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Tom Sgouros: Short Takes

Saturday, August 20, 2011


Pensions: Two alternatives

I'm still digesting the presentations from this past week's special pension commission meeting. This week, an alternative to the current pension system was presented that is sort of a hybrid 401(k) plan, and would cost the state a lot less. The pension costs for state employees would go from the projected 37% of payroll to 14% for fiscal year 2013. The presentation was also filled with assurances that the benefits would be comparable, and tables and charts to prove it. A 55-year-old state employee who's been working for 15 years would see her benefits reduced from 49% of final salary to 44%. They claim to show that the biggest change is that employees will assume more of the investment risk than before. (Plus retirees will give up 15 years of COLAs.)

However, if there's one lesson I've learned in years of business dealings and budget research, it is that there's no magic source of money out there. This makes me very suspicious of claims that comparable pension benefits can be provided at far lower costs. In other words, whether the money is in a defined benefit account owned by the state or a defined contribution account owned by a teacher, it's still earning the same investment returns. Shifting risk doesn't save money; it just changes who pays if things don't go as predicted. If the predictions say that the state's contribution goes down so dramatically, where does the money come from to pay comparable benefits?

I see two alternatives here. Alternative one is that benefits under the new system will be slashed dramatically from the status quo. Fifteen years of COLAs is a high cost, and the assumed risk isn't nothing, either. Alternative two is that the cost of providing the current benefits has been held unnecessarily high. Certainly both are possible to some extent, but the truth is on a straight line between these two options. If comparable benefits can be provided at lower cost, then people who should know better have forced upon us a crisis we didn't need to have. If a system can be designed that placates state employees with predictions of comparable benefits at lower cost, taxpayers should be furious about the conduct of the past few years.

Expensive farmland

Exeter's Schartner family is giving up on some of its farms. The owner of Schartner's, the Exeter farm, had bought some nearby parcels and tried to use them to expand their farm holdings, but to no avail. Too much debt and a long timeline for paying it off created too much risk, and so they are selling. There are some unclear parts of the story, like Richard Schartner wanting access to his land through an abandoned picnic grove owned by the state that the state was unwilling to grant for some reason, and other details. These are the typical kinds of minor issues that cloud the big one in stories of this kind. People will wind up focusing on the details and thereby miss the really important story. In this case, the giant fact hiding behind it is that Rhode Island is home to the most expensive farmland in the country, and this makes it hard for all farmers to farm.

Unaffordable farm land is just another side of the coin of unaffordable housing. Our real estate market has made lots of money for lots of people but the result is that lots of people now have no place to live or no place to farm. It is possible to do something about this, but it will mean acknowledging that the unencumbered market does not always lead to the highest and best outcomes. In this case, a little more friction on the real estate market, say with a tax on land gains, would make land speculation less appealing, and this could reduce some of the pressure on prices. Vermont does this, and it's worked well for them, helping them preserve their agriculture and keeping housing prices down.

I've lived through two real estate bubbles in Rhode Island, one in the late 1980's and the one that burst a couple of years ago. Neither was pretty, either in the build or the aftermath. As far as I can see, they both produced high rents, fewer farms, more sprawl, and economic devastation afterward. But some people made lots of money, so I guess it's ok.

CBPP: Tax Flight a Myth

The report is from April, but the message is as important now as ever. The Center for Budget and Policy Priorities published a report providing yet another debunking of the idea that prosperity awaits the state that wins the interstate competition for the pool of rich people floating above us and settling wherever taxes are lowest. In probably the most comprehensive look at the available data I've seen, the authors (led by former Boston Fed economist Robert Tannenwald) debunk the important claims (and the prominent reports supporting the idea) one by one.

The dime version is that they find that most migration is over housing costs. Florida, for example, is losing population. They still don't have an income tax, and it's just as sunny and sandy there as it always has been. But housing costs went through the roof during the bubble years, and the carnage hasn't really seen prices come down, even if some canny people can negotiate a bargain on an abandoned condo development.

Of course none of this is news. It's not as if the fear among legislators that rich people are poised to depart has any actual support from, you know, data. The dearly departed Ocean State Policy Research Institute (OSPRI) tried to twist some IRS data around to prove the point in a report they put out in January, but it didn't hold water. No matter: the folks in charge at the Assembly have been sold on the idea that they can't ask rich people to pay taxes any more because they might leave and where will we be then? So instead we let Central Falls go bankrupt. That will certainly help keep people around, won't it?

Tom Sgouros is the editor of the Rhode Island Policy Reporter, at whatcheer.net and the author of "Ten Things You Don't Know About Rhode Island." Contact him at [email protected].

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