The Week in Public Finance: Higher Ed's Lost Decade, Straining Connecticut's Localities and Popular Pensions

A roundup of money (and other) news governments can use.
by | August 25, 2017
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Funding Down, Tuition Up

State funding for higher education is still far below its pre-recession level, finds a new analysis by the Center on Budget and Policy Priorities (CBPP). Total funding for two- and four-year public colleges for the 2016-2017 school year was almost $9 billion (nearly 10 percent) below its 2008 level, after adjusting for inflation.

The per-student spending rate has dropped even more: 16 percent. The reason for the drop is that college enrollment surged rapidly during the recession, precisely at a time when states were making major cuts to higher ed in the face of budget shortfalls.

But while budgets have begun to recover, states have barely begun to restore their higher education cuts. Of the 49 states the CBPP analyzed over the 2008-2017 period, 44 spent less per student in the 2017 school year than in 2008. The only states spending more than in 2008 were Indiana, Montana, Nebraska, North Dakota and Wyoming. (Wisconsin was not included in the CBPP analysis.)

The Takeaway: Many blame the dramatically increasing cost of college on state funding cuts. But the cuts aren't solely to blame -- the rate at which colleges have increased tuition has far outpaced the cuts dealt to them by states. Annual published tuition at four-year public colleges has risen by 35 percent since the 2008 school year.

The persistent rise in costs has created a college tuition bubble. Over the past three decades, the cost of college has risen 400 percent, a trend that has fueled a surge in student debt. There are signs, though, that the bubble may be slowly deflating.The Wall Street Journal recently reported that college tuition increased this year by just 1.6 percent. That number is on pace with inflation, whereas the average increases in recent decades have been at double the rate of inflation. What's more, reports the CBPP, 36 states increased per-student funding last year.

 

It's Not a Good Time to Be a Local Government in Connecticut

As Connecticut lawmakers struggle to close a $3.5 billion shortfall, one thing is certain: Local governments will be hit. The only question is, how badly?

The state is likely to cut school aid and/or a portion of teacher pension costs. It is also may take money away from some localities in favor of Hartford, which is teetering on the edge of bankruptcy without a significant boost in state aid.

Already, hundreds of millions of noneducational aid is being withheld until a budget is agreed upon. But it could get worse: Gov. Dannel Malloy has said that if lawmakers could not agree on a budget by the end of the month, he would eliminate education aid to 85 school districts and reduce it for another 54 in order to keep funding the state’s neediest districts.

The Takeaway: No matter when a final budget is passed, it will place immediate fiscal pressure on many local governments. That's especially true for middle-income communities that depend heavily on transfers from the state, says a Municipal Market Analytics analysis. In some cases, cities and counties could see downgrades, particularly if they turn to one-time fixes to shore up a budget shortfall.

But the cuts could have some long-term positives. The state’s budget crisis could force localities to rely less on state aid. Looking at the more than 40 cities and towns with at least $50 million in outstanding debt, Municipal Market Analytics notes that a fair number rely heavily on state aid. Half of Hartford’s and Groton’s budgets, for instance, come from the state, while 10 other cities and towns rely on Connecticut for at least one-third of spending. While “many or most towns will end up raising their property tax to compensate for lost state funds,” the analysis says, it will also “reduce state (and state-dependent) spending in a more permanent way.”

 

Pensions Are Preferred

A new report finds that, when given a choice, most public employees still prefer a traditional pension plan over a more portable 401(k) plan. Among the eight states studied that offer employees such a choice, the traditional defined benefit pension take-up rates were at least 80 percent in six states, according to the National Institute on Retirement Security (NIRS), which advocates for keeping public pensions.

What’s more, the take-up rate has not changed significantly over the past 10 years, meaning neither the negative national attention toward pensions nor the investment losses of the recession seem to have had an impact on employees’ views. The rate instead seems to vary more by state. Florida public employees’ take-up rate has hovered around 75 percent, while the Ohio public employees' plan has stayed in the mid-90s.

The Takeaway: Part of the reason for the preference toward traditional plans is that most states in this study default to them. But in Washington State, the default is reversed. Employees are automatically enrolled into the state’s hybrid plan, a combination defined benefit and defined contribution plan. There, the take-up rate is far lower: On average, 6 in 10 employees choose the defined benefit plan.

While this speaks to the solid popularity of defined benefit plans, it’s important to note that a significant number of employees are opting for the alternative. That’s likely a reflection of the changing workforce. Many younger employees don’t expect to stay with one employer for most of their career. Defined contribution plans offer portability, meaning employees take what’s saved with them when they leave a job. To reap the full benefits of a traditional pension plan, most workers would have to stay with an employer for at least five to 10 years. Traditional pensions have the benefit of retirement income certainty. But when an employee isn’t certain of their ultimate career path, that might not be much of a selling point.

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