Unfunded Liabilities Undermine Budget Progress

Ohio’s new budget is a step in the right direction, but without pension reform this progress will be for nothing. A recent index of state budget solvency from the Mercatus Center provides a stark illustration of the need for reform. Ohio ranks well, relative to other states, but this is solely due to a stable short-term outlook. In the long term, unfunded liabilities present a threat to fiscal health that will overwhelm any short-term progress.

Each state is ranked based on total cash on hand, short-term budget solvency, and long-term unfunded liabilities. Ohio’s high ranking is due almost entirely to its cash solvency; the state has five to seven times the amount of cash on hand needed to cover short term spending, several times above the national average. In all other categories Ohio’s performance is middling to poor, with long-term solvency being especially dismal. Unfunded pension and healthcare liabilities total over $247 billion; more than half of Ohio’s total personal income, and a total eclipse of the budget surplus. While every state’s pensions perform poorly, Ohio ranks behind every state except New Mexico and Alaska.

Unfunded pension liabilities are a persistent, looming problem for Ohio. This report illustrates how Ohio’s short-term progress towards a responsible budget can be utterly overwhelmed by ballooning pension liabilities. Genuine, lasting fiscal health depends on more than bountiful cash reserves. More than anything else, it depends on meaningful pension reform.

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The Buckeye Institute’s Statement on King v. Burwell

Statement from Robert Alt, President and CEO of The Buckeye Institute:

“The Supreme Court decision today is disappointing because the Court rewrote the law to say what it does not.  The problems of the Affordable Care Act remain, which include increased costs for Ohioans due to excessive regulation as well as the expansion of Medicaid. These burdens will continue to strain Ohio’s finances and those of its families and businesses.

The Buckeye Institute is proud to have worked with Senator Larry Obhof to create an innovation waiver in the budget, which allows for states to seek relief from the regulatory constraints of Obamacare.  This innovation waiver has the potential to lower health care costs for all Ohioans, not just for those who receive subsidies.  With Governor Kasich’s signature, Ohio will become the national leader in seeking a better way forward on health care for the states.”

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Federal overregulation and Ohio’s electricity market, Part II: Harming consumers and the economy

Just like Ohio’s state renewable energy mandate, federal power plant emission regulations drive up electricity costs and risk reliability by directly interfering with the state energy market. The coal plants that are being closed generally cost somewhat more to operate than newer, more efficient plants. However, the older coal plants have recovered or nearly recovered their “capital costs,” or the costs to build the plant. Since power plants are expensive to build, it is actually more economically efficient to continue running the older plant that is already paid for than it is to build a whole new plant that is more energy efficient.

This situation is as if a new law forced you to sell your house, which you had recently paid off, in order to build a new house that had better insulation. Although the new house with better insulation would save money on your energy bills every year, the new mortgage cost would vastly outweigh this relatively small benefit. Similarly, these power plant regulations force power companies to forego the most economically efficient option in favor of more energy efficient options, in turn forcing power companies to raise prices for consumers and businesses.

So instead of producing power with the most reliable and lowest-cost sources, AEP and other generators are forced to consider less reliable and more expensive alternatives. To compensate for the loss in coal-fired generation, AEP has stated that it will begin looking into utility-owned solar to meet power needs. This statement demonstrates that government regulations pick winners and losers by creating an uneven playing field in what should be a competitive market. If solar power is an economically efficient endeavor for AEP and its customers, the company will provide solar without the forceful hand of the EPA guiding its decisions.

EPA is not relenting after the MATS rule, but adding the “Clean Power Plan” that regulates power plants’ carbon dioxide emissions. The carbon rule is projected to force an additional 90,000 MW of coal power to go offline, in addition to the nearly 61,000 MW forced to retire due to MATS. An economic analysis found that the Clean Power Plan could cost up to $348 billion from 2017-2031 (present value, inflation-adjusted 2013 dollars). Ohioans could see double-digit electricity price increases, which would hurt low and fixed income citizens the most.

The Washington bureaucracy is able to force coal plants to close prematurely by picking winners and losers in Ohio’s energy market. These regulations put jobs and grid reliability at risk and drive up electricity prices. Fortunately, some members of Congress are trying to help states push back against federal overreach. One example is Senator Rob Portman’s proposal to allow governors to opt-out of compliance if doing so would “increase retail electricity prices, threaten electricity reliability, or have a negative impact on the state’s economy.” Ohio is the 6th-largest consumer of energy in the United States, so such a measure is necessary to keep our state’s economy from running out of steam.

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Federal overregulation and Ohio’s electricity market, Part I: High cost, low benefit

Government overregulation recently caused American Electric Power (AEP) to shut down several coal plants—including one of Ohio’s largest generators—in May. Even more power plant retirements are looming due to the Environmental Protection Agency’s (EPA) imminent “Clean Power Plan” for carbon dioxide emissions. Power outages, price increases, and other economic damage will likely occur as these onerous regulations force more coal plants to close prematurely.

The latest closures are tied to the EPA’s Mercury and Air Toxics Standards (MATS) for coal power plants, which is the major cause of over 61,000 megawatts (MW) of coal plant early retirements nationally. National Economic Research Associates estimated the total compliance costs of the regulation to be $94.8 billion (present value in inflation-adjusted 2010 dollars).

Among the recent closures was AEP’s Muskingum River plant in Washington County, Ohio. This plant produced 1,440 MW of capacity. To put this in perspective, 1 MW has the ability to power approximately 1,000 homes. Closing this one plant eliminated enough energy to power 1.44 million households. The Muskingum River plant was the largest facility, in terms of energy generated, of the 9 plants that AEP shuttered on May 31st.

The Picway plant near Columbus, Ohio also closed due to the MATS rule. While this 100 MW plant generated a fraction of the power of the Muskingum River facility, it was important for meeting Ohio’s needs at times of high demand.

Since the power grid is a regional system, Ohioans also rely upon power generated in other states to meet our demand for energy. Unfortunately, AEP also closed three plants in West Virginia, two plants in Virginia, one in Kentucky, and one in Indiana. It is a slight consolation that one of the Virginia plants and the Kentucky plant will be converted to natural gas generators.

In total, AEP shuttered over 5.5 million homes’ worth of electricity in one day. The company expects to spend $3.3 billion to comply with MATS, which will harm shareholders as well as workers. AEP has issued layoff notices for upwards of 250 employees across six plants.

Of course, mercury air pollution is undesirable. But these regulations add far more cost than benefit overall, because coal plant emissions were already tanking before the rule was issued at the end of 2011. According to AEP’s 2014 Corporate Accountability Report, the company had already decreased mercury emissions by 60% since 2001. The Energy Information Administration provides further evidence that energy companies were making great environmental improvements before EPA’s costly mandates.

These regulations also create widespread economic damage by driving energy bills higher, which Part II of this series will examine in further detail.

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2015 Piglet Book Proposes $2.6 Billion in Savings

With the Senate budget looming on the horizon, it is time to consider how to make Ohio fiscally responsible. In that spirit, The Buckeye Institute released its 2015 Ohio Piglet Book, detailing close to $2.6 billion in wasteful and excessive state spending.

10% of these savings come from eliminating special favors to private companies. Ohio spends close to $220 million on subsidies, grants, and other forms of corporate welfare. The government should not be in the business of picking winners and losers in private industry, yet this is exactly what occurs when politicians issue grants to specific businesses. Using taxpayer money to support government-favored businesses is ethically inappropriate and economically harmful.

Just as private industry should guide investment, private charity should guide culture and philanthropy. Artistic and cultural endeavors can and should be driven by voluntary donors rather than by government fiat. This would save a further $55.7 million.

The most dramatic savings come from a disciplined, proactive approach to limited spending growth. It is reasonable, of course, to expect agency budgets to rise along with prices and a growing population, which makes inflation rates and population-growth good guides for tracking public spending growth. This pace would suggest that agency budgets should increase, for the most part, by not more than 3% per year.  While many agencies managed to do this well or better, overall $1.9 billion of the budget comes from growth above this benchmark.

The principles outlined in the full report would move Ohio towards a responsible, pro-growth budget. Governor Kasich and the General Assembly should reconsider their plan for 2016 and 2017, cutting back on what they do not need, and abdicating roles for which the public sector is less qualified.

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You’re Invited to An Evening with Steve Moore and Paul Atkins

On Tuesday, May 19, The Buckeye Institute will be hosting Steve Moore from the Wall Street Journal and former SEC Commissioner Paul Atkins at the Cleveland Marriott East in Beachwood, OH. Moore and Atkins will be speaking about regulations that are hurting Ohio’s prosperity and what can be done to reform them. Please join us at 5:30pm for a cocktail reception; the program will begin at 6:30pm followed by a private dinner. Seats are limited. Register now.

About the Speakers

Stephen Moore is a distinguished visiting fellow at The Heritage Foundation who previously served as the senior economics writer for the Wall Street Journal editorial page and a member of the Journal’s editorial board. Mr. Moore continues to be a regular contributor at the Wall Street Journal and other outlets, including Fox News, CNN, and CNBC. He was founder and president of the Club for Growth, and is the author of many books.

Paul Atkins is chief executive of Patomak Global Partners LLC, a financial services consulting firm that provides strategic regulatory advice, risk management and compliance services, and enforcement and litigation support. Mr. Atkins served as a commissioner of the U.S. Securities and Exchange Commission from 2002 to 2008 and as a member of the Congressional Oversight Panel for the Troubled Asset Relief Program (TARP) from 2009 to 2010.

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Ohio Supreme Court calls a foul on Cleveland’s jock tax

On April 30th, former Indianapolis Colts center Jeff Saturday and former Chicago Bears linebacker Hunter Hillenmeyer likely did end zone dances that would make Chad Ochocinco blush.  Their cause for celebration was the Supreme Court of Ohio’s ruling that the city of Cleveland must return a few thousand dollars of income tax to each of their bank accounts.  While their multi-million dollar NFL salaries dwarf the refund checks, the ruling was a moral victory for these gridiron veterans.

Jeff Saturday’s lawsuit provides the clearest picture of the problem.  The Colts played one game against the Browns in 2008, and Cleveland’s income tax was withheld from Saturday’s paycheck for that game—despite the fact that he had remained home in Indianapolis for physical therapy!

The policy in question is the so-called “jock tax,” which allows Cleveland to collect income taxes on the earnings of any professional athlete who plays in the city.

Jock taxes are not unique to Cleveland.  According to the Plain Dealer, Cincinnati, Columbus, Detroit, Kansas City, Philadelphia, Pittsburgh, and St. Louis all levy jock taxes.  However, the Ohio Supreme Court decided that Cleveland’s method of assessing the jock tax is unconstitutional.

The justices unanimously agreed that while Cleveland may tax out-of-state athletes for the portion of their incomes earned within the city, Cleveland may not tax any portion of their incomes that were not earned within the city.  Previously, Cleveland’s method of assessing the jock tax did, in fact, fall on income earned outside of the city limits.

This overreach violates The Buckeye Institute’s tax principles of simplicity and fairness.  The jock tax is difficult to calculate because it must be apportioned properly to the athlete’s share of income earned in each city and must be calculated for many different jurisdictions.  The city’s income tax also exempts the first 12 days of income earned in Cleveland—except for certain people like athletes and entertainers.  This is fundamentally unfair because it places different tax burdens on taxpayers with similar earnings.  More importantly to the justices, Cleveland’s implementation of the tax violates the due process clause of the United States Constitution.

The Ohio Supreme Court did not eject the jock tax from Cleveland’s tax game entirely.  Instead, Cleveland must revise their game plan so that the jock tax stays in bounds, although city tax officials estimate that such changes will result in a loss of about $1 million of revenue per year.  Regardless, the ruling will go down as a win for all out-of-state athletes who play in Cleveland, and for all proponents of fair and simple tax policy

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