What’s the Number?

It’s a dry subject, but a storm is forming offshore that could cost taxpayers billions.

Here’s how the NC’s pension plan works: Say the state hires 25-year old man and promises to pay him a pension. That amount, when he retires in 30 years, will be determined by a formula- but let’s say his pension will be $50,000 a year.

For the next thirty years, both the employee and the state each pays a fraction of his salary into the state pension fund. The Pension Fund, itself, which is managed by a Board of political appointees, invests the money.

In theory, when the worker retires, the money he has paid in, plus the money the state has paid in, plus the money the Pension Fund has earned on its investments – like Treasury bonds – will be enough to pay his $50,000 a year pension.

But what if it’s not? What if – 30 years from now – the money in the fund will only pay him a $35,000 a year pension? If that happens the state steps in and pays him the additional $15,000 each year.

It’s what’s called a Defined Benefit Pension Plan. And it’s great for workers. No matter what happens to the economy – dips, recessions, stock market meltdowns – state retirees face no uncertainty.

At one time these defined benefit plans were commonplace. But with all the ups and downs in the economy over the past decade governments are now about the only ones still offering them.

Most private companies long ago changed plans – where they say to their employees, You invest part of your salary in a pension plan, we’ll match part of your salary, then whatever the plan earns over the years will determine how much pension you receive.

Now, NC is obligated to pay state retirees nearly $69 billion in pensions. But the latest projections show the pension fund will only have the money to pay out $65 billion. So there’s a $4 billion shortfall (or unfunded liability) taxpayers will pay. That’s a problem. But given the size of the state budget it’s not an end of the world problem.

Except there’s another hitch.

To end up with only a $4 billion deficit the Pension Fund will have to earn a 7.25% return on its investments each year.

But can it?

Once upon a time earning a 7.25% return on investments – like Treasury Bonds – was simple. But then the world changed: Markets collapsed and interest rates turned upside down.

Today, the 30-year return on U.S. Treasury bonds isn’t 7.25% – it’s 2.5%.

That creates a massive problem for the state Pension Fund – which the political appointees on the Board ignore.

When the Board met in January it chose, even in the face of overwhelming evidence, to not adjust the retirement fund’s projected returns. It voted overwhelmingly to stick with the 7.25%.

Now surely the Board Members know, just as average citizens know, that a return on investment of 7.25% in today’s world is a dream. But in government decisions about spending money aren’t always rational.

So what’s the difference between a return of 7.25% and a return of 2.5%?

The result is shocking: Instead of a $4 billion deficit (or unfunded liability) the Pension Fund’s deficit soars to $47 billion – and taxpayers will be on the hook to pay every penny of that money.

By their nature, politicians aren’t inclined to face a multi-billion-dollar crisis that’s years away. Plus, state workers want bigger pensions – which isn’t likely to happen if the Pension Board projects a $47 billion hole in the budget. So ignoring the problem will work out fine for the politicians and for the political appointed board. By the time the storm makes landfall they will have long since retired. And paying those unfunded liabilities will be someone else’s problem.

By ignoring this problem and dreaming of 7.25% returns the Pension Board has us heading straight for a fiscal cliff. But it may also be true that using today’s Treasury rate of 2.5% is too low. The actual return may well fall somewhere between 2.5% and 7.25%. The problem is figuring out where.

So here’s the billion dollar question: What’s the number?

Collapse

Great civilizations seldom fall to foreign invaders. Because it’s not a simple matter to walk in and take over a great nation. And especially one like ours which is bounded by two oceans and has more guns than citizens.

On the other hand, there’s plenty of proof – from San Bernardino to Fort Hood — that a combination of our porous border and an enemy like ISIS has wreaked havoc. We have the power to defeat Isis but we also have two problems: 1) Obama, and 2) a government so big, bloated, and strength-sapping that on an average day it can’t whip much of anyone.

And I’m not just talking about government in Washington. After spending the last few years in the General Assembly, I have to admit government foibles aren’t limited to our nation’s capital. Here’s an example:

14 years ago, during a big storm in Hickory, the biggest sinkhole in North Carolina opened up beside U.S. Highway 70 and swallowed some fellow’s new Corvette. Which made national news – for about 15 minutes.

A decade and a half later the reporters are long gone. But the sinkhole is still there.

Which is creating a couple of problems: First, the sinkhole’s blocking the storm drainage system which simple engineering says will result in floods during big storms. And, second, eventually those blockages and floods will destroy the area’s entire storm sewer system.

Now if that sinkhole was in some out of the way cow pasture somewhere, it would be one thing. But when it floods a 5-lane U.S. highway through a major commercial corridor that problem is a little more serious.

Over the last 14 years, state government and local governments have spent hundreds of millions of dollars to give incentives to private corporations, to pay for public recreation facilities, and to build parking lots.

But at the same time the State of NC, with a $22 billion budget, and the City of Hickory, with a $100 million budget, have been unable to find $3 million to fix that sinkhole – and $3 million is roughly the damages suffered by a local business due to floods during the last big storm in Hickory in July.

Private business can build their own parking lots. And they can provide recreation facilities galore. And, for years, businesses in North Carolina prospered without government incentives.  But what the private sector cannot do is build and maintain an entire community’s basic infrastructure. That’s government’s responsibility.

I’m not sure how we fix all the political problems in Washington. Or in Raleigh. Or Hickory. But one way to start would be by asking a simple question: Why, after fourteen years, is that sinkhole still there?

flooding

Real Money

Unlike House Bill 2, state pensions and other benefits for state employees seldom land on the front page. But there’s money involved. Real money.

For example, the state has promised to provide every state employee with free health insurance after they retire, for life. But, it turns out, there’s one hitch: Not one penny has been set aside to pay those bills. How big a problem is that? It’s an unfunded liability of $26 billion that’s going to land on taxpayer’s doorsteps when the bills come due.

The state’s second promise – to provide pensions for all state employees – has been funded. Money has been set aside. But the question is, is it enough?

Using widely accepted actuarial tables, the pension system is $3.7 billion short of being fully funded. That may sound like a big miss but in the pension world it’s not bad, making NC one of the best funded systems in the country. But now, like a category 4 hurricane, two outside storms are heading our way that could make matters a lot worse.

A state employee can retire with full benefits after working 27.5 to 30 years. That means it is possible for a state employee to retire with a pension and free health insurance when he or she is forty-five years old.

If a state employee retires at age fifty and lives to be eighty – that’s thirty years of benefits. Second, to remain solvent the state’s pension fund needs to earn a return of 7.25% each year.

However, that’s a pretty steep mountain to climb. The policies of today’s politically controlled central banks (including our own Federal Reserve) make reaching that goal nearly impossible.

The risks here are enormous: If the pension fund earns a 2.5% return instead of 7.25% then the taxpayers face a staggering bill of $47 billion.

Obviously, piling up debt to fund pensions and retirement benefits comes with enormous risk. We’re digging a massive financial hole that’s getting deeper every year.

In the long run we might be better off to simply pay new employees cold hard cash – by raising their pay – and make them responsible for their own pensions and health care benefits. Then if they set aside enough money to retire when they’re 50, more power to them.

As I said, unlike social issues, pensions and state benefits hardly make the front page. They’re boring stuff. But they’re also real money. And someone’s going to have to pay the bill.

Specks and Planks

Occasionally someone will ask, “Doesn’t the legislature have anything better to do that talk about bathrooms?”

I am not sure we do.

House Bill 2 may be called a bathroom bill but it serves as a proxy for the fundamental split in our society about how we resolve firmly held beliefs among differing groups of citizens.

So far, both sides appear to be following Winston Churchill’s prediction of doing the right thing only after trying everything else.

2000 years ago, we were asked, “Why do you look at the speck of sawdust in your brother’s eye and pay no attention to the plank in your own eye?” That pointed out a simple truth that people are different and while we all share a commonality; we have arrived in the present by very different paths.  That’s the problem with judging others – using a flawed process to apply your own life experience to someone else’s life. It never works.

At least the positions were more clearly (if not satisfactorily) defined when, on May 4th, the U.S. Justice Department waded in with a letter to NC Governor McCrory saying NC’s “sex-segregated restrooms” are discriminatory because they treat “transgender employees… differently from … non-transgender employees.”

That may be so. But eliminating sex- segregated restrooms and changing facilities in all public and private buildings across NC (and the nation) will leave a large number of our citizens feeling like they are facing another kind of discrimination.

Perhaps some of us are just not sufficiently open-minded to fit the modern world. Maybe we are just old. Either way, discounting long and deeply held feelings and beliefs as simple bigotry won’t help raise anyone’s awareness.

Neither will huge corporations like PayPal (facing ethical challenges of their own) piling economic punishment on our state ease the personal discomfort resulting from sharing restrooms and locker rooms with members of the opposite sex.

We are offered stories about the heartbreaks of growing up as a transgender child along with demands that something must be done.  The LGBT community doesn’t have a monopoly on painful childhood memories.  If there is a hell on earth, it can likely be found inside a school locker room filled with adolescents of varying stages of physical development.  It’s hard to see how mixing in members of the opposite sex will make those childhood lives better.

A friend once asked me, “Do you prefer to be right or happy?”

That question suggests that, in a conflict, getting your way at any cost may mean you pay later. In other words, it’s unlikely we will permanently protect the rights of one group by trampling the rights of another.  Even if, with the help of the federal government, the power is there to do it, will that guarantee happiness?

More Over Regulated

If you rounded up all 55 of NC’s Occupational Licensing Agencies (OLA) and put them under one roof it wouldn’t be a massive new department of state government – but 485 employees is nothing to sneeze at either.

Altogether, those 55 boards handle $67 million dollars a year.

By way of comparison, with 2/3 of the OLA’s 485 employees, the General Assembly budgets and oversees $54 billion a year from state and federal taxpayers – 800 times as much money as the OLAs.

A better comparison may be the State Treasurer’s office which only has 334 employees, a third less than the OLAs, while managing $90 billion in retirement funds for teachers and state and local employees.

You can say I’m comparing apples and oranges – but look north to Virginia.

If Virginia managed their licensing agencies like NC, they would have to raise license fees by 40%. Instead, Virginia keeps their expenses down ($68 per licensee vs. NC’s $96) while handling just as many license related complaints and disciplining more licensees than NC.

The OLAs say these costs really don’t matter since their $67 million comes from fees paid by the people they license instead of taxes. And that’s true – OLAs do not receive tax dollars. But the money has to come from somewhere. And the answer is, ultimately, it comes out of the pockets of consumers and customers.

And, in the end, it doesn’t really matter whether the legislature is pulling dollars out of your pocket with taxes, or by granting an OLA the power to charge your barber for a license before he can give you a haircut. It’s still part of his cost of doing business. And it’s still dollars coming out of your pocket.

Naturally, OLAs keep telling legislators not to change a thing – that everything is fine.

But a little digging through financial statements shows OLAs have turned into a costly mess. Granted, this mess has been years in the making and isn’t the most urgent problem facing taxpayers – but for those of us who are fiscal conservatives, it’s getting harder and harder not to clean it up.

New Technology, Old Regulations

Out in the private sector, things change in the blink of an eye – while government struggles to keep up. And, in fact, government doesn’t have much reason to keep up.

A change in technology may offer the opportunity to save money. The private sector jumps at a bargain. For a bureaucrat, saving money may mean a reduction in his department’s budget, fewer government employees, and a loss of power.

But sometimes, outside forces overwhelm even the most cautious bureaucrat – to force a change. Transportation funding is an example. State governments are struggling with a simple fact: Better fuel economy is good news for drivers but means fewer gas tax dollars to build and repair roads.

Some propose toll roads as a solution. But anyone who lives near I-77 north of Charlotte can tell you toll roads also create problems of their own.

So maybe it’s time we looked at changing a few obsolete regulations.

Years ago, when we had to cross a small stream and the size didn’t require a bridge, we used a round pipe or a square pipe called a culvert. Back then we just laid the pipe on the stream bottom knowing the water would rise up to get through then waterfall out the other end.

It was a solution that worked until the environmentalists pointed out it created an environmental problem – by creating barriers for fish and other water creatures who couldn’t safely navigate the smooth concrete bottom, much less, climb the wall at either end.

So the environmentalists proposed a solution called stream mitigation. What that meant was simple: Every time the state blocked a stream with a culvert, it had to go out and find a degraded stream somewhere else and improve it to offset the harm done by the culvert. It’s hard to argue with mitigation as a theory but hard evidence of a benefit is less obvious.

And one thing is certain, mitigation costs a lot of money – almost $800 per linear foot of impacted stream. For a steam crossing requiring a 300-foot culvert, that means mitigation costs of $233,000. That adds up to NC spending over $5 million per year for mitigation. And that’s $5 million that could have been spent to build regular roads instead of toll roads.

Over the last 20 years the private sector found a better way to cross streams. They simply started burying culvert bottoms so that the stream flowed though unchanged. The creek critters could freely move from side to side.

It was a win-win solution and you’d think, surely, the regulators in Raleigh would have responded by not requiring mitigation where better technology could be used.

No. They didn’t. Apparently the regulators still live in 1995.

It gets worse. Mitigation in not just expensive, it’s complicated.

To speed up highway projects engineers started going around the need for mitigation by building bridges instead of using culverts.

That did make projects simpler and faster.

And much more expensive.

Short span bridges cost twice as much as culverts, last half as long, and add more tens of millions to the taxpayer’s bill.

This has gotten silly. With a little effort, and innovation, we can kill three birds with one stone: We can cut government spending, protect the environment and build more roads.

Helping the Poor

Winning the battle and losing the war is an old story.

Fervent Bernie Sanders-type Democrats here in North Carolina are still hollering for a return of the Earned Income Tax Credit – or EITC – which the General Assembly ended three years ago.

The EITC was a bit of a misnomer. It wasn’t just a tax credit that returned dollars to a worker that had been withheld from his or her paycheck. There was another component of the law, called ‘refundable,’ which let a person get a refund check even if he or she did not pay taxes. In other words, a person who paid no tax could get, say, a $200 refund. Or a person who paid $200 in taxes could get a $400 refund.

That leaves the realm of tax credits and crosses into the realm of welfare.

Here’s my point: If the goal is to help the working poor there’s a better way. For example, a current proposal would raise the ‘zero bracket’ for a married couple from $15,500 to $17,500. That means every couple would pay no tax at all on their first $17,500 in income. They would get to keep every penny of the $17,500. No matter whether their annual income is $20,000, $30,000, $40,000 or $50,000. Which means a significant tax cut.

Equally important, that tax cut is bigger than the tax credits that would be available by going back to the EITC – so it helps the poor more. And, at the same time, it helps the middle class.

Our more liberal Democrats are determined to refight the EITC battle. But does that battle matter if we find a better way to help the working poor?

Over Regulated

There is plenty of talk going around these days about political polarization, but occasionally the liberals and conservatives do come together and agree.

It was only a small NC legislative subcommittee hearing, but there they were, representatives from the conservative John Locke Foundation and the liberal N.C. Justice Center, agreeing there was too much regulation.

In this case, the regulations they were agreeing on involved 55 state commissions and state agencies that grant licenses to some 700,000 NC workers – such as doctors, attorneys or pastoral counselors.

Now, practically speaking, giving a Commission the power to determine who can be, say, an undertaker, gives that Commission a lot of control over the free market. They can literally determine how many funeral homes there are in a county.

NC, and other states, have long required licenses for professions like doctors and attorneys. And no one is arguing doctors shouldn’t be licensed.

But around 1973, the number of licensed occupations in NC started increasing like mushrooms after a summer rain.

Here’s where the two ends of the political spectrum agreed:

  1. Licensing creates a barrier to entry for workers in general, and particularly the poor, as they try to climb the economic ladder.
  2. Licensing raises the costs of services, which takes money out of everyone’s pockets, but hits the poor hardest.
  3. And, as a group, licensed professions experience slower growth rates than their unlicensed peers.

In other words, unnecessary licensing hurts workers, consumers and our economy.

Granted there are some obvious winners. If you already hold a license to be an undertaker, you find yourself in a protected environment that limits bothersome competition. That’s why people with licensees are quick to argue that uneducated consumers need the protection licensing offers. Without that extra bureaucratic protection, they say, people will be exposed to unnecessary risk from bad actors.

That may have been true 50 years ago. But in the age of smart phones and Yelp, there may be a better way to protect consumers than more bureaucracy.

Special Sessions

They’ve printed the same charge over and over – it seems like just about every newspaper article and every editorial harps on one fact: It costs $42,000 a day for the General Assembly to be is session.

I guess that’s a backdoor way of opposing holding a special session to repeal Charlotte’s city ordinance allowing grown men to enter restrooms occupied by women and young girls.

That ordinance goes into effect April 1st – on April Fool’s Day – but, unfortunately, it’s not a joke.

I admit I am all for cutting government spending. And if the media wants to support some real spending cuts there’re plenty of wasteful programs that make the cost of one day of the General Assembly look like peanuts. After all, state government spends twice that $42,000 amount every minute of the year.

There’s actually a simple reason for holding a special session: According to lawyers advising the legislature, once the Charlotte ordinance goes into effect it can create what’s called a ‘vested right’ in legal parlance. That means waiting may give a grown man, who likes the idea of entering a Charlotte locker room full of young ladies, a legal argument that changing the law denies his vested right.

That sounds plumb crazy to me. But I’m not an attorney. And I’ve seen liberal federal judges do crazier things. And not very long ago.

I’ve also, over the years, have had the misfortune of paying attorney’ s fees, now and then, and understand in a case like this the legal bills would surely end up costing taxpayers a lot more than $42,000.

So if we’re going to stop the Charlotte City Council’s ordinance it’s best to get it over with before April 1. Acting now is like getting a chance to buy an insurance policy after the storm predictors have said there’s a hurricane heading your way. It may cost something. But it saves a lot more.

Monopolies

I received another response to my piece criticizing requiring a farmer to obtain a government permit before renting his land to a solar farm – this time from a respected political group.

The group began by explaining carefully that it opposed ‘all energy tax loopholes and subsidies, regardless of the energy source.’ Which is fine. So do I.

Then it added, disapprovingly, that ‘North Carolina’s energy market currently exists in a monopoly system.’ Which is fine, too. No disagreeing with that.

But, then, the group declared that “the REPs” are a bad law.

Now, the REPs are a little known provision in utilities law that make it possible for independent solar companies to produce electricity in North Carolina.

Without REPs, utility monopolies (in North Carolina that basically means Duke Energy) have complete control of the market. The monopoly can put any independent solar company it wants out of business by simply blocking the right to build its product. REPs are what give independent solar companies a way to sell electricity in the marketplace. No REPs, no competition.

I’ll grant REPs are a peculiar provision. About the only time something like REPs make sense is when the government has granted one company – like Duke Energy – a monopoly over a market.

Since they’re peculiar, in a way doing away with REPs looks sensible. But, in fact, all it actually does is strengthen the monopoly. And reduce competition.

Is that conservative?