.7% per year.

But let us do the comparisons we saw with state revenue growth.

Going from FY2002 to FY2008, the compound average growth rate was 11.3%.

From FY2010 to FY2018, the CAGR was 7.1%.

I’m not directly comparing the state revenues with these contributions, because I didn’t include other local taxes. And, of course, the Public Plans Database doesn’t have all plans in there, but they do have all the largest plans in there. They prioritize it be plan size.

But here’s something to remember: even with these increasing contribution amounts, funding levels have not been appreciably improving. They really should be increasing their contributions well beyond where they currently are.


Various pension reform groups often point out that as pensions require more and more in contributions to be able to pay their benefits, other spending priorities get hit.

Like money for roads. Money for paying current teachers.

We’re already seeing the interception of funds for pensions in deeply bankrupt towns in Illinois (where they’re not being allowed to actually benefit from bankruptcy proceedings). But let us pick on some non-Illinois locations:

To solve its pension puzzle, Providence [,Rhode Island] must make tough choices:

The city has suffered from deep-rooted mismanagement of its pension system. Rosy expectations about investment returns and decades of inadequate contributions to the fund — the city came up $16 million short in 1999 alone — have left it just a quarter of the way toward covering the $1.3 billion it owes to current and future retirees.

Such numbers are mind-boggling in and of themselves, but the budget pressure they create reveals an acute crisis with a concrete human impact. A 2010 refinancing scheme demands 3.5 percent yearly increases in Providence’s annual contributions to its pension system, outpacing the 2 percent rate at which the budget grows overall. This means that pension liabilities could edge out priorities like other social spending and infrastructure. This would be catastrophic for a public school system defined by chronically absent teachers, for the 70 percent of Rhode Island streets in poor condition and for a city with the highest poverty rate in the Northeast.


Public pensions are already eating away Illinois government services, increasing by more than 500% during the past 20 years as spending on core services including child protection, state police and college money for poor students has dropped by nearly one-third since 2000.

At the same time the clock is running out on the state’s public pension funds, with the first potential insolvency looming as soon as 2039, according to an analysis commissioned by the Illinois Policy Institute.

Whenever media reports on a failure of state government services, including the ongoing crisis of a failing Department of Children and Family Services,6 the unsustainable cost of current pension benefits should be at the top of mind for residents and lawmakers.

Okay, no more Illinois.

Teachers Want Higher Pay, but Pensions Swallow Up the Money

A record number of American public-school teachers have walked off the job over the past two years—and now another strike looms in Chicago. Chief among the teachers’ demands is higher pay. They’re often right—teacher pay is too low—but for the wrong reasons.

Teachers and their unions typically attribute low salaries to flat or falling state spending on education, with skinflint politicians to blame. But in most places education spending is rising. It isn’t showing up in teachers’ paychecks because so much of it gets diverted to pay for expensive retirement benefits for former teachers. Politicians’ overly generous past promises, sometimes made at the behest of teachers unions, are now coming back to bite the education sector.

Michigan teacher pay stagnates as state funding flows to pension obligations

What we found:

Even as the average amount of per-pupil spending has increased 12 percent over the past five years, the new dollars are not finding their way into teachers’ paychecks. Michigan’s average teacher salary has remained at about $62,000.

Required pension obligation payments have taken on greater priority in education spending. Despite recent retirement system reforms, more and more school spending is going to meet unfunded retirement liabilities.

Unless changes can be made to ensure retirement obligations are met while providing adequate funding for other educational services, the outlook for Michigan’s teacher salaries remains gloomy.

Note that most of the articles I find are about teachers — and, as I’ve noted before that teachers are the most numerous state and local employees.

One more from Michigan: Is Michigan school spending up or down? Pension problems muddy the answer

Average teacher pay is stagnating in Michigan, likely heightening the struggles some school districts face trying to fill teacher positions and avoid uncertified long-term substitutes.

The cause: the rising cost of pensions for retired teachers, which now accounts for a third of payroll in the state’s traditional public school districts, according to a report released this week by Citizens Research Council of Michigan.

Teacher pay is one of numerous issues, including whether school funding is actually up or down, that can be traced to teacher pension problems, according to the report.

“We were trying to answer the paradox of per-pupil spending being up, and the claims from the field that we’re not seeing it,” said Craig Thiel, research director at Citizens Research Council.

State dollars spent on public schools have increased, but most of that additional cash is going to pension checks, Thiel said. That means the resources in a typical third-grade classroom – and the paycheck of the teacher leading that class – have barely budged.

This will become more acute… the number of seniors are growing more rapidly than the kiddies.

So, when priorities are made – who will get shafted?

The seniors? Who vote? And are concerned about their own benefits?

Or the kids? Maybe their parents will vote based on these interests… but if the seniors outnumber the parents?


Of course, those retirees kinda need taxpayers to cough up the dough. Because even if the public school systems are short-changed, the taxpayers want to make sure they’re getting roads and police protection and all that for their money.

As opposed to shoveling money to people who earned their benefits decades ago, who cannot strike now, and whose pensions should have been funded at the time they earned those benefits.

To be sure, this particular pain is not equally shared across the country.

But we will see that when I finish my cash flow projection tool update.

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