The Boston-based Pioneer Institute is out with some reviews of public employee benefit programs. (All are in PDF format, so break out your copy of Adobe Acrobat Reader.) Public Pensions: Unfair to State Employees, Unfair to Taxpayers looks at the plans that serve 275,000-plus active and retired workers. Ken Ardon finds that the plans are “not overly generous for typical employees,” but they can be improved in several ways. He points out that ambiguities, exceptions, and loopholes open the way for abuse and obscure transparency. In a Sarbanes-Oxley world, that’s not good.

In Leaving Money on the Table, Ardon looks at the 106 public pension plans in Massachusetts. He recommends that underperforming funds be merged into PRIT, a fund that has a record of superior returns.

The Elephant in the Room discusses what may be the most serious public finance problem you’ve never heard of: GASB 45. What’s GASB 45? An accounting standard that, if adhered to by governments, will make the costs of retiree health care benefits more obvious. Right now, these benefits are estimated to be a $1 trillion liability. Lawmakers and the public must ask: should these liabilities be funded, reduced, or eliminated?

The dinner speaker one night was Howard Fuller, who is a professor of education at Marquette University, and a passionate advocate for reforming education.

“People ask me,” he said, “why do I do this?”

Why? Because children are our most precious possession; and it is our responsibility to see that every one of them is educated. There’s a tribe in Africa. Their common greeting is “And how are the children?” That’s a question that we should ask every day.

The answer in America is that come children are doing well. But many others, especially those of color and from poor families, are not doing well. This is true in many areas of life, including their education. “I believe that … all of them can learn.” Today, many are not learning.

Some teachers are very good. Too often, they work well in spite of the system, not because of it. That’s because the adults who work in schools face the wrong incentives: whether or not students learn has no effect on the paychecks of the adults running the system. That’s just wrong.

We don’t have the will to change the institutions that are not serving the children well.

The question is, who are we supposed to be standing up for, the system or the kids? “I’m standing up for the kids.”

The report, “Defusing New York’s Pension Bomb,” calls for the public sector to adopt changes made by the private sector. Under the current system, which obscures costs, taxpayer contributions to the plans have increased $5.6 billion over the last 5 years.

Most governments use a defined benefit approach, in which an employee’s highest salary (usually the average of the highest-paid 3 or 5 years) is multiplied by the number of years of service. In recessions, investment returns go down—but so do tax receipts. That is, under a defined benefit plan, states must pay more money into employee plans at a time when they can least afford it.

The report calls for New York to shift employees to a defined contribution plan, in which a fixed percentage of compensation—say, 5 percent of a salary—is put aside. One benefit of the proposal: pension costs would be predictable. Another: when politicians increase the level of employee benefits, their moves will be more obvious to the public.

Why is reform required? There are many reasons, but here’s one. In recent years, New York City has implemented record tax increases. Three quarters of the increase has been dedicated to shoring up the pension plans.

It’s easy to get discouraged when thinking about health care policy. The expansion of government programs, while perhaps well meaning, crowds out the private sector. Programs meant for the needy have become thought of as a middle-class entitlement, and sizable budgets are growing even larger.

Yet there are some interesting and even worthwhile experiments going on in the states, which could have significant benefits for taxpayers, service providers, and people in need of care.

Kentucky, for example, is moving towards demanding co-pays for emergency room visits, something that one panelist called “an excellent idea.” Does that sound harsh? Consider that when people use ER visits as a substitute for ordinary office visits, the extra and unnecessary costs are borne by everyone. The idea behind co-pays is not to reap extra revenue—the amount is likely to be insignificant compared with the state budget for Medicaid—but to get people to become smarter users of what is, admittedly, someone else’s money.

South Carolina, meanwhile, is introducing health savings accounts for some groups of Medicaid beneficiaries. (Now might be a good time to point out that Medicaid serves four very different group of people: the mentally retarded and developmentally disabled; those in need of long term care such as nursing home residence; S-CHIP, or children; and the general population. Reforms that work for one group won’t necessarily work for another.)

South Carolina will also use a bidding system for long-term care beds in nursing homes, rather than using a “cost-plus” formula.

Florida will be offering some people in Medicaid 13 different plans to choose from—more than many people with employer-based coverage have. Health care providers will be given risk-adjusted payments, meaning that managed care organizations will get more money for taking on AIDS patients or children with difficult-to-treat diseases than they would for nearly healthy individuals. The state also will pay people for healthy behavior, on the theory that doing so will save taxpayer funds and result in healthier lives.

To what incomes do the highest rates apply? You may be surprised.

In Maine, the highest rate is 8.5 percent. (The Tax Foundation has a handy chart of income tax rates for the 50 states.)

So what income must you have to pay at this substantial rate—$1,000,000? $200,000? $177,000? No. Try $17,700. For a family of four, the federal poverty level is $20,000. As Bill Becker of the Maine Heritage Policy Center points out, you can be hit by the highest rate in Maine and still qualify for Medicaid.

Remarkable.


Note: This is one of a series of observations from the Education Reform Summit / Annual Meeting of the State Policy Network, held in Milwaukee during the week of October 2.

It’s been said by some that the move towards defined contribution plans (e.g., 401k) and away defined benefit plans (i.e., traditional pensions) is an act of a right-wing cabal seeking to beat up on the worker. In the case of public employees, it’s allegedly part of a plan to dismantle government.

How then to explain the moves of some people not usually thought of as being part of the “vast right-wing conspiracy?” Gov. John Corzine (D-NJ), for example, recently suggested that New Jersey must change the benefits packages it offers to new employees. (States usually cannot legally change the benefits packages of current employees.) In his State of the State address (p. 5, PDF), he called for raising the retirement age and “means-tested defined contribution plans.”

The marketplace is moving towards defined contribution plans, for their portability, and predictability. Government, driven by vote-seeking officials and special interest groups, is far away from matching the private sector, in which two-thirds of pensions are defined contribution.

But the hard facts of economic reality eventually make their impact known, even in a political climate. If government employee pension plans continue to outpace private plans, if politicians continue to implement unwise policies to buy labor pace, states will be faced with some unpleasant choices. They can impose crushing tax increases to maintain existing growth rates of government and of pension plans, or they will find a way to cut programs to pay for pension obligations.

Public programs such as Medicaid grow every year; in 2005, for example, spending on the Wisconsin Medicaid program grew 9 percent. And that’s without any expansions in the eligibility or benefit levels. Private insurance premiums increase at rates that put a squeeze on employers.

Spending more money on health care is not necessarily bad. Increased longevity is a good thing, as is increased health among the aging, the eradication of diseases, and improved treatment of chronic diseases.

But the current approach has many unintended consequences and side effects. The fact that most people get their insurance through the workplace mean that when you lose your job, you lose your insurance. That’s certainly the wrong time to lose insurance. This discourages people from changing jobs, which discourages economic dynamism and promotes an ill-fitting match between people and work.

Public programs, meanwhile, aren’t good for taxpayers or patients. One of today’s speakers, for example, said that it’s very difficult for a Medicaid patient in southeast Wisconsin to find a doctor. That’s not a good record for a program that allegedly serves the poor.

The solutions are many. Some involve changes in federal law. Others can be done at the state level. Still other solutions require changes in personal expectations of what health care should look like.

Note: This is one of a series of observations from the Education Reform Summit / Annual Meeting of the State Policy Network, being held in Milwaukee.

Taxpayers in Massachusetts have turned back attempts at instituting a graduated income tax—five times. In 2000, they went further, a successful ballot measure called for reducing the rate from 5.85 percent to 5.3 percent.

When a number of people objected to the cut, saying “I could pay more,” taxpayer advocates made an offer. They created a tax return that let tax filers pay either the new (lower) rate or the new (higher) rate.

So when people were given the chance to put their money where their mouths were? In 2000, 1 million people voted against the tax cut. Since the creation of the alternative tax rate, no more than 2,000 tax returns each year have used the higher rate.

You may know that Social Security is a fiscal disaster in the making. You may even know that Medicaid and Medicare and threatening state and federal budgets. But did you know about the other looming fiscal crisis, retirement benefits for public employees? General Motors faces an unfunded liability of just over $90 billion. For governments across the country, that number is $300 billion to $800 billion.

The private sector has moved toward a defined contribution system, with two-thirds of all retirement plans being of the defined contribution (DC) variety. Why the switch from the old-style defined benefit (DB) plans? Companies see the writing on the wall. In a global market, they must be able to compete on fiscal terms, and they cannot afford to continue on the current path. Further, increased mobility of workers mean that DC plans are required to attract employees who won’t be happy with DB plans, which penalize job-hoppers.

But only 90 percent of all public sector plans are DB plans—and they are generous plans at that. For political reasons (buying labor peace, campaign contributions, and votes), public officials are tempted to increase benefits through making benefit formulas richer, reducing the retirement age, and taking other steps that bring visible rewards today but costly obligations later on.

Officials must take one of three actions, or a combination thereof, to deal with the unfunded liabilities: raise taxes; cut benefits, or make reforms to pension programs. Moving toward DC plans is part of that reform. (Unlike companies, governments can’t discharge their obligations through bankruptcy.)

The cliché that politics makes for strange bedfellows has been proven several times this week, in which the Milwaukee Parental Choice Program has been highlighted. Under the program, families who live in the jurisdiction of the Milwaukee Public Schools and fall below a certain income level can get a school voucher. In other words, parents, not bureaucrats or politicians, decide where their children attend school. The program has been around in some form or another since 1990, now lets parents take control of $6,500 for use at an array of schools, including over 120 private schools.

The program has faced numerous challenges from the teachers unions, the rest of the education bureaucracy, and elected officials of both major political parties.

The first major legislative supporter was Polly Williams, an African-American Democratic lawmaker from Milwaukee. Of late, the leading legislative advocates have been white Republicans from outstate Wisconsin. When the lawsuits came along, libertarian-minded public interest firms provided significant support in the legal defense. And of course the people with the greatest interest in the program are the families involved in it.

If you assemble a representative group of the program’s defenders, you may find that they may not agree on much of anything else. In fact, they each may have several reasons for supporting school choice, and those reasons may not be compatible. But there is one thing that they hold in common, and that’s a belief in the principle that children matter over systems.

Many people who debate school choice, pro or con, are able to exercise it if they choose. In a forum of Wisconsin legislators, Representative Leah Vukmir (R-Wauwatosa) recounted her entry to the school choice movement. She was concerned about her child’s education, and knew that she could move her child to another school. But what bothered me, she says, was that some people couldn’t do that. This is what school choice is about: extending the ability to choose from those who can to those who cannot.

Vukmir pointed out another benefit to school choice: economic revitalization. The increased number of students able to attend private schools attracted new investment in schools. A well-educated population also brings economic benefits to the city and state as well.

Another example of a web-based directory is Great Schools. It includes public schools (including charter schools) and privately run schools. You can look at assessment data and other information across schools. It also offers public comments on specific schools.