A part of the Gov. Bobby
Jindal tax plan to shift taxation away from income and towards other kinds
included a $1.05 per pack tax hike on cigarettes. But with his retreat from
that specific proposal, it’s now in limbo. But a disturbing development in
California can provide the vehicle to resurrect something like it.
Recently, a federal
bankruptcy court ruled that Stockton could enter into the public sector
version of that protection, where one of the major creditors of the city is the
state’s public sector pension program. This precedent exposes pension funds to
a novel kind of liability, as now the required payments from the city to the
fund previously considered absolute and sacrosanct legally may not occur in
their entirety or at all.
That means for computation of funded status, pension funds such as Louisiana’s
13 state and statewide systems (there are 20 other municipal and parish systems
funds as well) must either increase the actuarial rate of return used by funds or
increase the contribution percentage rate for one or both of the employer
(government) and/or employee, or both, in order to offset the increased risk of
lower total contributions by government. In recent years, the state fiscal
situation has discouraged increasing the state contribution rate, and
policy-makers have turned away attempts to increase the employee rate. As for
the rate of return, the state has allowed
it to slide down for some funds in recent years, which has the opposite effect
of increasing the unfunded accrued liability now estimated across the state
funds as about $20 billion representing 40 percent unfunded.
This just adds to the ticking time bomb these liabilities represent to
state taxpayers, precisely because the downward adjustments insufficiently
reflect the reality of returns today. Across all 13 funds, Louisiana’s average
rate is pretty close to the national average of all state pension funds of 8.18
percent. But ever since the massive deficit spending binge of the Pres. Barack Obama
Administration and the consequent anemic economic growth policies it has
pursued required a dramatic suppression of interest rates (both feeding into
each other: the slow economy sapping borrowing demand, while the monetary
expansion devalued the dollar requiring the Federal Reserve to keep rates low
to offset inflationary pressure from dollars growing faster than the economic
system’s wealth produced), rates of returns on equities and debt have
plummeted.
Another way of putting it is, can an actuarial rate of return of 8.18
percent over the next decade really be expected when the ten-year Treasury bond
currently trades in the neighborhood of 1.75 percent and
domestic equities as a whole in the past five years have increased only around six percent –
total (since 2000, the return of the 100 largest private pension funds has
been 5.6 percent annually)? In fact, a good estimate going forward for the near
future for equities – the inflation rate plus productivity improvements plus the expansion of the
price/earnings multiple – is only three percent. Over the next few years, can any
fund hope to hit that 8.18 percent rate of return without taking on
extraordinary risk and successfully
beating the market?
Prudence with taxpayer money
dictates very much otherwise. So, in other words, the actual UAL that will
manifest over the next several years is badly understated and will increase extra
annual costs to state taxpayers to maintain solvency – which already rests in
the $1
billion range or four percent of this year’s budget that if available would
moot all agonizing over the fiscal picture. And now the precedent that ailing local
government units – fortunately, none in Louisiana seem in these straits – can skip
their contributions has been established, increases the risk of further UAL
ballooning.
While legislation currently lies in wait in this year’s session to address
very modestly the understated UAL crisis, it’s here where a tobacco tax
increase could prove useful. Simply, dedicate an increase to paying down the
UAL, making it effective until the constitutionally-specified
due date of 2029 when the UAL must disappear. Better, there is a reasonable
relationship between the tax and pensions: with the association between smoking
and life spans being inverse, with the increased discouraging of smoking, life spans
will increase, necessitating increased pension payouts.
With its 300+ dedications already in existence, normally creating
another one to further encase budgeting in restrictions would not constitute
good policy-making. But the spending requirement already is in the Constitution
and it is known that revenue must be allocated in that direction every year.
Further, it does not tie this source of funding that by its nature is designed
to decrease to an ongoing program expected to operate without sunset, but to
one that its demands also ought to go down over a finite time span.
Current supporters of the idea independent from the Jindal plan may not
have envisioned this use for the hike. But it is the best use for a tax with
these characteristics, reasonably related to its nature, and fulfills a
critical need. And, given Jindal’s opposition to tax increases that would
require legislative supermajorities for approval and to override an expected
veto, this rationale could get enough legislator support to make it into law.
(NOTE: the initial publication of this neglected mentioning that HB 417 by state Rep. Harold Ritchie includes in part a dedication to paying down the UAL. However, the majority of funds this bill dedicates would be to additional spending other areas.)
No comments:
Post a Comment