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Out of Control Policy Blog Archives: 4.7.13–4.13.13

New Jersey Announces Lottery Privatization Contract Award

The New Jersey Department of the Treasury today announced its intention to award a 15-year contract for the private operation of the state's lottery that will bring a $120 million upfront payment to the state and an estimated $1.4 billion in additional net lottery revenue to the state over the life of the deal, relative to in-house operation. From the state's press release:

To ensure the future performance of the New Jersey Lottery exceeds its past record of providing essential support to State institutions and education programs, the Department of the Treasury’s Division of Purchase and Property has issued a Notice of Intent to award a 15-year contract to Northstar New Jersey Lottery Group to provide the Lottery with services to support its marketing and sales operations.

As part of the contract terms which guarantee the State a minimum amount of income, Northstar NJ will provide an accelerated payment of $120 million to the State upon the final award and execution of the contract. It has also committed to generating at least $1.42 billion of total additional net income for the State from Lottery operations over the life of the contract with a potential actual increase in net income of $6.88 billion. The $1.42 billion mark is above and beyond what the State could expect to see if Lottery operations remain unchanged.

Northstar NJ is a joint venture consisting of GTECH Corporation of Providence, Rhode Island, Scientific Games International of Alpharetta, Georgia, and OSI LTT NJ Holdings, a unit of the Ontario Municipal Employees Retirement System (OMERS). GTECH and Scientific Games are two of the world’s leading companies in lottery management and OMERS is one of the largest pension funds in Canada.

“For more than 40 years, the Lottery has provided critical financial support to New Jersey’s institutions and educational programs. The contract we plan to enter into with Northstar New Jersey protects that legacy commitment to New Jerseyans by positioning the Lottery for sustained growth and continued success in the face of an increasingly complex and competitive marketplace,” said State Treasurer Andrew Sidamon-Eristoff.

Carole Hedinger, executive director of the Lottery, said the contract will immediately strengthen its operations. “GTECH and Scientific Games have outstanding records of success in helping public lotteries grow their revenues and improve their operations. Their business plan for the Lottery is solid, well-researched and builds upon our existing strengths.”

New Jersey now becomes the fourth state—after Illinois, Indiana and Pennsylvania—to move forward with a private management agreement for lottery operations in recent years. The shift to private management has already occurred in Illinois and Indiana, while officials in Pennsylvania continue to renegotiate their contract after the state's Attorney General raised several legal concerns in February, which has slowed the process in the Commonwealth.

Check back to reason.org in the coming weeks for my state lottery privatization roundup as part of our Annual Privatization Report 2013.

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Obama’s Cigarette Tax Will Hurt the Poor While Enriching Politicians’ Friends

CNN is reporting that President Obama wants to raise federal cigarette taxes by 94 cents per pack: 

The tax is being presented as way to fund education and reduce smoking rates. It would raise roughly $78 billion over 10 years.

"The proposed tobacco tax increase would have substantial public health benefits, particularly for young Americans," the president's budget read. "Researchers have found that raising taxes on cigarettes significantly reduces consumption, with especially large effects on youth smoking."

After a 62-cent-a-pack tax hike was passed in 2009, cigarette sales dropped by 10%, according to the Campaign for Tobacco-Free Kids.

The tax is being sold as a way to help the poor, with the revenue supposedly going to early childhood education programs. But if the results of state cigarette taxes are any indication, the tax will disproportionately hurt the poor, fund programs directly connected to politicians and negatively impact small businesses, all while consistently failing to meet revenue goals. 

Cigarette taxes hurt the poor

Cigarette taxes are extremely regressive. The poor pay a larger chunk of their income to the tax than the wealthy. This is further exacerbated by the fact that low-income, low-education and minority populations all smoke more than high-income, high-education and white populations, and by a good bit. Nearly a third of people below the poverty line smoke, while only 18% of those at or above the poverty line do. A tax on cigarettes is therefore paid mostly by society’s poorest individuals. 

Cigarette tax revenue goes to politicians’ friends

In theory the revenue from cigarette taxes helps low-income populations by xyz. But as Reason’s Adrian Moore has pointed out, in reality bureaucrats often use it to fund projects their friends run. 

In California, a cigarette tax was supposed to fund health, safety and educational programs for children. Instead, a San Diego county commission spent at least $67 million of that money to help ensure the continued employment of members of their advisory board. Almost 60% of early childhood grants went to organizations with direct ties to the commission. Another California commission used cigarette tax dollars to overpay a contractor by over a half million dollars. Then $800 million just sat around:

Supervisor Zev Yaroslavsky said First 5 LA was sitting on hundreds of millions of dollars of unspent taxpayer funds, and criticized the staff for a lack of transparency, accountability and competitive bidding.

"It's sitting on over $800 million," Yaroslavsky said. "And some of it for good reason, and some of it for no apparent good reason. It's just been sitting there and accumulating." First 5 LA's annual operating budget is about $180 million a year.

An audit by Harvey M. Rose of San Francisco found First 5 LA's commission was unable to monitor money that was being spent "since monthly programmatic expenditures are not presented relative to a budget." Auditors also concluded the agency was overstaffed while under-spending on programs for children. 

Cigarette taxes don’t raise much revenue

Not only are cigarette taxes regressive, but they often fail to meet their revenue estimates. Reason’s Anthony Randazzo notes “revenue from Gov. Pawlenty’s 2005 tax increase was estimated to generate $174 million per year, but Minnesota's cigarette tax revenue has only increased by an average of $4 million per year—a paltry 2.72 percent of the estimate.” 

Similarly, a 2008 Maryland cigarette tax increase only yielded half the projected additional revenue. 

This Mackinac Center for Public Policy study shows the states which are top destinations for smuggled cigarettes:

  1. New Jersey
  2. New York
  3. Vermont
  4. Massachusetts
  5. Connecticut 

The Mackinac Center also reports that more than 40 percent of the cigarettes smoked in Rhode Island are purchased on the black market or in other states. That represents a huge loss of revenue to state government and local businesses. In the face of the data, many states are cutting their cigarette taxes.

Taking money from poor people, hurting state businesses, filtering it through bureaucrats who are likely to waste it and funnel it toward connected organizations, and then cutting those programs that do get funded when sales decrease didn’t make sense for states and it doesn’t make any more sense on a national level. 

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New Year, Same Old Transportation Budget from the White House

President Obama has released his 2014 transportation budget. It includes much the same nonsense as his 2010, 2011, 2012 and 2013 budgets. And since Congress is no more likely to approve the projects for 2014, it is just as pointless. 

Let’s detail the old proposals in the new budget: 

$50 billion in stimulus spending: In February 2011, September 2011, and February 2012, the President requested $50 billion in one-time stimulus spending. None of these three previous proposals ever made it out of a committee. Republicans have promised the fourth time will be no different. 

Transportation Trust Fund: In FY 2012 and FY 2013 the budgets proposed to convert the Highway Trust Fund into a Transportation Trust Fund. Why? The President wanted to transition Amtrak and high-speed rail funding into mandatory trust funds so that they would be exempted from discretionary funding caps. The problem is that the gas tax, which supports the trust fund is intended for highway use only since it is paid for by drivers and bus users. And this same gas tax is going broke; before MAP-21’s gimmicky accounting rules provided a temporary fix, the highway trust fund needed 10 bailouts from the general fund. What is the solution for an account going bankrupt in part because it funds activities it was never designed to support? In Washington, the answer is to add new activities but not the revenue to pay for them. For this reason, Congress clearly rejected this approach when it passed MAP-21. Yet less than a year after MAP-21 was signed, the President wants to undo this change and increase funding by $2.7 billion for Amtrak and $3.7 billion for high-speed rail. 

Increasing the statutory cap on passenger facility charges: In the FY 2012 and FY 2013 budget the President wanted to increase the statutory cap on passenger facility charges at the largest airports in exchange for removing these airports from the Airport Program grants. However, in the 2012 FAA reauthorization law Congress rejected this approach and did not change the funding level. This reauthorization locks in existing levels until 2015. This is actually a very good idea that would save several hundred million dollars and I must give credit to the White House for proposing it. But just because a new policy is a good idea that does not justify discarding current law in the middle of a long-term authorization. And just how Congress would implement this is a mystery. 

In his FY 2010, 2011, 2012 and 2013 budgets the president proposed creation of a national infrastructure bank. While the exact details changed, the proposal never went anywhere in Congress. The 2014 national infrastructure bank would use $10 billion in seed money to finance transportation, water and energy projects. There is no reason that the transportation projects could not rely on TIFIA. Congress substantially increased the funding of TIFIA in lieu of an infrastructure bank in MAP-21. And while loans are important, the White House has not articulated why it needs an infrastructure bank. 

The White House proposal includes a few elements that are more realistic such as pipeline user safety fees and the relocation of the Research and Innovative Technology Administration from its own administration to the Office of the Secretary of Transportation. Further, the funding proposals for Surface Transportation are more realistic than in the past. (Although the targets for the FAA remain completely unrealistic.) But too many of the proposals are completely unrealistic. 

But the White House has knowledgeable transportation experts (Not Ray LaHood) who know this budget proposal is completely unrealistic, so what is really going on? The budget has always been a political document more about setting priorities than offering a real outline forward. But President Obama’s transportation budgets have taken politics to a level never before seen. The White House’s goal is to build support behind these changes for the next transportation reauthorization whether it is the Surface Reauthorization in 2014 or 2015 or the Aviation reauthorization which may not occur until after the President leaves office. The budget has become completely political. 

Transportation in Washington D.C. has become almost all about building coalitions and scoring political points; there is very little focus on solving actual real world problems. Despite passage of long-range Surface and Aviation transportation bills, U.S. transportation policy is at a crossroads. A new funding source to supplement or replace the declining fuel tax and removal of waste in the transportation budget remains a priority. After four long years the administration has finally admitted that public-private partnerships are a critical part to solving the transportation problem. I had my own unrealistic hopes that this White House might get serious about fixing our transportation problems. But I should have realized that the President’s main use for transportation is politics. In reality this administration cares very little about actual transportation policy.

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Alexander's Concerns Over Tolling are Bogus

Last week, Rachel Alexander a writer on Townhall.com who typically authors columns on socially conservative viewpoints such as how “Taking God out of the schools has contributed to the decline in society,” and how the “Disney Channel is fueling a degenerate culture because it is full of hyper, crass-behaving children,” decided to take on toll roads. Her very creative but very incorrect column on PPPs is so blatantly wrong that most blog commentators trashed it. Toll roads that allow the market to dictate when to build a new road or add capacity are as free market libertarian as any transportation concept. Let’s dissect Ms. Alexander’s myths one by one:

Myth one: It is an illusion that toll roads are a free market way to solve a growing government expense. Toll road contracts are set up as public-private partnerships, which are not the same thing as privatization. Public-private partnerships (PPPs) result in government-sanctioned monopolies granted to one or more favored companies, essentially crony capitalism. It is easy for the government to write specifications for projects so they will only fit select businesses. The PPPs may last from 30 to 100 years, granting an extremely long monopoly without competition.

Reality: Procuring a public-private partnership is an open competition with many stages. All bidders must pass through many steps including a request for qualifications, a request for proposal and a bid. It is not a monopoly since the private bidder has to meet very real performance standards. If those standards are not met the government can cancel the lease, reassume control of the highway and restart the bid process. Public-private partnerships are not the same as privatization, and where truly private roads are realistic, we support them. But full privatization is not realistic for most roads. There has been no evidence that governments have written PPPs to favor one company. But if they did, this is a failure of government not of PPPs. PPPs are long-term contracts because the public sector, the private sector and toll road users get the best deal. If the state wants to choose a shorter contract, it is free to set a contract for any length that it wants.

Myth two: The most expensive highway project in the U.S. (the big dig) was paid for by tolls, and so mismanaged that taxpayers filed a lawsuit against the state of Massachusetts over being required to pay tolls for the enormous expense.

The big dig was a conventional toll project not a PPP. Its costs escalated because after the initial plan was created, politicians put pressure on the state to add unneeded elements. Had the big dig been a PPP, this cost escalation would NOT have happened since PPPs help insulate projects from politicians. Ms. Alexander actually made a point in favor of PPPs!

Myth three: There are reports that 80 percent of the money raised from tolls goes to the company managing the toll roads. Tolls rarely disappear after enough money has been raised to pay for a project. Proponents admit this, but defend the perpetual tolls by stating that the money goes to ongoing maintenance. Isn't that what gas taxes are for? 

Reality: Tolls are the method used to finance the road. Financing is a far better method to pay for roads than funding. Since private companies build the road, it is only logical that they get paid for their work. As the private operator is responsible for road maintenance such as repaving, mowing and updating signs, they receive small continual payments for this service. For private toll roads, the owner collects the toll and operates the road. And as Ms. Alexander points out earlier in the report gas taxes do not pay for all maintenance costs since they have much less buying power than 10 years ago. Private operators receive the funds because they are the entity that is managing the road.

Myth four: The traffic diversion that results from toll roads increases congestion on roads in other locations. This leaves too few motorists on the toll roads to make them efficient.

Reality: Traffic diversion from toll roads is very minor. Often the alternative roads are just as congested or take much too long to be a realistic alternative. Toll roads put an economic price on an otherwise unpriced trip. Since gas taxes do not fully pay for roads, driving is artificially cheap. Toll roads help restore economic balance to the system.

Myth five: Those who do not pay the tolls, for whatever reason, are treated practically like criminals and fined incredible amounts of money. Not to mention the state may suspend their driver's license and registration.

Reality: Enforcement is not any toll road operator’s favorite task. And some toll road operators wait to begin enforcement until multiple violations have occurred. Those who do not pay tolls are breaking the law; as many toll roads do not receive gas tax money, they have no other source of funding. If everybody freerode like these toll violators there would be no money to maintain the road or pay back the bonds. Each toll violation is a small fine. But if somebody has 50 violations, that is going to be a significant amount of money. Suspending someone’s license is the last alternative and only occurs after someone has racked up multiple violations.

Myth six: There is a deafening silence from the left about the disparate impact toll roads have on the poor. The left is also noticeably silent regarding the extra wasted fuel that is used and dispersed into the environment as motorists drive extra miles to avoid the toll roads. 

The Transportation Research Board has studied equity issues in toll roads and found a very minor impact. Lower income individuals often value toll roads more than others because they face more serious repercussions from being late to their jobs. Drivers with children in daycare value toll roads because the cost of the toll is far lower than the cost of picking up their children 15 minutes late. Some toll operators have studied vouchers. But since the equity effects are so minor, it is generally not good public policy.

Myth seven: Toll roads wouldn't be quite as bad if government would adopt them in place of gas taxes. 

Reality: Toll roads can be funded without gas taxes. And Mileage Based User Fees (MBUFs) may allow gas taxes to eventually disappear. But gas taxes pay for local, state, and federal roads and only a fraction of these roads have tolls. 

Myth eight: Gas taxes may not be a perfect way to fund roads, but they aren't much more of a tax than toll roads. 

Reality: Gas taxes are not a perfect way to fund roads and tolling is much better. With tolls the highway operator can charge users the exact amount the highway costs to build and maintain. And to manage congestion, the toll can be varied depending on the time of day. A gas tax is a flat instrument that pays for all roads equally. Roads that are more extensive to maintain such as freeways are charged the same rate as roads that are cheaper to maintain such as neighborhood streets. And part of the federal gas tax and many state gas taxes supports transit, bicycling, walking and removal on non-native vegetation. It is hard to understand how a tax that supports these non-highway project is a better way to pay for highways. 

There are some other important facts that Ms. Alexander forgot to mention. It was President Eisenhower’s and many other transportation policy makers choice to toll the interstate highway system from its inception in 1956. However, lower traffic counts in the west and the lack of technology made this unrealistic. But now where traffic counts are feasible there is no reason not to build new toll roads. In poll after poll motorists favor tolls over increasing the gas tax. The left-of-center Brookings Institute, the fiscally and socially conservative Heritage Foundation, the moderate Eno Foundation, and yes we heathenous libertarians at the Reason Foundation, Cato Institute and the Competitive Enterprise Institute all support tolling because it is the fairest and most economic way to pay for infrastructure. 

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Margaret Thatcher was the Master of the Free Market

A roundup of some of Reason's commentary on the impact Margaret Thatcher:

Thatcher was the Master of the Free Market 
In USA Today, Kim Hjelmgaard writes: "As prime minister for more than 11 years, Margaret Thatcher stood up to communism, transformed the United Kingdom's welfare state, liberalized its financial markets and wrought political changes that inspired and divided generations alike.

“But on the home front perhaps most of all she changed the way people in Britain lived every day, especially how they conducted business. 'Virgin wouldn't be flying from Heathrow if it wasn't for her believing in competition,' said Richard Branson, the English businessman and chairman of the Virgin Group, on Monday.

"Thatcher explained her vision years later for Reason magazine. 'Privatization shrinks the power of the state and free enterprise enlarges the power of the people,' she said. 'The policies we introduced ... were fiercely opposed. Too many people and industries preferred to rely on easy subsidies rather than apply the financial discipline necessary to cut their costs and become competitive. But we understood that a system of free enterprise has a universal truth at its heart: to create a genuine market in a state you have to take the state out of the market.'"
In Her Own Words:Read Margaret Thatcher's Column for Reason Foundation's Annual Privatization Report

How Thatcher Liberated Western Europe
"Like all the geopolitical giants of the 1980s—Ronald Reagan, Mikhail Gorbachev, Pope John Paul II, Nelson Mandela, Helmut Kohl—Thatcher was a flawed character who made grievous mistakes. But to her lasting credit—and to the lasting fury of her staunchest ideological enemies—Thatcher fatally discredited the notion that governments in the West have any business owning business, and did so with both word and deed at a time when the outcome was anything but certain. May we continue to heed that lesson." — Reason magazine Editor in Chief Matt Welch

What America Can Learn From Thatcher Today
At Reason.com, Ira Stoll writes: "In today’s America, mere minor reductions in planned growth in government spending trigger paroxysms of political opposition, and the prospect of reducing government’s share of the economy, as Thatcher did, by eight percentage points seems remote. But it probably seemed remote in the late 1970s, too, that Britain’s first woman prime minister, who had grown up in an apartment above her father’s grocery store, would reshape a failing post-colonial power into an exemplar of liberty."
Ronald Bailey: Timeless Quotations from Margaret Thatcher

Explaining Reason's Role in the Thatcher Revolution
John Blundell, author of the book Margaret Thatcher: A Portrait of the Iron Lady, writes, "Let me use this sad day not to mourn but to celebrate the $30 billion a year Reason’s Bob Poole has saved the U.K. taxpayer for decades now. Why the Queen has not given him an honorary knighthood is beyond me."
Video: John Blundell on The Legacy of Margaret Thatcher

Comparing the Real Thatcher and the Symbolic Thatcher
Reason Senior Editor Jesse Walker offers a different take: "Thatcher did enact some genuine market reforms, most notably when she privatized enterprises her predecessors had nationalized. But at a time when countries all over the world were liberalizing their economies in one way or another—even nominally left-wing governments like Manley's in Jamaica or the Labour Party's in New Zealand—Thatcher's emergence as a symbol of the transformation was a matter more of cultural perception than political reality.”
Margaret Thatcher Decentralized the British Economy But Centralized Politics

Margaret Thatcher, Meryl Streep and The Iron Lady: Fact vs. Fiction
Fact checking the Oscar-nominated bio-pic The Iron Lady

Kurt Loder Reviews The Iron Lady
"We want to see more of this woman and her unbending convictions"

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Margaret Thatcher: "Privatisation shrinks the power of the state and free enterprise enlarges the power of the people"

Margaret Thatcher, Britain's first female prime minister, has died at the age of 87 after suffering a stroke.

Reason Foundation's Annual Privatization Report published this piece by former Prime Minister Thatcher in 2006:

All too often the state is tempted into activities to which it is either ill-suited or which are beyond its capabilities.

Perhaps the greatest of these temptations is government's desire to concentrate economic power in its own hands. It begins to believe that it knows how to manage business. But let me tell you, it doesn't as we discovered in Britain in the 1970s when nationalisation and prices and incomes policy together deprived management of the ability to manage. And when we came to privatise and deregulate in the 1980s it took some time before these skills returned.

A system of state control can't be made good merely because it is run by "clever" people who make the arrogant assertion that they "know best" and that they are serving the "public interest" interest which of course is determined by them. State control is fundamentally bad because it denies people the power to choose and the opportunity to bear responsibility for their own actions.

Conversely, privatisation shrinks the power of the state and free enterprise enlarges the power of the people.

The policies we introduced in the 1980s were fiercely opposed. Too many people and industries preferred to rely on easy subsidies rather than apply the financial discipline necessary to cut their costs and become competitive. Others preferred the captive customers that a monopoly can command or the secure job in an overmanned industry, rather than the strenuous life of liberty and enterprise.

But we understood that a system of free enterprise has a universal truth at its heart: to create a genuine market in a state you have to take the state out of the market.

For Britain, the 1970s was a decade of decline: even worse than that, our people seemed to accept it. Our nationalised industries were inefficient, overmanned and weakened by restrictive practices. Government had no business being in business.

We tackled privatisation in the way which best suited us.

First, we had to put the balances of the industries we wanted to sell in good order. Where redundancies had to be made because of overmanning we were determined to ensure that those who lost their jobs would receive a capital sum related to the length of their service. For the first time in their lives this put capital into their hands and each industry helped them to find other jobs or to set up businesses of their own. Thus we made clear our concern to look after those who were losing their livelihoods as well as those who were staying on.

Read Thatcher's full piece here

Reason Foundation's Annual Privatization Report is here. 

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New at Reason: Looking Back at the Last Year in Toll Roads, HOT Lanes, Infrastructure Finance

The rollout of Reason Foundation's Annual Privatization Report 2013 continues today with the release of the Surface Transportation section—authored by Reason's Robert Poole—which provides a comprehensive overview of the latest on toll roads, HOT lanes, infrastructure finance and other news on privatization and public-private partnerships in surface transportation. Topics include:

  • Federal Reauthorization—MAP-21
  • State Public-Private Partnership Enabling Legislation
  • Transportation Infrastructure Finance 2012
  • Private Activity Bonds
  • Major Public-Private Partnership Highway Projects
  • Leasing Existing Toll Roads
  • Managed Lanes and Networks

And in case you missed it, Reason Foundation released the Air Transportation section of the Annual Privatization Report 2013 last week, also authored by Poole. It offers an overview of the latest on privatization and public-private partnerships in air transportation, with topics including airport privatization, U.S. airport security, and air traffic control.

» Annual Privatization Report 2013: Surface Transportation
» Complete Annual Privatization Report 2013

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Innovators in Action: Swampscott, MA Selectman Barry Greenfield on Breaking the State’s Control of Municipal Pensions in Massachusetts

In Massachusetts, the state mandates the types of retirement benefits that municipal governments provide to employees, effectively precluding local governments from having full control of their fiscal destiny. As unfunded pension and retiree healthcare obligations continue to mount in local governments in Massachusetts—as across the country—at least one town is trying to end the state's grip on local governments and give them the ability to pursue their own tailored, financially sustainable retiree benefit reforms.

The push for local control is being driven by Barry Greenfield, a selectman in Swampscott, Massachusetts and the founder and publisher of EfficientGov.com, a publication aimed at spreading public policy innovations. Greenfield has led the push to build a coalition of Massachusetts cities and towns—all of which have unfunded retiree benefit obligations—to build support for legislation that would give local governments the power to determine retirement benefits, rather than having the state mandate what municipalities provide.

Swampscott offers an illustrative example of the challenge local governments face. The town of 13,700 people has an unfunded liability of approximately $38 million dollars, and current pension costs account for close to 10% of the town’s budget. Worse, the town faces an $80 million unfunded liability in retiree healthcare. Together, retiree pension and healthcare benefits are currently consuming almost 20 percent of the town’s annual budget.

In our latest interview in the Innovators in Action 2013 series, I interview Greenfield on his efforts to give local governments the power to determine public employment retirement benefits in Massachusetts, getting the state out of a key aspect of municipal decisionmaking. Here's a brief excerpt of the interview:

Leonard Gilroy, Reason Foundation: Can you describe what prompted you to launch your current pension reform initiative?

Barry Greenfield, Town of Swampscott, MA Selectman: My town, Swampscott, is involved in a state-run public employee pension plan—a mandated retirement system that we pay the cost for, but which is overseen by the state. This plan covers public employees and teachers as well. It’s a defined-benefit plan where the retirement benefits for your pension are based on years of service, a multiplier that’s based on what type of employee you are, and what age you retire, in addition to employee contributions and investment return. The town contributes to those retirement benefits primarily through property taxes. A similar state-run system dictates OPEB [other post-employment benefits] like retiree healthcare benefits as well.

What’s happened over the years is that when they first implemented this program—which I believe was in 1911—the number of active employees to retired employees was at least 40-to-1. And that’s what most of these plans were designed on—a high level of active employees with relatively few retired employees. But over time, as the country has aged and people have aged, we in Swampscott are now down to a 1-to-1 ratio.

Most pension experts—and by that I mean academics, as you’ll get different answers from the actuaries involved in the state-run pension system—will tell you that the research has shown that once you get to a 5-to-1 ratio of active to retired employees, you’re really heading for trouble because you just don’t have enough new active employees paying contributions into the system to keep it afloat. There’s a myth that each employee contributes enough to pay for their own pension. Even when you add the projected investment return, the numbers simply don’t add up.

We’re at a 1-to-1 ratio in Swampscott, and it’s only going to get worse, because we have an aging workforce. If you look at the age of our municipal employees, they’ve all been working for 10 to 15 years and there are very few new employees coming into the system. People are working longer because the longer they stay working, the better the pension and OPEB benefits are.

So what I started reading and writing about in other states is what I would describe as the ability of cities to take control of their pension issues and realize that they’re unsustainable, as city and town services are falling by the wayside simply to fund retirement benefits. So what you’re seeing is that property taxes are rising—mine have gone up 50% in six years—but the services in the town have not improved. Almost all of that money has gone to pension or OPEB benefits.

[. . .]

This April, the town will be voting on a home rule petition that says we should have the freedom to decide what retirement benefits are a fit for our financial situation. The reality is that each town is not identical in terms of its fiscal footprint. We’re a small town trying to offer city-like services with few prospects for regionalization. It’s not necessarily saying that we’re going to move away from a defined benefit plan, nor does it say that we’re going to move toward a defined contribution plan. It’s not saying exactly what we’re going to do—all we want is the freedom to pursue options because we’re $38 million underfunded in our pension obligations and close to $80 million underfunded in our OPEB obligations. While those numbers may change a little on a day-to-day basis, they are still significant numbers when you’re talking about a town of only 13,700 people.

So I think that our town has proven that this particular mandate from the state—and I actually believe it’s an unfunded mandate—we need to be able to determine what’s best for us. We’ve proven that the current system doesn’t work for us, so that’s what this issue is all about.

The full interview is well worth a read and is available here. Other articles featured in the Innovators in Action 2013 series are available here.

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