In this Let People Prosper episode 65, let's discuss the legislative priorities set by the Texas House and Texas Senate in their recently proposed recommended budgets. While there's much to wade through, here’s what I’ve derived so far from the House and Senate recommended budgets. Of course, there will be many discussions over these budgets during the next several months until a final budget is determined and approved by both chambers, but these recommendations give a good indication of the priorities of each chamber, much like your family's budget.
The first thing to note is that both chambers have prioritized public education and property tax relief to a certain extent. Both chambers have relatively large increases in public education, but the details will need to be worked out throughout the legislative session to determine the allocations to public education spending and tax relief.
In general, there should be a push for spending current resources more wisely within public education before considering any new money. In other words, there could be a large amount of money to buy down the school maintenance and operations property tax as outlined in TPPF's property tax plan (view how much you would save over time with our online calculator).
The House budget noted first in the table below shows that the recommendations for state funds and all funds (state and federal) are greater than the Conservative Texas Budget limits based on growth of 8% in population and inflation in the last two fiscal years. The amounts appropriated for 2018-19 budget are from the LBB's Fiscal Size-Up for an apples-to-apples appropriation comparison. I've also noted the Texas Comptroller's Biennial Revenue Estimate (BRE) amounts. The House budget allocates $9 billion towards pub ed/property tax relief but is contingent on bills passed for those. There aren’t specific allocations of that $9 billion for pub ed or property tax relief.
The Senate budget is noted second and is below our CTB limit for state funds but is above our limit for all funds. The Senate budget provides $6 billion in pub ed/prop relief to the tune of $3.7 billion for increased teacher pay ($5,000) and $2.3 billion for prop relief.
I've excluded $7.1 billion in federal funds from both chambers' 2020-21 budgets for disaster recovery after Harvey as these should be one-time, unexpected expenses.
Overall, the Senate budget is in better shape to meet the CTB limits to keep the average taxpayer's ability to pay for government from unnecessarily growth and doesn't include use of the ESF like the House does of $633 million.
Bottom line: There’s work to do to limit government spending and provide tax relief to #letpeopleprosper.
In this Let People Prosper episode 64, let's discuss the Texas Public Policy Foundation's Policy Orientation, which was a sold out event that helps define the narrative for the 86th Texas Legislature, and highlight the recent spending limit set by the Legislative Budget Board.
The following are the panels that I moderated or participated in some capacity and my key takeaways with resources:
The other big news on Friday was that the Legislative Budget Board (LBB) set the state's spending limit for the upcoming 2020-21 budget. This spending limit is on only general revenue not dedicated by the constitution which is less than half of the total budget. While statutorily the spending limit should be based on growth in personal income, last session the LBB chose the rate based on population growth and inflation. This time the spending limit is 9.89% for the 2020-21 budget, which is based on an increase of 8.39% in population growth and inflation and 1.5% for Harvey.
This is another good sign that the LBB continues to use a measure for the limit that better matches the average taxpayer's ability to pay than the inappropriate growth rate of personal income. This spending limit is in-line with the recent BRE increase of 8.1% in general revenue-related funds and provides funds available to cover needed expenses along with property tax relief. Specifically, the Legislature could use half of the funds of about $4.4 billion for spending and 90% of the rest of the funds of about $4.1 billion to buydown the school maintenance and operations property tax.
In this Let People Prosper episode, let's discuss today's release of the Texas Comptroller's Biennial Revenue Estimate report. This report is key because the state's balanced budget amendment means this estimate provides the projected amount of taxpayer money available for the 86th Texas Legislature to appropriate during the upcoming legislative session that starts tomorrow. The revenue estimate indicates that the Legislature can pass a budget that funds legislative priorities while including taxpayers in the budget process by lowering property taxes within the average taxpayer's ability to pay.
The report notes that the 2020-21 budget will have available an estimated $265.6 billion in all funds (state funds and federal funds) (6.7% increase), $176.9 billion in state funds (7.3% increase), and $119.1 billion in general revenue-related funds (8.1% increase). Included in these amounts is an available fund balance of $4.2 billion remaining from the 2018-19 budget.
The 86th Legislature has a grand opportunity to pass what could be the third straight Conservative Texas Budget (CTB) while prioritizing taxpayers in the budget process to lower property tax bills and improve education.
Specifically, the Conservative Texas Budget Coalition, which includes the Texas Public Policy Foundation and 15 other member organizations, has set conservative spending limits on the 2020-21 budget of $234.1 billion in all funds and $156.5 billion in state funds based on an 8 percent increase in population growth plus inflation over the previous two fiscal years above current appropriations.
There are also 2018-19 supplemental bill limits of $3.6 billion in state funds and about $4.4 billion in all funds to cover unfunded expenses in the 2018-19 budget. But these amounts could be quickly reached as there's a $1.8 billion amount likely needed to fund a delayed payment to transportation and $2 billion in unfunded Medicaid expenses. Legislators will need to appropriate these dollars wisely so the 2018-19 budget can be the second straight CTB.
But the Conservative Texas Budget is a maximum to just keep in line with the average taxpayer's ability to pay. Given skyrocketing property taxes, the Legislature should add taxpayers in the budget process and limit general revenue-related funds spending so that the rest can be used for property tax relief through the TPPF proposal here. Many have claimed that Texas can't afford TPPF's proposal, but this revenue estimate shows that Texas clearly can and must for the sake of prosperity in the Lone Star State.
If the upcoming 86th Texas Legislature limited spending of general revenue-related funds to just 4% growth, that would provide $4.4 billion in new spending on budget items while allowing the rest of the 4% of those funds under the CTB of $4.1 billion to go to lowering the school maintenance & operations (M&O) property tax.
The school M&O property tax is about 45% of the total property tax burden. The $4.1 billion would amount to an almost 8% biennial cut in that portion of the property tax, leaving more money in the pockets of taxpayers. The school M&O property tax would continue to be lowered each session given taxpayers are part of the budget process and fully eliminated within about a decade. This process could be sped up by lowering the rainy day fund cap and using excess funds, which the rainy day fund amount could grow to more than $15 billion, to provide property tax relief.
Although slowing the growth rate of property taxes over time is good step towards reform, taxpayers want lower property tax bills for relief. The TPPF proposal works to lower property tax bills, and the Texas Comptroller's revenue estimate proves that it can and must be done.
In this Let People Prosper episode 61, let's discuss the U.S. Senate's passage (and soon will be in the House) of a landmark criminal justice reform bill called the First Step Act, the unanimous vote by the Texas Commission on Public School Finance of recommended changes to the system, and the ninth increase by the Federal Reserve of the federal funds rate target to a range of 2.25-2.5%.
These are all key issues. But I'm particularly proud of the work that TPPF's Right on Crime team did to make criminal justice reform a priority for years and ultimately by the Trump administration. The First Step Act "provides reentry programming to help reduce recidivism, includes modest sentencing reforms, increases public safety, and gives those incarcerated a second chance once they have paid their debt to society." This is truly a step in the right direction as far too many are locked up for far too long and then return to a life of crime after because of the lack of a job and social normalcy.
The Texas Commission on Public School Finance provided a number of recommendations on how to improve student outcomes, how to increase teacher pay, how to more efficiently spend taxpayer money, and ultimately how to provide tax reform. Fortunately, the final version included language similar to TPPF's property tax plan that could provide lower property tax payments for Texans across the state. This is what Texans need and deserve to assure that they have every chance possible without unnecessary government barriers keeping them from reaching their hopes and dreams.
Finally, the Federal Reserve raised their overnight lending rate between banks, known as the federal funds rate, to 2.25-2.5%. This is the 9th increase since December 2015 after the Fed had left this rate in a range of 0-0.25% for seven years. The new rate remains near historic lows, as noted in the chart below.
While the stock market tanked after this report, the fundamentals of the economy remain relatively strong. One reason for the decline in the stock market today was because the price of credit increased today. This raise reduces the net present value of longer term capital investments and profitability along with the expectation of at least two more raises next year.
My take is that the Fed left rates too low for too long when you compare it with an indicator of a more market-driven, "neutral" rate derived by the Taylor rule. As you'll notice in the figure below, the Taylor rule suggests a neutral rate above 4%, which is almost twice as high as the federal funds rate. By the Fed's distortion of the markets with imposing an ultra-low interest rate policy and multiple rounds of quantitative easing, there are many assets that are bound to be highly inflated and we should expect corrections in these markets as the rate is raised to a more normal level. This isn't necessarily a bad thing as letting the air out of these inflated markets will help steady the markets and ultimately the economy for a firmer foundation for the long run. Interestingly, stocks remain much higher than they were when President Trump took office, which are positive signs of a growing economy as the economic institutions were strengthened from regulatory and tax relief even as burdens were imposed by excessive government spending and trade protectionism.
More to do to #letpeopleprosper.
In this Let People Prosper episode 57, let's discuss the following: 1) latest news on the stock market volatility from uncertainty regarding international trade and the Federal Reserve actions; 2) my latest co-authored piece at the Dallas Morning News on the economic freedom of Buc-ees and what could be done to increase prosperity; and 3) what's next for Texas' rainy day fund.
Below is the file for my presentation before the American Legislative Exchange Conference's Fiscal Policy Reform Working Group in Washington, D.C. This presentation is based on my TPPF research paper titled "Do Institutions Matter for Prosperity in Texas and Beyond."
I've also provided a more in-depth presentation in this episode of my YouTube series "Let People Prosper" at the channel "Vance Ginn Economics."
Eliminating Property Taxes in Texas Starts With Limiting Government Spending: Let People Prosper Episode 53
In this Let People Prosper episode, let's discuss one of the things that's on most Texans' mind: property taxes. I recently testified before the Texas Commission on Public School Finance's Revenue Workgroup on the problem and solutions to wretched property taxes in Texas. Here's my written testimony and you can watch my oral testimony at time 59:45 here.
Texas’ property tax system has turned property owners into renters, where government is their landlord and Texans who struggle to pay annual tax bills face confiscation of their properties. Additionally, the growth of government is harming taxpayers and the economy through higher taxes and more regulation.
The goal must be to eliminate all property taxes as they violate property rights, destroy economic growth, and disproportionately hurt the poor while being subjectively determined as they support excessive local government spending. A good place to start down that road is by ending nearly half of the property tax burden in Texas through the elimination of the school maintenance and operations (M&O) property tax, which is supported by the 18 groups in the Conservative Texas Budget Coalition. This is relatively easier than other local tax jurisdiction because the state already determines the school finance formulas and has a way to distribute funds to school districts.
First, we must identify the problem.
From 1996 to 2016, total property taxes across the state have increased by 233% while the school portion of the property tax increased by 201%. Personal income has increased by 199%; however, the best metric of the average Texan's ability to pay taxes is measured by the compounded growth of population plus inflation for that period, which was only 123%. This means that the total tax levy increased by 1.9 times more than pop+inf and the school district tax levy increased by 1.6 times more than the average Texan's ability to pay.
It's no wonder that many people are being forced out of their homes and businesses because of skyrocketing property taxes. This is a travesty what government is doing to people who are trying to leave a legacy for their kids and grandkids.
This points to the disease of the symptom of high taxes: excessive government spending. Taxes (and deficits) are always and everywhere a spending problem. To gain control of skyrocketing taxes, we must first get control of the driver of the problem in excessive government spending.
This brings us to a solution: By limiting state and local government spending, Texas can use taxpayer dollars collected at the state level to eliminate the school maintenance and operations (M&O) property tax, which is nearly half of the property tax burden, very soon. While other options have been tried in the past, like raising the homestead exemption and swapping the property tax with a reformed franchise tax ("margins tax"), those didn't permanently reduce property taxes--making those attempts a failure in the eyes of most taxpayers.
Fortunately, there are solutions.
One option is to permanently buy down the school M&O property tax with state surplus dollars until it is eliminated. Here's how:
Another option is to replace the school M&O property tax by broadening the sales tax base and limiting state and local government spending. Here's how that could work:
Clearly there is no silver bullet. This will be a difficult hill to climb whichever option is chosen.
Recently, two economists from Rice University estimated that if the buy down option or the swap option over time was chosen, the Texas economy could expand by about $12.5 billion above expected growth and private sector job creation could increase by 183,000 net jobs above expected growth soon after reform.
The Texas Model is strong, but there's more that must be done. These options would provide a clear path to more prosperity and less of a burden of holding property until you can finally own it when property taxes are eliminated entirely.
Check out the article by economist Stuart Greenfield below.
It's interesting how his progressive views, and CPPP—but I repeat myself, has started appropriately considering growth of government spending at no more than population growth and inflation. They just happen to want to use a measure of price inflation for state-local expenditures that grows at a more rapid rate than the more typically used consumer price index, which matches their desire to increase spending and ultimately taxes.
Of course, the State-Local Implicit Price Deflator supported by Greenfield in the piece below closely measures prices of goods and services purchased by government with little to no voluntary exchange because they are dominated by government intrusion—both the demand and supply. So, those who want spending to rapidly grow can ratchet spending up to increase demand or regulate the supply to get their desired level of spending, which would most often be MORE!
Instead, let’s consider the often recommended measure of population growth plus inflation, which is recommended by the Conservative Texas Budget Coalition for a Conservative Texas Budget.
State population increases may require more government provisions. Inflation measured by the Consumer Price Index is closely tied to wage growth (see figure below). The addition of these two measures allow for some level of economies of scale. Thus, the metric of pop+inf gives a relatively good indicator of Texans’ ability to pay for their government instead of how much government can inflate their spending by controlling demand and supply.
Given it's Halloween, here’s the spooky part: Governments in Texas already spend too much. In fact, the state's budget is up 7.3% more than population growth plus inflation since 2004. This amounts to $15 billion more in taxpayers dollars spent this two-year budget cycle than if the Legislature had increased the budget by no more than pop+inf since 2004. Or, this means that Texas families of four must spend $1,000 more in state taxes, on average, this year alone.
They’ll really go nuts when there is the necessary push for a budget that doesn’t increase at all, or…wait for it…shrinks! Because we all know the government currently spends way too much. Meaning we are taxed way too much!
The best measure of government is their spending of our hard-earned tax dollars. Guess that’s too spooky for some.
Here is the article by Stuart Greenfield at Quorum Report
Greenfield: "How much more can be cut from the Texas budget"
In response to the TPPF-led “conservative budget,” economist Stuart Greenfield argues that “what these proposals don’t recognize is that growth in population varies over space and that using the CPI understates the increase in prices local governments experience. But what’s a methodological error among conservative friends?”
Before beginning my analysis of state spending over this century, I would like to wish both Ursula Parks, director of the LBB and Mike Reissig, Deputy Comptroller the best as they head off into the joys of having a defined benefit plan pension for the rest of their lives. I would also like to thank them for their willingness to assist my less than sterling efforts at providing readers of the QR analysis on various public policy issues.
In Shakespeare’s Most Famous Soliloquy, Hamlet states, “to be or not to be that is the question.” This soliloquy must have been modified by the recently organized Conservative Resolution Underfunding Many Basic Services (CRUMBs), whose motto is “to spend or not to spend, what a stupid question.” Alternatively, the group might have named itself, Conservative Actions Killing Education (CAKE), as in Marie Antoinette’s “let them eat cake.”
My humor aside, the Conservative Texas Budget Coalition has offered another conservative budget proposal that would reduce the growth in state expenditures and impose restrictions on local government property tax increases. Their proposed “solution” would over time increase the state’s proportion of expenditures for public education and reduce the growth rate in local property taxes.
Who could ask for anything more?
From FY00-17, state expenditures grew at an average annual rate of 4.9 percent. In FY18, expenditures grew by 3.5 percent. This rate was less than the rate of increase experienced from FY00-17 in the state’s population (1.8 percent) and the increase in the State-Local Implicit Price Deflator (3.0 percent).
So yes, the state’s expenditures for FY18 were conservative. Is a conservative budget the way to ensure continued growth in the Texas economy? That is a point of contention between those advocating for additional state expenditures for public education, health services, et al., and the Conservative Texas Budget Coalition, which advocates for a budget that increases by population and inflation so that taxes can be reduced.
Like Julius Caesar’s Commentaries on the Gallic Wars, state expenditures can be divided into three parts, Public Assistance Payments (primarily Medicaid), Public Education, and Other Expenditures. Total All Funds (AF) state expenditures over the 18 fiscal years of this century were $1.6 trillion.
Figure 1 shows how these expenditures were divided among the three groups.
Other Expenditures (Transportation, Public Safety, Higher Education, Salaries) comprise the largest percentage of state expenditures this century, the trend in this expenditure category has been in decline.
As shown in Table 1, Other Expenditures accounted for 45.0 percent of All Funds expenditures in FY00. By FY18, this percentage had declined to 36.9 percent.
One should also note that along with a decline in the proportion of All Funds expenditures devoted to other expenditures, the proportion of All Funds expenditures for public education also declined. The proportion of state expenditures devoted to Public Assistance Payments increased from 28.3 percent in FY00 to 40.1 percent in FY18. This increase in proportion was an increase of almost 42 percent.
Almost half (49.0 percent) of the increase in state expenditures between FY00 and FY18 was accounted for by the increase in Public Assistance. Only 20.2 percent of the increase in All Funds expenditures were for Public Education.
Along with reporting the current/nominal dollars of state expenditures, most analyses take into accountthe growth in both the state’s population growth (1.8 percent/year over the century) and the increase in prices.
Unfortunately, most of these analyses use a less precise measure (Consumer Price Index) of how state-local expenditure prices have changed. Over 40 percent of the CPI is comprised of consumer spending for housing. Not even Allen ISD spends 40 percent of its budget on housing its football team.
Had the reports used the appropriate measure of State-Local Government prices, the Government Consumption Expenditures and Gross Investment: State and local (implicit price deflator, they would find that the prices state-local governments pay for goods and services are higher than the CPI. One can view how the CPI and State-Local Implicit Price Deflator (S-L IPD) have varied over time. In 2017 the S-L IPD was 16.1 percent greater than the CPI in 2017.
Figure 2 shows how the population and the differing price indices affect real expenditures. Using the appropriate price deflator has a significant effect determining real expenditures. As shown in Figure 2, between FY00 and FY18 nominal or current dollar AF expenditures increased by 134.5 percent. When adjusted for the state’s increasing population (1.8 percent per year) and the increase in the CPI (2.1 percent per year) since FY00, the CPI-adjusted AF increase was 17.3 percent. Using the more precise S-L IPD (3.0 percent per year) shows a decrease in real AF state expenditures of 0.4 percent since FY00. So the state spent 0.4 percent less in FY18 than it spent in FY00. Talk about being parsimonious!
I would hope that in the future greater concern is shown on using the correct measure for inflation that state and local governments face. According to Fiscal Size-Up 2018-19, 28.5 percent of state All Funds Appropriations for 2018-19 are for purchasing medical services, i.e., Medicaid. In the CPI the relative importance of medical care is 8.7 percent, one-third the importance in the state budget. This difference in importance understates how inflation affects real state-local expenditures over time.
Using the incorrect price index affects two other areas that are being debated during this election season. These areas include state expenditures for public education and local government property tax increases. Analyzing state public education expenditures finds different groups using different student counts (ADA, WADA, Enrollment) and different price indices (US CPI or Texas CPI). Again, using either of these price indices understates the increase in costs faced by local school districts.
Those advocating for reducing the growth rate in local government tax increases would limit this growth to the growth in population and increase in inflation. To exceed their 2.5-4 percent increase in local property taxes would require voter approval. What these proposals don’t recognize is that growth in population varies over space and that using the CPI understates the increase in prices local governments experience. But what’s a methodological error among conservative friends?
Future articles will address these two issues and show how using state population growth, and the CPI will have adverse an impact on the areas of the state that have experienced most of the state’s population growth. The other article will show that using the CPI instead of the S-L IPD understates the “true” decline in the state’s financing of public education. Bet y’all can’t wait for these page-turners.
Dr. Stuart Greenfield holds a Ph.D. in economics from the University of Texas. He worked for three Comptrollers of Public Accounts, and since retiring from the state in 2000, Greenfield teaches economics at ACC and UMUC.
In this Let People Prosper episode, let's discuss Nobel prize-winning economist Paul Krugman's recent concern about the $779 billion budget deficit in FY 2018 under President Trump. Unfortunately, he wasn't worried about the 4 years of more than $1 trillion in deficits under President Obama and he in fact wanted even higher deficit spending. This episode provides a lesson in economics on the aggregate demand-aggregate supply model of how these policies should work in theory but how this mainstream view misses a lot that actually results in my preferred mainstream view of how the economy actually works and the burden higher government spending and resulting deficits put on economic activity and our prosperity.
Last Friday the Bureau of Economic Analysis reported that there was an increase of 3.5% in real GDP growth in the third quarter of 2018, indicated that 2018 may be above 3% growth for the first time in more than a decade. This issue along with the rising deficit gave rise to Krugman's tweet below.
Here's what Krugman tweeted: "Reaction to the GDP numbers: quarterly growth rates don't mean much. For one thing they fluctuate a lot -- e.g. rapid growth in 2014, signifying little. For another, you can always juice the numbers for a few quarters by running big deficits. What about the long term"?
Here was my tweeted response to his tweet that received a lot of attention: "Who is this @paulkrugman who wasn’t worried about budget deficits during #Obama’s 4 years of more than $1 TR deficit but is worried about #Trump’s $779 B? Recall #Krugman was in favor of LARGER deficit spending to “stimulate” the economy under #Obama. Principles matter."
I recommend going to my tweeted response and viewing the comments and discussion. It was a rather lively discussion with some good info in there along the way, but much of it was just noise.
This recent WSJ opinion piece by Nobel prize-winning economist Edmund Phelps explains the fantasy of fiscal stimulus quite well along with the nice figure below that shows stimulus doesn't correlate with faster economic growth.
What we really need for more prosperity is a government that simply sets the rules of the game such that the institutional framework allows for civil society to flourish along with the resulting prosperity for people. Government under presidents of each main party have fallen victim to the "stimulus" argument when in fact it should be about providing the most pro-growth economic environment while running balanced budgets. A good model would be to look at Texas.
In this Let People Prosper episode, let's discuss how the best path to prosperity is capitalism and that starts with a job. The more ways that we can free up the labor market from government barriers to opportunity, such as the minimum wage and occupational licensing, the more prosperity we can all enjoy.
My recent op-ed in the Investor's Business Daily titled "Amazon's Minimum Wage Revelation: It's About Competition, Not Workers" notes the opportunity costs associated with a government-mandated minimum wage compared with a private market decision: "Just as the company's management had the freedom to consider the firm's profitability and outlook in deciding whether to offer the higher wage, other private employers should have the same freedom. Amazon apparently thinks they shouldn't, hence the lobbying for a national mandate. Those lobbying efforts could end up doing even more harm."
My recent paper with Dr. Edward Timmons titled "Occupational Licensing: Keeping People Poor" notes the huge cost that many licenses have on people whether they be workers, consumers, or employers. We highlighted this in a recent op-ed: "Between 1993 and 2012, Texas added licensing requirements for 22 low-income occupations. Data from the Texas Department of Licensing and Regulation indicate a 460 percent increase in the number of licenses issued by the department, far surpassing the state’s population growth of 37.5 percent in that period. By making it harder for aspiring workers in Texas to enter the job market, licenses artificially inflate wages — and this means higher prices for the services provided. National estimates suggest that licensing inflates wages of professionals by about 15 percent. And this means consumers pay higher prices. In addition, individuals looking to enter a new field may be prevented from achieving their dreams."
For the sake of human flourishing, we should be doing all we can to reduce government barriers to prosperity that are socialist programs like the minimum wage (price of labor control) and occupational licensing (quantity of labor control).
This commentary was published at TribTalk.
We’ve set some pretty high goals for Texas’ budget for the upcoming biennium. And to achieve them, Texas need to overhaul its arcane and opaque budget-making process.
On Sept. 25, the Texas Public Policy Foundation, Heartland Institute, and 16 other member-groups of the Conservative Texas Budget Coalition held a press conference to introduce its legislative priorities for Texas’ 2019 legislative session.
These groundbreaking priorities would limit government spending below population growth and inflation and provide enormous tax relief for families across the state.
Every odd-numbered year, state lawmakers craft Texas’ two-year budget through the General Appropriations Act, which typically just increases funding to government agencies above their prior biennial levels. If lawmakers suspect that spending increases are unnecessary, the burden of proof is on lawmakers to prove they should spend less.
It’s not an ideal process. And it’s made worse by the fact that lawmakers and their constituents often have no idea whether government agencies are spending their money efficiently. When Texas funds departments, it uses a largely unaccountable process known as strategy-based budgeting.
As the name suggests, lawmakers designate dollars to agencies to accomplish broad strategies such as providing education, delivering health care, or paving roads. While these objectives are certainly important, the process makes it all but impossible for legislators to know whether government agencies are effectively pursuing these goals, let alone accomplishing them.
In fact, many lawmakers have no clue how much spending is dedicated to each agency’s programs, where the money comes from, or whether the money is spent productively.
This lack of transparency is a major reason why spending in Texas has exploded over the last 14 years. State spending is up nearly $15 billion more in the current budget than it would be if it had matched increases in population growth and inflation since 2004. This costs the average Texas family of four more than $1,000 in higher taxes each year.
And even though many lawmakers wish to tame runaway government spending, they lack the necessary information to determine which programs should be reformed, trimmed or eliminated.
One way lawmakers can attain greater fiscal transparency is by replacing Texas’ current strategy-based budget with a program-based budget.
Under a program-based budget, legislators and their constituents can track every taxpayer dollar they send to Texas’ various agencies and which specific programs and initiatives they are funding. This will allow both lawmakers and taxpayers to identify misspent funds and root out inefficiencies.
Another reform to enhance accountability would be to transition Texas’s finances to a zero-based budgeting process. Under this type of budget process, each agency begins with a budget of zero dollars and must make a clear and compelling case to lawmakers why taxpayers should be spending money on its various programs. They must defend its purpose, its goals and how it spends money to achieve these goals.
This increased transparency will allow lawmakers to more effectively scrutinize each agency’s performance and remove programs that fail to serve the public’s needs.
Zero-based budgeting has a long history of successfully trimming wasteful spending.
In 2003, Texas faced a $10 billion budget shortfall and needed to find a way to balance the budget because of a constitutional balanced budget requirement?. In response, then-Gov. Rick Perry sent every government agency a budget of zero dollars and ordered them to find efficiencies to close the state’s deficit.
Not only did these reforms eliminate Texas’ shortfall, they drove agencies to make long-lasting, needed changes to their programs. They cut unnecessary initiatives, streamlined operations and consolidated duplicative programs. Overall, these reforms helped the state balance the budget by reducing spending for the first time since World War II – and not raising taxes.
Zero-based budgeting has also allowed lawmakers to eliminate wasteful spending in Georgia, Chicago, and Montgomery County, Pennsylvania.
These examples show that proper fiscal transparency and accountability can help Texas’ elected legislators craft a strong conservative Texas budget. Not only would this rein in the excessive size of government, it would help provide an opportunity to deliver substantial tax relief for all Texans.
Achieving the Coalition’s priorities would put the Lone Star State on a path to increased, long-term prosperity.
In this Let People Prosper episode, I cover my updated presentation that provides information about Texas’ economic and fiscal situation, compares Texas with other large states, and suggests key public policy recommendations to strengthen the Texas model so that it can foster more individual liberty and economic prosperity.
Institutions matter as noted by the recent state business tax climate index by the Tax Foundation, which Texas dropped to 15th best nationwide. Texas should increase economic freedom by eliminating unnecessary government barriers to competition to support prosperity.
Watch my explanation of this state-level labor report and other videos at my YouTube channel: Vance Ginn Economics.
OPINION: CALIFORNIA IS A FAILED MODEL NO MATTER HOW YOU LOOK AT IT
Vance Ginn and Elliott Raia | Director and Research Associate, Center for Economic Prosperity
When you have to begin an argument with “depending on how you look at it,” you’re not arguing from a strong position. Yet such has become the answer to the question of, “Is California a good role model?” posed recently in The New York Times.
Even its defenders say California’s prosperity is relative. The good news is that those seeking more concrete progress need only to look to the state that inspired the lone star in the upper-left corner of the Golden State’s flag: Texas.
While the Texas Model of limited government needs improving, it has already proven to be a more sustainable catalyst for job creation and economic prosperity than in California.
Although the idea of limited government may be foreign to many Californians, the Texas Model embraces the principle of reengaging institutions such as family, community, and free markets — institutions that are often undermined by an over-burdensome state.
This is not to say the government has no place in Texas; it does. Nor is this to say that those who have fallen through the cracks don’t deserve help in their times of need; they do.
Rather, the model revives the notion that government’s primary responsibility is to preserve the liberties of families and individuals, instead of attempting to supplant them. In the case of Texas, this also means allowing employers to operate with freedom and without onerous regulation.
The outcome of Texas’ limited government approach is empirically clear. In creating jobs, no one messes with Texas as one in four jobs added nationwide were created in the Lone Star State in the last decade since the Great Recession.
But it’s an even longer period of prosperity. Consider that the average unemployment (U3) rate since 2000 was 5.8 percent in Texas compared with 7.7 percent in California and 6.4 percent nationwide.
Perhaps more telling of the complete picture is the average underutilization(U6) rate, which includes the unemployed, underemployed, and discouraged workers. Given the data available since 2003, Texas averaged 10.5 percent while California averaged 14.3 percent and the United States averaged 11.6 percent.
And poverty is lower in Texas. The Census Bureau’s supplemental poverty index that adjusts for regional costs of living differences and government transfer payments places California’s 19 percent poverty rate the highest nationwide whereas Texas’ rate of 14.7 percent is near the U.S. average of 14.1 percent.
With a relatively light tax burden on employers in Texas compared with California, Texas’ employers have the freedom to innovate and grow. Although the current level of taxation is a stark departure from West Coast philosophy, Texans already see where improvement can be made as efforts to corral skyrocketing property taxes are underway to maintain their economic canter.
While taxes play a role in overall government intrusion, burdensome regulations do, too. The Texas Model, while still not free of all unnecessary regulation and corporate welfare, places more faith and decision-making in markets, where individuals — not politicians — decide the best way to satisfy their desires.
Consider the energy industry in Texas.
While the state has yet to completely eliminate its wind subsidies, it has, in general, taken a more moderated position on industry regulation than the California model. Instead of coercing consumers towards a source of energy favored by bureaucrats and politicians, Texas strengthens its power generation, reliability and cost efficiency by allowing consumers to access a wide energy portfolio.
As a result, Texans pay half the price for their electricity than their Californian counterparts, while also not having to contend with potential rolling blackouts whenever the sun doesn’t shine and the wind doesn’t blow.
While energy is just one example, the California Model’s policies highlight why the state has nearly 20 percent of its population in poverty. No matter how well-intentioned, when government entangles itself in the lives of individuals and tries to supersede other institutions that may be more effective, tribulation soon follows.
Will the nation follow California down a road to serfdom, or, more recently, follow Texas down a road to liberty? That question remains undecided.
But if the mass migration of individuals and businesses out of California and into Texas is any indication, the trend is clear that institutions matter. When institutions in civil society are strengthened by limiting government, people prosper.
Vance Ginn, Ph.D., is director of the Center for Economic Prosperity and senior economist. Elliott Raia is a research associate. Both work at the Texas Public Policy Foundation. Read the Foundation’s latest report for more.
Texans appreciate living in a state that values liberty, sensible business policy, and, perhaps most importantly, a strong dislike for taxes, which inevitably infringe on the first two values.
But, in comparison with other states, Texas is beginning to lose its competitive edge in business climate as noted in the Tax Foundation’s recently released 2019 State Business Tax Climate Index.
The report ranks all fifty states based on the burdens of each state’s corporate income tax, individual income tax, sales tax, unemployment insurance, and property tax.
Figure 1 presents the ranking of each state whereby the top-ranked states include either states without at least one major tax, such as the individual income tax, or states that have all major taxes with low rates and broad bases.
Meanwhile, poorly ranked states share similar shortcomings such as complex non-neutral taxes and comparatively high tax rates, such as in the three worst ranked states: California (48th), New York (49th), and New Jersey (50th).
In this year’s report, Texas’ overall rank took a hit, sliding from 13th best nationwide in 2018 to 15th best for 2019. Yet, the drop is not due to new policy as the state’s individual category scores remained unchanged and actually improved by 8 ranks for Unemployment Insurance. Rather, the new lower overall rank highlights Texas’ stagnation in decreasing its tax burden as other states jump on the opportunity to increase their prosperity from lower burdens.
While Texas excels in the category of individual income tax because as it doesn’t have one, the state is consistently held back by its corporate income tax portion of the index, which remains unchanged at 49th, or second worst!
This is because Texas’ business tax is a gross receipts-style tax that is costly to comply with and pay. If Texas eliminated this onerous tax, the Tax Foundation has found the state’s business tax climate overall rank could improve to 3rd best. And the Texas Public Policy Foundation and the Legislative Budget Board (LBB) have estimated large economic gains.
Texans have been hurt by burdensome local property taxes for too long, with that ranking in the report being 14th worst in the last three years. We know all too well about complexity, high rates, and lack of voter oversight of Texas’ local property tax system.
To overcome this over-burdensome system, the Foundation has recently released a report detailing a strategy to slow the growth of state and local government spending in order to use surplus state funds to permanently reduce the school maintenance and operations (M&O) property tax until its eliminated. This would end nearly half of the property tax burden in Texas within about a decade while increasing funding for school districts over time with state taxes that would eventually fund 100 percent of schools M&O.
Moving forward, Texas’ elected officials should consider these rankings by the Tax Foundation and other reports when looking for ways to improve the state’s business tax climate so Texans have the best chance to start a new business or gain employment.
The Texas model of limited government has contributed to human flourishing, where 24 percent of new civilian jobs created nationwide have been since December 2007, but there’s always room for improvement.
In this Let People Prosper episode, I provide today's press conference of the 18-member Conservative Texas Budget Coalition, with special thanks to Senator Donna Campbell for standing with us on these key legislative priorities, along with my explanation of the details of each of these priorities and how they work together to let people prosper.
The Coalition outlined its legislative priorities for Texas' upcoming 2019 session. This includes the Conservative Texas Budget that sets limits for the 2020-21 budget of $156.5 billion in state (non-federal) funds and $234.1 billion in all funds to effectively limit spending so tax relief can be realized by all Texans. Read today's press release with quotes by each of the members of the Coalition.
This is important because spending trends since 2004 outlined in the Real Texas Budget show that Texas families of four are paying $1,000 more, on average, in state taxes than if the budget had just matched population growth and inflation.
Moreover, if the Texas Legislature can hold spending within a 4 percent growth limit this session and thereafter, Texas can eliminate the school maintenance and operations property tax--nearly half of the property tax burden statewide--within about 11 years. Read this for details of this simple property tax relief plan.
As noted on the Coalition's website, other legislative priorities includes strengthening government spending limits, eliminating the business margins tax, creating a tax relief fund, and increasing budget transparency to let people prosper.
Texas’ property tax system has turned property holders into renters, where government is their landlord and Texans who struggle to pay annual tax bills face confiscation of their properties. Additionally, the growth of government is harming taxpayers and the economy through higher taxes and more regulation.
For example, Eddie Wilson owns the landmark Austin restaurant Threadgill’sbut recently announced he must close a location soon noting that he is “Flummoxed and bludgeoned by property tax increases, the grim truth is that we can’t afford it on the slim margins you make on meatloaf and chicken-fried steak.”
Substantial, permanent property tax relief is needed.
The Foundation’s recent report provides a plan of limiting government spending to eventually abolish property taxes in Texas by starting with eliminating the school maintenance and operations (M&O) property tax—nearly half of the property tax burden in Texas.
The school M&O property tax is a good place to start because the level of student funding is determined by state funding formulas that are first funded by local property taxes and then by state dollars. Although there’s a lot of noise about whether local governments or the state legislature is at fault for a skyrocketing local property tax burden, the truth is excessive spending is the problem and taxpayers foot the bill regardless (see figure below). The relative ease of this process is lost with other local tax jurisdictions.
Our plan is simple: State and local governments would limit spending such that state revenue permanently replaces the school M&O property tax within about 11 years. In other words, every dollar not spent by the state or school districts will produce a 90-cent property tax cut for Texans until half of the property tax in Texas is eliminated.
Here are the plan’s details:
Table 3 shows how the plan could work mathematically given the above criteria:
Under this plan, Texans will experience substantially lower property tax bills immediately and slower growth in them over time along with the broader economic benefits of slower government spending and a lower tax burden. Other options, such as sufficiently broadening the sales tax base, that begin with spending restraint to replace the school M&O property tax may be considered to deal with this problem.
Limiting government spending and using state dollars to replace nearly half of the property tax burden that funds education would shift Texas toward a more efficient sales tax system to let people prosper.
We previously discussed the problems with Texas’ skyrocketing property tax burden. Let’s now consider past failed property tax relief attempts signaling a need for options that will provide permanent relief.
Since Texas’ modern property tax system took shape in 1979 with the passage of the “Peveto bill,” there have been three major attempts by the Texas Legislature to provide relief for taxpayers. Unfortunately, none of the attempted solutions created lasting reductions in property taxes as the attempts failed to address increased spending—the cause of increasing taxes—and instead simply shifted around the burden.
1997 Reform Attempt: Homestead Exemption Increase by $10,000
The 75th Texas Legislature attempted to reduce the rising property tax in 1997 by increasing the homestead exemption for school district property taxes by $10,000. Instead of allowing only $5,000 to be deducted from the taxable value of an individual’s property, the taxpayer could now deduct up to $15,000. The increased exemption was accompanied with homeowners who were 65 and over receiving a freeze on their school district property taxes. The total tax relief package was estimated at $1 billion. However, it resulted in little to no effect as school district property taxes increased by nearly $1 billion and total property taxes increased $1.4 billion the year after implementation and continued rising thereafter.
2006 Reform Attempt: Property Tax-Franchise Tax Swap
After the Texas Supreme Court determined the school finance system was unconstitutional in 2005 from an essentially statewide property tax, the Legislature in a 2006 special session aimed to bring property tax relief. The solution was a reformed business franchise tax to what’s known as the margins tax today and increase the motor vehicle sales tax and tobacco tax while also changing the school finance formulas. While the outcome was an initial reduction in school district and total property taxes, the declines were marginal the first year with taxes being substantially higher than 2006 in 2008. As a result, instead of sustained property tax reduction, Texans experienced an increase in both local property taxes and state taxes. Moreover, the swap exchanged an already poor property tax system with an arguably worse margins tax that should be eliminated.
2015 Reform Attempt: Homestead Exemption Increase by $10,000
Similar to the 1997 reform, the 84th Texas Legislature looked to raise the homestead exemption for school districts property taxes another $10,000 to $25,000. Again, lower local property tax collections were replaced with state funds so as to not decrease school district budgets. Yet, much like 1997, there was no improvement in the tax burden as school property taxes increased by $1.7 billion and all property taxes increased by almost $4 billion the next year.
With past property tax relief failures of increasing the homestead exemption and the franchise tax swap, the time has come for a strategy that employs reducing the growth of government spending at the state and local levels while using state dollars to eliminate property taxes.
Despite the economic success of the Texas Model of relatively fiscally conservative governance, a skyrocketing local property tax burden remains one of the state’s most pressing policy challenges.
While Texans have the luxury of not paying a state personal income tax, which should be constitutionally banned, they’re currently weighed down by more than 5,100 local taxing jurisdictions that boast the sixth highestproperty tax rate nationwide. These locally-determined tax rates along with often subjectively appraised property values combine to give the total property tax levy statewide of $56 billion in 2016—contributing to an average property tax burden of more than $8,000 per year for families of four.
Although many Texans live in uncertainty year-to-year on what their property tax bill will be, much of the damage of such ominous tax burdens are not so uncertain: discouraged economic growth, distorted investment decisions, depressed job creation, and ultimately renting property from the government forever.
While the pain is felt statewide, it’s particularly felt among housing-rich but income-poor individuals, such as the elderly, who often must move as increasing tax liabilities extend beyond their means. In fact, some Texans who have paid off their mortgage now pay more for their property tax liability than prior mortgage payments, forcing them out of their home. The high property tax burden also keeps some people from ever having the means with which to purchase property.
Both of these issues limit the liberty and economic prosperity of Texans from property taxes at often no fault of their own. This is particularly harmful because people aren’t able to ever own their home but rather pay rent to the government forever.
And even those who do not have property are burdened as renters can reasonably expect property managers to pass the tax along to them and consumers pay more goods and services as business owners do the same.
The culmination of these increases by local tax jurisdictions contribute to the total property tax levy statewide increasing by 233 percent to $56 billion in property taxes collected in 2016—the single largest tax imposed in the Lone Star State. For comparison, there may be a need for increasing spending and therefore taxes to fund increases in population and inflation.
However, in this period, the state’s population growth increased by 47 percent and price inflation increased by 53 percent—collectively well below the increase in property taxes.
On an average annual basis, the total property tax levy increased by 6.3 percent during that period; however, population growth increased by 1.9 percent and price inflation increased by 2.2 percent. Again, these growth rates indicate the mounting burden on Texans compared with a potentially reasonable argument for spending and taxing more.
With many local tax jurisdictions raising property taxes at rates that are outpacing key measures of Texans’ ability to pay, the Texas Legislature has attempted to limit the growth of property taxes but to little avail. The steady increase in the property tax burden despite these unsuccessful attempts signal the real issue: Texas’ local governments don’t have a revenue problem, they have a spending problem.
By first identifying this spending problem, we can begin to discuss real property tax relief.
In this let people prosper episode, I discuss two key reports released today. The first is that the Energy Information Administration reported that the U.S. oil production exceeded Russia and Saudi Arabia to become the top oil producer in the world in August 2018. The second is the Census Bureau released the latest income and poverty-related data that shows less poverty nationwide with little change in Texas' supplemental poverty measure (SPM) while California still has the highest SPM in the nation.
Regarding the EIA's data, the following figure shows this historic moment in U.S. history. Here's the EIA's projection through 2019: "Although EIA does not publish crude oil production forecasts for Russia and Saudi Arabia in STEO, EIA expects that U.S. crude oil production will continue to exceed Russian and Saudi Arabian crude oil production for the remaining months of 2018 and through 2019."
Much of this expansion in oil production has been in Texas. In fact, Texas is producing a record amount of oil at 4.4 million barrels per day as of June 2018 (latest data available), which is about 40% of total U.S. production that month.
The increase in oil production in the last couple of years has contributed to faster economic growth and job creation, thereby helping to reduce the poverty rate. Of course, this is a relatively small direct relationship, but the indirect relationship of more production capacity in the private sector is quite remarkable. Moreover, the regulatory cuts last year and the general increased economic activity and job creation in recent years has helped get people out of poverty.
This is noted by poverty measures improving some in the latest report for the average of the 2015-17 period (see page 26-27 of this report). The Official Poverty Measure (OPM) looks at one poverty level across the entire nation with the federal poverty level of $12,752 for an individual and a family of four (two adults and two kids) of $24,858. The OPM declined to 12.9%, or 41.2 million, nationally for the average of 2015-17.
However, the OPM is a poor measure of poverty because there are different housing costs in each state along with different levels of government benefits.
Several years ago the Census Bureau created the Supplemental Poverty Measure (SPM) that accounts for after-tax income, differences in regional costs of housing and other expenditures, and government transfers (see figure below). The SPM declined to 14.1 percent, or 45.3 million, nationally.
These measures for the 2015-17 period are also available by state. Let's consider the two largest states: California and Texas. California's OPM is 13.4%, which is near the national average, with 5.3 million people in poverty, and SPM is 19%, which is the highest nationally, with 7.5 million in poverty. Texas' OPM is 14%, more than a percentage point higher than the national average, with 3.9 million people in poverty, and SPM is 14.7%, which is near the U.S. average, with 4.1 million in poverty.
These data make sense because Texas is a relatively cheaper place to live that in California so Texans' dollars go a lot further than Californians' even as California has a more liberal welfare state and spends much more per capita.
In this Let People Prosper episode, I'm interviewed by Josiah Neeley of R Street Institute and Doug McCullough of Lone Star Policy Institute on the Urbane Cowboys podcast about trade, NAFTA, Texas Model, and much more ("Ginn as in Gig").
You can listen to the podcast on Apple iTunes or wherever you get your podcasts.
In this Let People Prosper episode, I discuss the latest state-level jobs report for July 2018 issued by the U.S. Bureau of Labor Statistics while highlighting how economic freedom and the recent federal changes to the State and Local Tax Deduction (SALT) matter to our prosperity.
As noted in my previous blog post (see presentation), Texas continues to be America's jobs creation engine as the Lone Star State has created 23% of all new civilian jobs added nationwide and created the most nonfarm jobs of 377,100 in the last 12 months.
In general, states with more economic freedom and lower taxes have performed better in terms of economic growth and job creation over time than states with less economic freedom and higher taxes. Hundreds of papers have found this connection when considering the Economic Freedom of North America report by the Fraser Institute.
Watch the episode to find out more. Have a blessed day and let people prosper.
(Tip: Get checked by a dermatologist periodically, especially if you have fair skin like I do. That's the reason for the band-aid on my left cheek--praying for no issues!)
AUSTIN – Today, Texas Public Policy Foundation announces that Senior Economist Vance Ginn, Ph.D., has been named a Champion of Freedom by Grassroots America-We the People, one of the state’s leading conservative grassroots organizations.
“We are thrilled to announce Vance Ginn as a 2018 Grassroots America Champion of Freedom,” said JoAnn Fleming, executive director of GA-WTP. “To read, hear, and observe Vance assert the fundamentals of economic freedom one can never question that he believes these principles down to his very core. Vance’s gift is his ability to translate abstract economic principles into concrete, understandable applications for maximum liberty, while doing so with infectious enthusiasm and good cheer. Vance is a happy warrior, arming citizen activists with usable information as they battle government bureaucracy and prosperity-stealing over-regulation and taxation. Dr. Vance Ginn is a tremendous asset to the growing Texas conservative grassroots movement.”
“Vance’s important work continues to advance the goals of the Texas Public Policy Foundation – promoting liberty at every level, from local governance to state and federal issues,” said TPPF Executive Director Kevin Roberts, Ph.D. “This honor from Grassroots America-We The People is an unexpected but richly deserved award. We thank Grassroots America for its own work of holding government officials accountable and ensuring that government itself remain efficient, open and limited.”
Ginn will be honored with the award at GA-WTP’s annual Champions of Freedom Banquet, to be held on Sept. 8 in Tyler, Texas. Other honorees for 2018 include Teresa Beckmeyer of Lone Star Voice, Jim and Elizabeth Graham of Texas Right to Life, Aaron Harris of Direct Action Texas, Rachel Malone of Texas Firearms Freedom, Dr. Laura Pressley of True Texas Elections and Pastor Dave Welch of the Texas Pastors Council.
Previous honorees include Sen. Ted Cruz, Congressman Louie Gohmert, members of the Texas House Freedom Caucus and Pastor Rafael Cruz.
Grassroots America – We the People, Inc. is the largest constitutional conservative citizen organization in East Texas and one of the largest in Texas.
In this episode, I have a conversation with Dr. Brandon Logan, who is the Director of the Center for Families & Children at the Texas Public Policy Foundation, about his fantastic work in helping kids and families prosper more throughout their lives.
The most essential institution is the family, and with government crowding out many of a family's basic functions, civil society suffers. By letting people prosper through limited government, whereby parents have the freedom to raise their child as they see fit without abuse, families can have the best opportunities to flourish.
Here's more on Dr. Logan: Before joining the Foundation, Brandon represented hundreds of children as attorney and guardian in child welfare courts throughout Texas. He is certified as a Child Welfare Law Specialist by the National Association of Counsel for Children. Brandon has also represented parents, grandparents, and foster families in custody and adoption cases across the state.
Brandon earned his undergraduate degree from Texas A&M University. He holds a law degree and doctorate in human development and family studies from Texas Tech University, where he also taught courses in child welfare policy and family dynamics. His academic work includes child maltreatment, abuse trauma and treatment, and family and father engagement.
Brandon and his wife, Mindy, were raised in the same small West Texas town and are blessed with five young children – four boys and a baby girl.
I gave the following presentation at a policy forum on property tax reform at the Arlington Chamber of Commerce.
Here's an overview of the forum from the Greater Arlington Chamber of Commerce:
Property tax relief and slowing the growth of property taxes proved to be a topic capable of bringing approximately 120 business leaders and elected officials together at the Greater Arlington Chamber of Commerce on Friday, August 3. Four experts on property taxes presented their perspective on the issues and then responded to questions from Tarrant County Property Tax Assessor/Collector Ron Wright. The event was the first ever sponsored by the Coalition of East Tarrant Chambers.
Vance Ginn, Chief Economist with the Texas Public Policy Foundation in Austin, presented TPPF's view of how to completely eliminate school maintenance and operations property tax. Dr. Aaron Reich, President of the Arlington ISD Board of Trustees, talked about the complications of the Texas system for funding property taxes and how it seems to short change districts like Arlington. He made the point the state uses taxes collected as "school" taxes for other state expenses like health care and transportation. County Judge Glen Whitley represented the perspective of cities and counties and made the point that without a state income tax, which he does not favor, Texas has a two-legged stool which is hard to sit on. He took great exception to the idea of eliminating property taxes and replacing them with more sales tax could be made to work. State Representative Matt Krause brought the perspective of the legislature to the discussion. He shared about the state's overall shortage of funds and how growing Medicaid expenses are crowding other important items in the budget.
Follow this link to read a summary of the presentations.
Click here to view the video of the entire Forum.
A recent Wall Street Journal article highlighted how the $4 trillion in total unfunded public pension debts of cities and states nationwide equals Germany’s economy. The WSJ figure below highlights how this massive sea of red ink means that there could be a tremendous burden on taxpayers as contributions rise or on public sector employees’ as funded ratios decline without major reforms.
In other words, public sector employees and taxpayers may soon be in a world of hurt because of decades of poorly managed and constructed defined-benefit pension plans.
The Teacher Retirement System of Texas, or TRS, recently lowered its assumed rate of return for its pension fund from 8 percent to 7.25 percent. The TRS figure below shows that the lower rate is more consistent with the average annual returns in the past 20 years of around 7 percent, but it remains well above the 5.8 percent average return in the last decade.
While some Texas teachers and unions worry about potential benefit cuts, teachers shouldn’t fret about changes to current benefits from the lowered assumed rate of return but rather note that the increased transparency helps better reflect longer-term solvency issues.
The lowered return indicates unfunded liabilities amount to a staggering $45 billion, pushing the funded ratio below 80 percent, which that some consider actuarially sound. However, if the funded ratio is below 100 percent, then some teachers are at risk of not receiving their retirement because of insufficient funds to pay them.
The goal of public pensions should always be a 100 percent funded ratio so teachers and taxpayers aren’t shortchanged.
To better fund teachers’ pensions, TRS has stated they will request more contributions from the Texas Legislature this upcoming session. These added contributions could come from current teachers or taxpayers through increased state or school district spending, but that’s up to legislators.
While Texas has historically had terrific credit ratings, it risks a downgrade if the Legislature doesn’t solve what could be a looming pension crisis. Total state unfunded pension liabilities now amount to more than $60 billion after the recent TRS decision. These unfunded liabilities, if not covered, will require more resources from teachers and taxpayers.
Lowering the rate of return to a more accurate assumption is a step in the right direction, but more reform is necessary.
To assure a 100 percent funded ratio, the Legislature should consider transitioning pension plans to cash balance plans. Or, to avoid getting back into the current situation from mismanagement of the portfolio over time, legislators should consider hybrid contribution plans or defined contribution, 401K-style, plans.
Traditional opponents of defined contribution plans say they cost more to the state, are less stable for retirees, and generate less returns over time. However, most of these are unfounded and those that are legitimate have solutions. A well-designed defined contribution plan can be even more beneficial to teachers so that they are in control of their retirement while practically eliminating the risk to taxpayers.
The looming debt crisis could hurt teachers and taxpayers if the can is continually kicked down the road. Before the can makes it off the cliff, legislators should act and reform the system.
Vance Ginn, Ph.D.