Cincinnati Coming to Grips with Pension Costs

Posted on May 16, 2012 by Adam Schwiebert

With the public pension reform debate heating up in the Statehouse, it’s fitting timing for another pension crisis to arise—this time, in Cincinnati.

Cincinnati’s situation is unique. Unlike Ohio’s other municipalities, Cincinnati city employees do not participate in one of Ohio’s five statewide retirement systems; rather, they are members of the Cincinnati Retirement System.

Like so many other defined-benefit plans across the country, the Cincinnati Retirement System is in financial distress.

As reported by the Cincinnati Enquirer, Cincinnati’s pension fund for city employees is underfunded by roughly $728 million. Only 67 cents of assets exist for every dollar in liabilities. And the projections for the future are grim. Even if the fund hits its average investment return of 7.5 percent, the system with only be 10 percent funded by 2044.

Obviously there are many similarities between Cincinnati’s pension struggles and those of Ohio’s statewide plans: overly generous benefits, poor investment returns, and demographic changes. But there is one key difference. Unlike Ohio’s pension funds, Cincinnati has frequently failed to make the annual required contributions to the system. Underfunding a defined-benefit pension plan (while politically popular) is a near guarantee for future shortfalls—and closing the gap only grows harder by deferring the costs.

For instance, in 2013, the required contribution from the city will be $67 million–$30 million more than the city contributed this year. There appears to be little political appetite (and even fewer dollars) to find the extra money to fully fund the system in 2013.

These shortfalls will undoubtedly have an impact on both public employees and taxpayers. Cuts to benefits, while politically unpopular, are necessary. Past promises made to public employees cannot be fully kept. For taxpayers, either taxes must be raised or more funding will need to be diverted away from other public services to shore up the fund.

Choosing to do nothing is not an option. As a growing number of communities across the country have witnessed, unfunded pension obligations can bring a city to its knees.

Cincinnati knows the depth of the hole and where the current trajectory leads; the only question that remains is which path is the best way forward.

It must be understood that the defined-benefit system contributed to the current situation. Defined-benefit plans are complex and under them it’s easy to promise benefits today and hide the costs for years—as was the case in Cincinnati.

Defined-contribution plans are far more transparent. Either the city makes its contribution today or it doesn’t. Costs cannot be hidden behind accounting gimmicks or false promises. Unfunded liabilities do not exist.

As we’ve long argued, shifting toward defined-contribution plans can, if properly structured, save taxpayer dollars, reduce risk, and provide greater portability.

Cincinnatians have seen where the status quo has brought their city: huge unfunded liabilities and few good choices going forward. Perhaps it’s time to try something new.

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Discussing the need for pension reform on 610 WTVN

Posted on May 15, 2012 by admin

Buckeye President Kevin Holtsberry was on 610 WTVN this morning discussing the need for pension reform and its impact on Ohioans. You can listen below.

For more information on this important topic see Diehl Fellow Adam Schwiebert’s, testimony in the Ohio Senate on this issue last week and our report Hanging by a Thread: Big Payouts and Promises Leave Ohio Pension Plans on the Brink of Collapse–or a Massive Bailout

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Should You Need the Government’s Permission to Work?

Posted on May 14, 2012 by admin

The Institute for Justice has recently released an interesting report called License to Work. The report details the burdens the government frequently puts in the way of those seeking to find work and create jobs in the form of licensing and regulations:

So How does Ohio stack up:

Ohio licenses 31 of the 102 low- to moderate-income occupations studied, fewer than most states, but it imposes substantial burdens on workers wishing to enter those occupations. Ohio has the 16th most burdensome licensing laws, with average requirements of $137 in fees, 341 days and one exam.

In some of the 31 licensed occupations, Ohio has exceptionally high barriers compared to the other states. For example, aspiring commercial HVAC contractors lose five years to experience before getting a license, more than twice the national average. Ohio requires that school bus drivers possess a driver’s license for two years prior to working. Thirty-one states have no such requirement, requiring instead tests, fees, a minimum age and in some states a short course or training session. Ohio is one of only five states that require a year or more of training to become an auctioneer. Ohio is also one of only three states to license dietetic technicians and one of seven states to license social and human service assistants. The state requires two years of training to perform both of these jobs.

Some of Ohio’s licensure requirements also appear excessive compared to those of other occupations licensed by the state. For example, Ohio requires aspiring emergency medical technicians to undertake only about one month of training. But skin care specialists must complete 140 days, massage therapists 175 days and cosmetologists 350 days, and auctioneers and barbers must train for more than a year.

Ohio could expand its low-income workers’ job prospects by reducing or eliminating such burdensome licensing laws.

This is just another example of government laws and regulations that warp the market, cost Ohioans jobs and provide very little benefit in return.  And these regulations hurt entrepreneurs and job creators the most – the very people who drive job growth.

Policy makers should review these regulations and seek ways to make Ohio a more friendly state for entrepreneurs and small business owners.

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Constant Engagement is the Key to Moving Policy

Posted on May 11, 2012 by Greg R. Lawson

Getting public policy right is a difficult challenge.  Even when everyone understands the need for change, the forces of the status quo win out.  All too often, it is simply easier to let inertia set in and not do the heavy lifting that change requires.

That is why it is necessary that the Buckeye Institute (and others who seek serious, structural reforms focused on restoring Ohio to the forefront of economic growth) be relentless and creative in its engagement on these issues.

Explaining to policy makers just how big an economic hole Ohio has dug for itself over the last few decades is an ongoing process of communication, education and building trust-in our data and our ideas.

Explaining to policy makers the tools and options that are available to limit government growth while empowering the private sector to generate jobs and wealth involved an equally important commitment.  The Buckeye Institute can’t just issue a report and expect that the right people will read it and act on its recommendations.

Rather, regular and effective engagement is the key to change.

This week provided an illustration how of this plays out.  Buckeye staff testified before three committees on three different issues:

• Senate Finance Committee: urging members to focus on fiscal discipline and restraint and to keep seeking innovation and structural reform rather than a return to the status quo of more spending;

• House Criminal Justice Committee: explaining how keeping low level offenders permanently outside the job market harms the economy, can lead to recidivism and results in higher expenses in the criminal justice system;

• Senate Insurance and Labor Committee: reminding members of the need for systematic pension reform in order to address billions in unfunded liabilities and reduce taxpayer risk, bring public sector benefits in line with those of private sector, and introduce portability and true ownership to the system.Of course, Buckeye Institute staff meets on a regularly with legislators and other policy makers in order to keep policymakers engaged and informed on the critical challenges Ohio faces.  But testifying in committee is another opportunity to highlight our fundamental commitment to freedom, opportunity, responsibility and community and to connect those commitments and ideals to concrete policy choices.

And as important as sustained engagement with policymakers is, and will continue to be, grassroots communication and education is equally important.  And we continue to be regularly engaged on this front.

For example, Buckeye Institute staff will be participating in a Citizen Watchdog event hosted by the Franklin Center this weekend and at the Northwest Conservative Conference next weekend.  We’ll be talking about watching local government spending and workplace freedom.

The challenge before us can be daunting but the Buckeye Institute remains committed to sustained engagement and making sure real reforms are always on the table, not locked away in a dusty file cabinet.

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Big Government Spending Does Not Equal Economic Growth

Posted on May 10, 2012 by Kevin Holtsberry

Just as Ohio’s economy shows signs of life the chorus has begun: spend, spend, spend!  New tax revenue?  Spend it.  Surplus revenue at the end of the fiscal year?  Spend it.  The calls for increased spending cover a host of issues from schools to local government to social welfare programs and infrastructure.Put aside the fact that the economy seems rather fragile, and that assuming a straight line of upward growth is not very prudent, does spending really mean growth and opportunity for Ohioans?

Adam Schwiebert, The Diehl Family Fellow at the Buckeye Institute, has put together a short policy brief that questions the connection between spending and growth.

Using a measurement know as “state spending burden” which compares the combined state and local government spending as a percentage of private sector Gross Domestic Product (GDP), Adam shows that Ohio has a higher level of spending than growth states like Texas, South Dakota and Colorado.

In fact, from 1990 to 2009 Ohio’s state spending outpaced inflation by 41 percent.  And yet, per capita income growth was a mere 3.4% over this period.  Clearly, simply spending more money does not equal growth.

Please, take a moment to read the short report as a useful corrective to the calls for more spending and bigger government.

Ohio needs fundamental reform and restructuring if we are to get back on a long term path to income and job growth.  The status quo has failed.  Now is not the time to simply return to our high spending ways.

This is a message that the Buckeye Institute is focused on communicating every day to legislators, opinion leaders and engaged citizens across Ohio.

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When Government Gets Involved in Higher Ed, Costs Increase

Posted on May 7, 2012 by Adam Schwiebert

The rising cost of a college education has been in the news a lot recently, and deservedly so. Controlling higher education costs is essential to ensuring that young people can attain the necessary skills needed to compete in a global economy without burying themselves under mountains of debt.

The current trajectory of college costs is clearly unsustainable. The cost of tuition and fees has grown by 439 percent since 1982—a rate more than four times the rate of inflation. Over the past decade, total federal student aid has increased by nearly 100 percent to over $117 billion. And yet, the average college graduate is leaving school with $25,000 in student loan debt—for a national total of over $1 trillion.

The latest highly publicized “fix” to rising higher education costs is the continuation of the reduced interest rates on federal student loans, as advocated by President Obama and passed by the U.S. House of Representatives. Although popular, the proposal does little if anything to address the heart of the problem.

While lowering interest rates reduces borrowing costs (only about $25 a month), costs will only continue to rise. As long as government is willing to loan tens, if not hundreds, of thousands of dollars to students, colleges and universities have little incentive to restrain the growth in costs. If anything, the reduction in student loan interest rates only encourages more borrowing, driving tuition even higher.

A better way to manage student loans suggests Glenn Harlan Reynolds, a law professor at the University of Tennessee and author of the forthcoming “The Higher Education Bubble”, is to adopt private-sector principles.

Student loans should be treated like other types of loans and granted on the likelihood that they can be repaid. For instance, the likelihood of timely repayment on a $100,000 loan for a degree in gender studies might be considerably lower than a $25,000 loan for a civil engineering degree. Considering these factors would reduce default rates (which cost taxpayers) and prevent students from taking on crushing debt.

Another idea Reynolds suggests is for colleges and universities to assume a portion of the risk on student loan defaults. If students are unable to repay their loans, universities should bear part of the loss, just as other creditors do for other types of loans. When universities have a financial stake in the future fiscal health of their students, more responsible lending will likely take place.

Finally, more emphasis needs to be placed on matching career aspirations with the appropriate educational path. The current emphasis on 4-year degrees at the expense of 2-year and technical degrees is likely incongruous with labor market demands. Jobs in high-tech manufacturing, skilled trades, and the health care industry are in demand, accessible with 2-year degrees, and save thousands in student loan debt.

Any reforms addressing the rising costs of higher education must be based on real world principles. The free flow of money to anyone and everyone who desires a college education, regardless of employment prospects, must be re-evaluated.

Saturating the higher education market with more government spending and more borrowing may be well intentioned but it has proven to be highly ineffective. Tinkering with interest rates will not change the fundamental problem or bring real relief to students.

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Ever More Reason for Reform… NOW

Posted on May 7, 2012 by Greg R. Lawson

The Buckeye Institute continues making the case for bold, fundamental reforms across the board in order to return Ohio to vibrancy.  The reasons for such bold reform are manifest, but here are two things to keep in mind:

First, Friday’s job numbers is a troubling read. The bottom line – it’s nice to see the unemployment rate go down (to 8.1%), but fundamentally, the fact that 522,000 people apparently exited the labor force in April is truly frightening.  Of course unemployment rates will go down… when people stop bothering to look for work!

This is the lowest rate of Americans participating in the labor force since 1981.

Meanwhile, as our monthly Ohio by the Numbers report shows, Ohio is at least five years away from returning to its peak private sector employment, which was in March 2000.  That means that it would, under the best of circumstances (which these are clearly not as that labor force number indicates), it would take 17 years to go from peak to peak with private sector employment.

Looking at those two data points together paints a picture with major storm clouds brewing.

While it is probably true that some of the labor force shrinkage is due to Baby Boomer retirements, that fact reinforces the point that we must be growing the economy at a fast enough rate to absorb new, younger workers seeking to enter the force for the first time while also reabsorbing those who have left the labor force.

As Walter Russell Mead puts it in a recent blog posting,

“There are some healthy underlying trends. The private sector is growing faster than the public sector. But we need to do more: if the American middle class is going to be stable and prosperous, private sector demand for workers needs to grow. Small business and start ups will be the key to that. The central policy debate in this country needs to be over how we can create the most favorable possible conditions for the development of a wave of new business.”

That comment mirrors exactly, the thoughts outlined by Richard Epstein in an article our President, Kevin Holtsberry, just posted a blog about.  According to Epstein,

“…The calcification of labor markets is the primary impediment to economic recovery. The direct effects of government regulation of labor can matter far more than the indirect effects of macroeconomic policy, whether Keynesian or austerity-based. Neither austerity nor lavish public expenditures will improve the overall situation, which is why the massive increase in American public debt has not nudged unemployment rates down. The only workable solution has to stress job creation, not by misdirected subsidies, but by dismantling the government obstacles to market exchange. [emphasis mine]”

As Kevin then outlined,

“Obviously, we agree.  In Ohio Right-to-Work: How the Economic Freedom of Workers Enhances Prosperity, we detail the significant economic costs of forced unionization.  This is one very a large example, but there are a great many others.

Ohio’s growth deficits and economic stagnation are a clear indication that we have allowed government obstacles to market exchange to drag our economy down for far too long.  We must begin the process of removing obstacles and creating a competitive, dynamic and flexible business climate.  That is the path to growth and opportunity, not more spending, more subsidies and more programs.”

Mead, Epstein and Kevin all have a very important point.  We have to fundamentally change how things are working in Ohio to deal with the big picture challenges.

More of the same policies will lead to more of the same outcomes, outcomes no one can be happy with.

Posted in Economy, Labor, Local Government | Leave a comment

Attracting Quality Workers and Reforming Public Pensions

Posted on May 4, 2012 by Adam Schwiebert

A common argument made against substantive public pension reform is that state and local governments will be unable to attract qualified workers without generous retirement plans.  While it’s true that any potential employer must offer competitive benefits in order to attract qualified workers, few have questioned how much pension reform would truly reduce state and local governments’ ability to attract a skilled labor force.

By almost every measure, it won’t.

Government employees decide to work in the public sector for many reasons, one being job security.  And the evidence shows that the public sphere is a relative safe haven for securing permanent employment.  From 2000 to 2012, Ohio’s private sector total employment fell by 10 percent while the public sector only cut 2 percent of its labor force.  Even in times of budget cutting and fiscal austerity, public-sector employment remains strong.  Reforming public pensions would do nothing to change that.

Job seekers also turn to the public sector for generous benefits.  In Ohio, public employees typically contribute 15 percent or less to their health care premiums while private sector workers pay upwards of 31 percent.  A number of public sector workers also have the ability to cash out unused sick and vacation time at retirement, creating payouts of tens of thousands of dollars.  Again, pension reform would not touch these benefits either.

In the areas where pension changes would affect government employees, the system still remains quite generous.  Even under the reform proposal recommended by the Ohio Public Employees Retirement System (OPERS), Ohio’s largest public employee pension fund, employee contributions would not increase from the current rate of 10 percent of salary.  Meanwhile, government employees would continue to receive a 14 percent contribution from taxpayers.

For perspective, private sector workers receive only a 10.2 percent contribution from their employers, split between Social Security and a 401(k), which they then match with their own 10.2 percent contribution.

Additionally, under OPERS’s reform plan, eligibility for full pension benefits would increase to 55 years with 32 years of service.  Meanwhile, private sector workers must wait until age 67 for eligibility for full Social Security benefits, regardless of the number of years worked.

OPERS’s proposal also does nothing to reform the defined-benefit structure, meaning that pensions payments are legally guaranteed to retirees (on the backs of taxpayers) while private-sector retirees shoulder more risk in securing their retirement.

The bottom line is that public sector employment still has many advantages over private-sector employment—even if the pension funds’ reform proposals are enacted in their entirety.

The reforms that the Buckeye Institute has proposed revolve around a simple principle: Public employees should have retirement benefits comparable to those in the private sector.  By transitioning to a defined-contribution plan or a defined-benefit/defined-contribution hybrid that utilizes private-sector retirement eligibility criteria, Ohio would be much closer to achieving that goal.

Restoring fiscal responsibility to Ohio through aggressive public pension reforms would not diminish government’s ability to attract a qualified labor force; rather, a public sector with fiscally sustainable retirement systems better ensures that its costs do not grow beyond what taxpayers can afford.

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Richard Epstein on “dismantling the government obstacles to market exchange”

Posted on May 3, 2012 by Kevin Holtsberry

In case you missed it, I wanted to draw your attention to an excellent article by Richard A. Epstein.  In Beyond Austerity Epstein focuses in on the labor market and free exchange as critical to economic recovery and future growth.  He really gets to the philosophical heart of many of the reforms the Buckeye Institute is focused on.

He outlines the steps needed to spur growth outside of the macroeconomic policies so often discussed and debated (particularly in Washington):

The best first step is to free up labor markets world wide. Specifically, we need policies that take aim at the unbearable political forces that seek to tighten the regulatory noose on voluntary labor markets.

Unfortunately, the dominant attitude of macroeconomists is to assume that nothing that takes place within the labor market (of which Krugman never speaks) is large enough to influence the large macro trends to which they attribute today’s high employment rates.

The blunt truth is exactly the opposite. The calcification of labor markets is the primary impediment to economic recovery. The direct effects of government regulation of labor can matter far more than the indirect effects of macroeconomic policy, whether Keynesian or austerity-based. Neither austerity nor lavish public expenditures will improve the overall situation, which is why the massive increase in American public debt has not nudged unemployment rates down. The only workable solution has to stress job creation, not by misdirected subsidies, but by dismantling the government obstacles to market exchange. [emphasis mine]

Obviously, we agree.  In Ohio Right-to-Work: How the Economic Freedom of Workers Enhances Prosperity, we detail the significant economic costs of forced unionization.  This is one very a large example, but there are a great many others.

Ohio’s growth deficits and economic stagnation are a clear indication that we have allowed government obstacles to market exchange to drag our economy down for far too long.  We must begin the process of removing obstacles and creating a competitive, dynamic and flexible business climate.  That is the path to growth and opportunity, not more spending, more subsidies and more programs.

Posted in Economy, Labor, Regulation | Tagged , , | 1 Comment

Buckeye Institute Participating in Northwest Ohio Conference

Posted on May 3, 2012 by Greg R. Lawson

The Buckeye Institute’s Statehouse Liaison and Policy Analyst, Greg R. Lawson will be participating in a series of panel discussions at the Northwest Ohio Conservative Conference.

The event will be held on Saturday, May 19 at the Hilton Garden Inn in Perrysburg, Ohio.  It will run from 9am-4pm, for more information check out this flyer from the organizers.

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