States have been called the laboratories of democracy. If so, then these laboratories are like Dr. Frankenstein’s, or one of those secret, sinister installations where mad scientists supervised by demented bureaucrats cook up chemical and biological agents that can wipe out humanity. State and local governments are burdened by promises made to their employees they cannot keep. Unlike the federal government, they have no recourse to a money-creating central bank, and cannot, except through accounting legerdemain, run deficits. The states have had a variety of creative, albeit perturbing, responses to fiscal stress. In the future expect them to get even more “imaginative.”
Last week Bloomberg.com hailed an increase in the average state pension funding ratio—the percentage that a pension is funded—from 68.7 to 69.3 percent. The article was more cause for concern than celebration. The increase was the first in six years, after five years of “recovery,” and was propelled by the stock market’s hefty ascent last year. The S&P index is not going to rise nearly thirty percent every year, and pension funds have been using unrealistic return assumptions to guide their contributions (many assume 7 to 8 percent, with high quality long-term bonds, which are a good portion of their investments, yielding less than 4 percent). Ominously, the pension funding ratio is much higher than that for promised medical care. The Pew Charitable Trusts, which have done several studies on states’ funding gaps, puts that ratio at under 5 percent in 2010, and it probably has not improved much since then. The total shortfall is at least $1.38 trillion.
When the going gets tough the tough get going. Raising taxes to fund benefits for government employees is a nonstarter, and it moves your jurisdiction lower in all those business climate surveys. You can only sneak in so many user fee and rate hikes, and many of them smack of desperation. Some states are letting fewer in-state and more out-of-state students—who pay higher tuition—matriculate to their public colleges and universities. Vice and sin have been embraced as a revenue source: liquor and cigarette taxes, government-run lotteries, and casino gambling. Weed taxes are part of the argument for marijuana decriminalization and legalization. If prostitution is ever legalized outside of Nevada, expect proponents to use potential fornication levies to clinch the case for it.
States and cities have been playing venture capitalists, offering subsidies and tax breaks to entice businesses to their locales. California has seen a steady migration of its movie and television production to states offering such blandishments. Subsidy glutton par excellence Elon Musk put states in competition to see who would offer him the largest bribes for his car battery factory (Nevada won). No self-respecting mogul would relocate his athletic team without receiving taxpayer assistance for a new sports palace and sweetheart deals on parking, concessions, and television rights. The theory is that public venture capital pays for itself as relocated businesses create jobs and generate new tax revenues. Many studies indicate otherwise, but politicians get photo ops with glamorous stars or at ribbon cutting ceremonies in front of a new stadium or factory. What the press releases never hail are the individuals and businesses who are soaked to fund this misguided largess.
Civil asset forfeiture puts another hand in our pockets, making a mockery of the Fifth Amendment’s guarantee of due process before persons are deprived of their property, and its stricture: “nor shall private property be taken for public use without just compensation.” Authorities have confiscated cash, cars, boats, and homes from people they claim to have “probable cause” for suspecting of having committed a crime. The suspect need not be convicted, or even charged. When the suspect’s property is confiscated, a civil lawsuit is filed directly against that property, leading to weird case names like US v. One Pearl Necklace and State of Texas v. $6,037. The property is guilty until proven innocent, and the owner is required to run a lengthy and expensive legal gauntlet to reclaim it. Understandably, many owners choose not to do so. Confiscating authorities then get to keep it, which has led to rampant abuse. (see “Taken,” by Sarah Stillman, The New Yorker). Police cruise in high-end cars, trucks, and SUVs, and their departments use confiscated cash to meet all sorts of vital “needs,” like drones and MRAP armored vehicles.
This is the ugly side of municipal finance, and it’s only going to get uglier. When a city or state is tapped out, it has three groups it can disappoint: recipients of services, employees, and creditors. All three find themselves losing an increasingly brutal game of hardball. Bankrupt Detroit turned off the water on those who hadn’t paid their bills. Last week fiscally challenged Philadelphia unilaterally canceled the expired contract under which its teachers had been working and decided they would contribute to their own health insurance for the first time. This will be challenged in court, but when the money is not there, it’s not there. In California, like many other states, it had long been believed that public pensions were protected by the state’s constitution. Earlier this month, US Bankruptcy Judge Christopher Klein punctured that notion, ruling that bankrupt Stockton could reduce promised pension payments.
Although there are a number of worthy contenders, right now municipal bonds may be the worst investment class on the planet. Although it is tax-free, interest received is microscopic, subjecting holders to significant price risk when rates head back up. State and local governments are careening towards the brick wall of their unfulfillable promises, which translates into substantial credit risk. When they run into trouble, bondholders will be just another class of combatants in lengthy, convoluted political and judicial food fights. Save yourself the heartburn. Let somebody else lend to governments that so desperately want your money.
The Institute for Justice is a nonprofit foundation that fights civil asset forfeiture and other abuses by government. It is an excellent candidate for your nonprofit donation dollars. Website: http://www.ij.org
Pingback: A Caustically Funny Look At Civil Asset Forfeiture by John Oliver | STRAIGHT LINE LOGIC
Pingback: Reckless Stock-Market Leverage Intoxicates Politicians, by Wolf Richter | STRAIGHT LINE LOGIC