Finance

The Week in Public Finance: Mo' Money, Mo' Problems and a Pension Lesson from Washington Teachers

A roundup of money (and other) news governments can use.
by | June 13, 2014
 

Where does being rich actually mean you're rich?

A new policy report released June 10 by the Federal Funds Information for States takes a look at where people are getting the most bang for their buck – where can you make the most money and make those dollars stretch the farthest? Turns out that the residents of the District of Columbia are the big winners. This is perhaps something of a surprise; although income per capita in the nation’s capital is the highest in the country ($74,773 in 2012), it’s also an expensive place to live. Still, even though FFIS shaves a full $15,000 off of those incomes due to cost of living, the District retains its top ranking.

Every other state, however, changes places. Overall, 27 states see their per capita income rank increase as a result of adjusting to reflect cost-of-living, while 23 states see their rank decline. A few, like Hawaii and Nebraska, drastically shift. After adjusting for price levels, Hawaii’s ranking drops from No. 21 to No. 47, while Nebraska’s increases from No. 20 to No. 7. A per capita income of about $45,000 equates to more than $47,000 in Nebraska but only $36,000 in Hawaii.

FFIS notes that considering cost-of-living when measuring income per capita could have dramatic implications for states’ Medicaid funding, which is based on per capita income. The 13 states with the highest per capita incomes receive the 50 percent minimum in matching Medicaid funds from the federal government, while the remaining states get a rate that varies year-to-year, based on their incomes over a three-year period.

If Medicaid funds adjusted for cost-of-living, Hawaii would see its matching rate increase the most, from 52 to 64 percent, the report says. Other states that would move from 50 percent to a higher matching rate would include Alaska, California, Illinois, New Hampshire and Washington State (although in most cases the increases would be small). Missouri, Ohio and Iowa would see “substantial reductions” (8 to 10 percent) in Medicaid funding.

Washington state’s pension lesson

A new brief from the University of Washington’s Center for Education Data & Research analyses the state’s teacher pension system, which has offered new enrolles a choice between a traditional plan or a hybrid plan since 1996. As other states consider similar changes to traditional pension plans, the paper notes that Washington provides a look into what could happen.

The paper finds that the “state’s financial exposure is significantly lower under the hybrid plan” as its per-teacher pension liability is approximately half as large as under the traditional plan. Interestingly, when given a choice, at least six in 10 teachers (statistics vary by year) choose the hybrid plan, the paper says. This runs counter to claims by traditional pension supporters that the defined benefit plans are more attractive and therefore better for recruiting talent.

Additionally, teachers may obtain more money under the state’s hybrid-plan. "In calculating potential retirement wealth accumulations under [the hybrid plans]," the authors note,"we find that teachers enrolled in Washington’s hybrid plan are likely to have a level of retirement security that is comparable or greater than that provided by the traditional plan." The paper concludes that Washington State’s experience “suggests that teacher pension systems can be reformed in a way that is attractive to both teachers and states and ensures that significant resources are being set aside for teacher retirements.”

Puerto Rico (kind of) bounces back

In last week’s WIPF, it appeared Puerto Rico’s dreams of a balanced budget in 2015 could be shattered after the commonwealth’s April tax collections fell short of expectations. This week, its treasury secretary, Melba Acosta Febo, reported that the preliminary May collections for the General Fund totaled $753 million, surpassing estimates by $29 million. While that’s better news than last week, that still leaves PR with revenues that are $320 million below the 2014 budget estimate.

To close this gap by the end of fiscal year in two weeks and potentially save the 2015 balanced budget, officials are considering using a $35 million surplus earned from a 2009 bond issue and making corporations that applied for tax extensions pay by June payments, rather than giving the companies until July 15.

The commonwealth is also considering what it's calling “adjustments to the repayment” (read: delaying payment) on money it owes to the Government Development Bank and the Central Government Employees Retirement Systems Administration.

In a statement, Office of Management and Budget Director Carlos Rivas reminded people that Puerto Rico reduced expenses in February by $170 million thanks to “a strict spending discipline.” And, though the additional reduction of $340 million will be based on [cuts outside of the day-to-day cost of running the government], “we will continue exerting the same fiscal responsibility.” He promised that within the next 90 days, the government would submit legislation that establishes repayment plans to the development bank and the Retirement Systems Administration.

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