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In the Year 2047....
A new federal report on state and local fiscal health contains an astonishing prediction: that total tax revenues for the sector -- as a percentage of gross domestic product (GDP) -- won't return to their 2007 historical high until 2047. A big reason, according to the Government Accountability Office (GAO), is that property and income tax revenues spiked as a percentage of GDP leading up to the recession. But because of less growth in those two areas now -- and because sales tax revenues continue to have less impact as the economy shifts from one based on goods to one based on services -- it will take decades for total revenues to hit that 2007 peak again.
The GAO report also predicts that state and local governments will continue to face a gap between revenue and spending during the next 50 years -- in other words, they'll keep spending more than they make. The gap is largely being driven by pension and health-care costs. "State and local governments would need to make substantial policy changes to avoid these fiscal imbalances in the future,” according to the report.
Tradition Wins in Retirement
This week saw good news for advocates of traditional pension plans over 401(k) plans for public employees. The Boston College Center for Retirement Research (CRR) released a report that compares investment returns in the two types of plans using data from 1990 to 2012 from the U.S. Department of Labor. It found that traditional defined-benefit pensions earned an average of 0.7 percent more each year than defined-contribution 401(k)s -- even after controlling for plan size and type of investments.
One reason for the slightly lower returns in 401(k)s is higher fees, which the CRR said “should be a major concern as they can sharply reduce a saver’s nest egg over time.” The same is true for individual retirement accounts (IRAS), which is where much of the money accumulated in 401(k)s is eventually rolled over into. While some researchers have suggested that the difference between defined-benefit and defined-contribution plan returns has declined in recent years, the report said it's actually larger after 2002.
Pension plans and how well they work have been headline-worthy news since the 2008 stock market crash wiped out one-quarter of most pension funds' values, forcing huge unfunded retirement liabilities onto government ledgers. For the worst plans, however, a government culture of not setting aside money for benefits has been a bigger blow than the stock market losses. Still, the past decade has seen many attempts to shift public employees to 401(k)-style plans in an effort to take the funding burden off governments.
Small Governments, Big Fees
A new study looks at the one-time fees that governments pay the finance firms that help them sell their bonds in the municipal market. These fees are in adddition to the published interest rate the government pays the investors who actually buy the bonds. The study, commissioned by the University of California at Berkeley and the ReFund America Project, found that the average government issuer pays finance firms a 1.02 percent cut from their bond sale. But this percentage varies widely and tends to be larger for smaller issuers.
For example, a $2.1 million bond issued by the Dehesa School District in Southern California incurred $200,138 in fees -- more than 9 percent of the principal amount. That means the school district is paying interest on more than $2 million in debt but in actuality received only $1.9 million after the bond sale. “Had this issuance followed the 1.02 percent average, its issuance fees would have been nearer $21,000,” wrote the report's author, Marc Joffe, who is also a Governing contributor. “In our findings, six California school districts incurred costs in excess of 8.5 percent.”
The report, however, offers solutions for lowering or equalizing costs. For one, better transparency could provide a template for standardized reporting. This report was done using public records requests, but the increasing popularity of government websites that detail their finances is also a potential venue for reporting such fees. Another idea relates to the millions of dollars government issuers pay annually to get so-called CUSIP numbers, which are like social security numbers given to each bond issuance. The CUSIPs protect each issuance and its data as unique, but Joffe noted that the benefits “do not appear to merit the costs,'' suggesting that the charge from the privately operated CUSIP Service Bureau could reasonbly be much lower.