by Dave Kopel and Fred Holden
Gaylord Entertainment is offered $81 million in Colorado taxpayer money for its proposed 1,500-room Denver International Airport hotel and other projects. By what authority can the state government take tax money out of your pocket and give it away to a private corporation? The answer is that corporate welfare schemes, such as so-called “public-private partnerships,” flagrantly violate the Colorado Constitution.
Article V, section 34, of the Constitution states: “No appropriation shall be made for charitable, industrial, educational or benevolent purposes to any person, corporation or community not under the absolute control of the state … .” Very easy to understand.
Part of the Gaylord welfare scheme, and similar subsidies to developers, is that the developer gets to collect and keep Colorado sales-tax revenue, and then spend the tax money on the development. This violates the next section of the state constitution:
“The general assembly shall not delegate to any special commission, private corporation or association, any power to make, supervise or interfere with any municipal improvement, money, property or effects, whether held in trust or otherwise, or to levy taxes or perform any municipal function whatever.”
When a developer collects sales-tax money, and then spends that money to build roads, sewers, and so on, the developer is plainly levying taxes to make “municipal improvement.” The Colorado Constitution says that is illegal. Governments — not private corporations — are supposed to levy taxes and perform municipal functions.
Another provision of the Colorado Constitution requires that the government treat people equally. The government cannot pass laws giving a particular corporation special privileges: “The general assembly shall not pass local or special laws in any of the following enumerated cases, that is to say; … granting to any corporation, association or individual any special or exclusive privilege, immunity or franchise whatever.” Article V, section 25.
Yet giving Gaylord the special power to tax, and the special power to spend tax money on certain projects, is certainly a special privilege that is denied to everyone else.
Simply giving taxpayer money to a corporation is also illegal: “Neither the state, nor any county, city, town, township, or school district shall make any donation or grant to, or in aid of … any corporation or company … .” Article XI, section 2.
Back in 1991, United Airlines asked Colorado and Denver taxpayers for hundreds of millions to build an aircraft maintenance facility in Colorado. State Attorney General Gale Norton explained to the legislature that the bill to provide corporate welfare to United “would not pass muster under the Colorado constitution.” Yet she predicted that the Colorado Supreme Court would probably rule in favor of the United welfare bill.
She was correct. For decades, the Colorado Supreme Court has ignored the plain text the Colorado Constitution, and allowed taxpayer money to be donated to corporations.
In the case of United, the welfare from state government coffers would be laundered through the Colorado Housing and Finance Authority. The CHFA is a corporation created by the legislature in 1973, for the ostensible purpose of providing money to homebuyers and to small businesses.
Fortunately for Colorado, United found an even bigger sucker in Indianapolis. Funded by lavish corporate welfare, the United maintenance facility in Indianapolis opened in 1994. United abandoned the facility in 2003. Corporate promises about how the taxpayers will get rich by giving their own money to big business rarely come true.
While the Colorado Supreme Court has refused to do its duty to enforce the many anti-corporate welfare clauses of the Colorado Constitution, citizens have their own remedy: They can vote for state and local candidates who will uphold the Colorado Constitution. Under our constitution, big businesses are supposed to pay their fair share of taxes.
This article originally appeared in the Denver Post, June 16, 2012.
by Penn Pfiffner and Barry Poulson
This legislative session Colorado HB1250 was introduced to begin addressing an unfunded billion-dollar liability in the Public Employee Retirement Association’s (PERA) retiree health care benefit program. Its own sponsor then killed the bill after it came under a fire storm of hysteria-tinged and false criticisms, fueled by one-sided media coverage.
Colorado taxpayers lost an important opportunity for the Legislature to begin the fundamental reforms required to put PERA on a sustainable fiscal path. Instead PERA will continue to carry huge unfunded liabilities that in the absence of reform will eventually require a taxpayer bailout or PERA retirees being denied their promised benefits.
About a dozen years ago, PERA established a health care program for people who retire before age 65 and no longer are covered by their government employer for health insurance. Local governments, school districts and state government contribute annually. The program is a type of “defined benefit.” In other words, a promise with no cap to the cost.
The PERA health benefit also gives retirees a direct premium subsidy even after they turn 65 and begin using the taxpayer-supplied Medicare.
HB 1250 would have changed the program from an open-ended promise to pay retirees whatever it takes, to a $230 fixed subsidy — the amount they receive today. Additionally, eligibility for PERA’s retiree health insurance would have been restricted to those 65 years of age and under, and thus not eligible for Medicare or Medicaid.
Unfunded liabilities in PERA’s retiree health plan have doubled over the past five years to more than $1 billion, and are projected to continue to grow for the foreseeable future as health benefits paid to public sector retirees continue to increase more rapidly than employer (read taxpayer) contributions to the health plan.
An Independence Institute study last year found that PERA’s amortization period is in excess of 30 years. Its actual contribution rates are far below the required contribution rates that would meet standards set by the Government Accounting Standards Board (GASB).
What’s more, the funding crisis in PERA is actually worse than reported in their annual financial statements. PERA assumes an 8 percent return on assets and uses this rate of return to discount liabilities in the plan. GASB recently issued guidelines that recommend using a discount rate that is a blend of the municipal bond rate and the Treasury rate, a rate between 4 percent and 5 percent. Using this discount rate, a recent study by Robert Novy-Marx from the University of Chicago and Joshua Rauh from Northwestern University finds that on a per capita basis, PERA has one of the most underfunded pension and retiree health plans in the country, with unfunded liabilities equal to $33 billion in the pension plan and over $1 billion in the retiree health plan. The study projects that over the next two decades, state plans with large, unfunded PERA-sized liabilities are likely to go bankrupt.
A number of states have recognized the huge risk posed by their retiree pension and health plans and have begun to make changes that follow the lead of reforms that have already been enacted in the private sector. Most private employers have either eliminated retiree health benefits, or replaced them with a defined contribution plan in which the employer caps the subsidy to retiree health insurance at a fixed dollar amount, with employees picking up the remainder of the health insurance premium.
HB1250 was an attempt to address PERA’s impending fiscal nightmare with some sensible reforms. Unfortunately, the public sector retiree lobby is better organized and louder than the Colorado taxpayer lobby. Sure, HB1250 was not going to solve all of PERA’s problems in one fell swoop, but that is more a testament to how deeply flawed our public pension system is than anything else.
Fixing this mess is a massive undertaking that will require many reforms enacted through many steps. HB1250 would have been a great first step. Let’s hope, for the sake of both Colorado taxpayers and future PERA retirees, that some courageous legislators undertake this task, and soon.
The article originally appeared in the Colorado Springs Gazette, May 3, 2012.
by Harris Kenny
Solar panel-maker Solyndra has been in the headlines because it received $528 million worth of taxpayer-backed federal loans and then went bankrupt. But Denver residents don’t need to look at failed Solyndra to see the trouble that government loans can bring. Sadly, there are some prime examples closer to home.
Last month, The Denver Post reported ["Tattered sales twist finances," Dec. 9 news story] that roughly 15 percent, or around $20 million, of the loans in the Denver Office of Economic Development’s $127 million portfolio are currently in arrears or in default.
One of these loans, known as the Lowenstein Project, illustrates how local officials have been gambling with taxpayer money on dubious urban renewal initiatives. The Lowenstein Theatre, located across from Denver’s East High School on East Colfax, had been essentially vacant for 20 years. In 2006, former Office of Economic Development (OED) Director John Huggins proposed the Lowenstein Project, which would target the area for a $14 million redevelopment effort to build a movie theater, bookstore, music store and restaurants.
Denver officials loved the idea and helped private companies buy the Lowenstein property by handing out tax increment financing (TIF) loans of $475,000 each to Charles Wooley; Denver-based real estate firm St. Charles Town Co.; Twist & Shout; and Neighborhood Flix Cinema and Cafe.
By 2008, Neighborhood Flix Cinema and Cafe was bankrupt, taking taxpayer money that had been loaned to the company down with it. Then, in February 2011, the Lowenstein Project developers defaulted on their $2.4 million TIF loan.
Fast forward to now: On Dec. 19, the Denver City Council amended the $2.4 million TIF loan sitting in default so that a separate, more senior $1.5 million TIF loan can be paid off first.
As The Post reported, Huggins, who advocated for the Lowenstein Project in 2006, happens to be buying the loan in question for cents on the dollar from U.S. Bank. In other words, the rules are such that former politicians and bureaucrats can go through the revolving door and profit at the expense of the taxpayers once they’re out of office.
The OED claims that these TIF loans are innovative ways to jump-start projects. In truth, they are corporate welfare, which leads to socialized risks and privatized profits.
Politicians love the loans because they don’t have to pay for projects as they go, don’t have to issue municipal bonds, and don’t need voter approval.
Proponents of government-issued loans argue that government needs to provide assistance that would not otherwise be available in private capital markets. In other words, politicians and bureaucrats are taking risks with taxpayers’ money that banks, private companies and taxpayers aren’t willing to take themselves.
This is an unavoidable flaw when politicians and bureaucrats are in the business of issuing loans. However, some see it as a feature. As District 10 Councilwoman Jeanne Robb explained prior to the council vote, “All these loans are risky. That’s why OED makes these loans and private banks do not.”
In contrast, Councilmember Jeanne Faatz of District 2 cast the lone vote against amending the contract. Faatz said that the City Council’s “job is to do the best job we can with taxpayer money.”
Government-issued loans are often based on insider favoritism and politics. They rarely fulfill their supposed purpose of the public good. The companies that receive government welfare are given an unfair advantage over those that don’t. Corporate welfare encourages companies to be good at politics, instead of good at business.
Government-issued loans amount to taking money from productive taxpayers and wasting it on politically connected insiders. Politicians interested in urban renewal might instead look in the mirror and see if their own policies are stifling economic growth.
Harris Kenny is a Denver-based policy analyst at Reason Foundation (reason.org). He wrote this for the Independence Institute. This article originally appeared in the Denver Post, January 6, 2011.
by Barry Poulson
In November, Colorado citizens will vote on Prop 103 to increase taxes and earmark the revenue for education K-12. Prop 103 increases the personal income tax, the corporate income tax, and the statewide sales and use tax for the years 2012 through 2016.
The Fiscal Impact Statement prepared by the Colorado Legislative Staff estimates the cost of this tax increase at $2.9 billion. However, the cost of the tax increase for Colorado taxpayers will be significantly greater than estimated by legislative staff. That is because legislative staff uses static analysis, measuring only the direct impact of the higher taxes on state revenue. They ignore the negative impact the tax increase will have on economic growth and jobs in Colorado.
In a study for the Independence Institute, we used dynamic scoring to measure the impact the Prop 103 tax increase will have on the Colorado economy. Previous research has shown that for every one percent increase in a state’s tax rates, economic growth is reduced by 1/4 to 1/3 of a percent.
So we applied that finding to Colorado data for fiscal years 2007 to 2011, to see what would have happened if Proposition 103 had been in effect then.
The tax increase will significantly reduce personal income in Colorado. The cost of the tax is not just how much extra taxes that people will pay; another costs is the reduction in economic growth, which will reduce personal income. Thus, the total cost to Coloradans of Proposition 103 is estimated between $4.8 billion and $6.0 billion. The total cost per household is estimated between $2,169 and $2,711.
The higher tax and consequent reduction in economic growth will reduce job opportunities in Colorado. Proposition 103 will cost between 7,400 and 11,600 jobs.
By further slowing the economy, the higher tax will also reduce the tax base, and thereby reduce state tax revenues. So instead of raising $2.9 billion in tax revenue, Proposition 103 would actually raise about $2.8 billion.
The revenue generated by the tax increase is earmarked for education, but it is not clear what education programs would be funded. There is a high probability that most of the money will be used to cover operating costs of ongoing education programs. A basic rule in public finance is that one-time money should not be used to finance ongoing programs. “Annualizing” one-time money will exacerbate the structural deficit in the budget.
At the end of five years the Prop 103 tax increase will (supposedly) come to an end, but the ongoing education programs funded by that tax increase will remain. This structural deficit will put tremendous pressure on the state to extend the tax increase and make it permanent.
Because of Amendment 23, enacted in 2000, General Fund spending for K-12 education has already increased to 40 percent of the state budget; Prop 103 will result in an even greater share of the budget allocated to fund education K-12.
Colorado has created one of the best business tax climates in the country by reducing tax rates. As a result the state has experienced higher rates of economic growth than most states. The state has attracted new business investment and jobs at a higher rate than most states. People are attracted to Colorado by the rapid growth in incomes and jobs.
The tax increase in Prop 103 will reverse these trends. At a time when other states in the region, such as Oklahoma, are reducing tax rates, Colorado will be increasing those rates.
Some states, including Wyoming and Texas, impose no income tax. If Colorado tax burdens are rising relative to other states in the region, Colorado will become less competitive in attracting new business investment, and some Colorado businesses may emigrate to states with lower tax burdens.
Colorado has avoided a fiscal crisis such as that experienced in California and other states largely because of the fiscal discipline imposed by the Taxpayer’s Bill of Rights. Proposition 103 will move us toward a path similar to that in California with higher tax burdens, lower economic growth, and reduced job opportunities for Colorado citizens.
Article published in the Summit Daily News, October 9, 2011.
by Barry Poulson
In the November election, Washington citizens approved Initiative I-1053 by a more than 64 percent margin, requiring that “Legislative actions raising taxes must be approved by two thirds legislative majorities or receive voter approval.”
In other words, Washingtonians have elected to reign in their legislature’s ability to further tax them through a simple majority vote, and to have more say, at least temporarily, over how much state government is enough.
Washington voters approved a similar measure in 2007; it squeaked by with by a 51 percent margin. As quickly as the law allows (a two year waiting period in Washington) the initiative was temporarily repealed by the legislature until July 2011. Legislators argued this was necessary in order to increase taxes through a simple majority and close a budget deficit.
Initiative I-1053 reinstates the statutory requirement that legislative actions raising taxes must be approved by a supermajority vote of the legislature or receive voter approval. The initiative also requires that new or increased fees receive a supermajority of the legislature for approval.
The initiative was supported by a broad cross section of Washington businesses. The Board of Directors of the Washington Association of Business (AWB) voted unanimously to support the measure. AWB President Don Brunell stated that “Taxes and increased costs on business are the top issue of concern for our members right now. This fall’s elections will undoubtedly be about the impact of taxes on families and businesses. Our Board felt strongly enough about the measure to provide an early endorsement, in the hopes of raising the visibility of the issue among voters.”
Legislators who opposed I-1053 argued that citizens should leave tax and spending decisions to them. Gov. Christine Gregoire said of Tim Eyman, the sponsor of I- 1053: “For those like him who want to have a say constantly, come on down and run for election. Otherwise, leave it to us.”
But citizens in Washington have learned that a simple majority vote of the legislature is too easy a hurdle to raise taxes. Too often legislators respond to the special interests that benefit from higher taxes and increased spending.
The increase in citizen support for this measure from slightly more than half in 2007 to more than two thirds this year is very revealing. It is not surprising that legislators in Washington were not able to increase taxes while this constraint was in place. Securing a two-thirds vote of the legislature, or voter approval, is a high hurdle to raise taxes. Citizens have learned that this constraint allows them, rather than politicians, to decide how much in taxes they are willing to pay. With this measure in place it is up to citizens to decide how much government they want and are willing to pay for.
Citizens in Washington have sent a clear message to the governor; we are no longer willing to just “leave it to us.” As in other states, such as Colorado, where citizen approval is required to raise taxes, once citizens exercise this right they don’t give it up lightly.
Perhaps the governor and legislators in Washington will get the message this time.
This article was originally published in the Denver Daily News on December 24, 2010.
by Barry Fagin
As a long-time, hard-working federal employee who gives up a lot to work where he does, I have just one thing to say about the proposed federal employee pay freeze. I think it’s a terrific idea.
Well, maybe not exactly terrific, particularly if you think about how little difference it would actually make. But symbolic gestures can matter in politics. If this one lays the groundwork for something that’s actually important, then I’m all for it.
To get an idea of how utterly insignificant a federal pay freeze would be, take a look at the numbers fro 2008, the most current data available. For that year, the federal government payroll was about 15 billion dollars. During that same year, the Bush administration’s budget spent 2.9 trillion dollars.
Let’s suppose a pay freeze would save 10% of payroll costs, a figure that errs generously on the side of money saved. The fraction of spending reduced would have been 1.5 billion out of 2.9 trillion, a whopping one half of one tenth of one percent of all federal outlays. And let’s not forget this is 2-year-old data. Bush was the biggest spender since LBJ, but when it comes to red ink Obama and the until-recently-Democratic Congress make Bush look like a piker.
Hooray for the courage of Washington D.C! Through the miracle of bipartisan consensus, they boldly solved one half of one tenth of one percent of our spending problem. For our next trick, we’re going to treat drug addiction by flooding the streets with crack that’s only 99.95 percent pure.
Given that a pay freeze wouldn’t actually accomplish anything tangible, what about the intangible? How would a national government pay freeze work as a symbolic gesture? That’s a tougher question. Particularly since it’s hard to know what a pay freeze would actually mean.
Federal employee compensation is determined by the classification of your position and the “step” within that classification. It’s complicated to explain in a column, but basically your “step” goes up by one every year. Your salary is determined by a table released by the Office of Personnel Management. Look up your classification and your step in the table (with some non-trivial adjustments based on where you live), and that’s your salary. Period.
While in theory you could be denied a step increase, there are tremendous barriers in place to make sure that doesn’t happen. I suppose out of two and a half million Federal employees, somebody somewhere gets denied a step increase every once in a while, but in over 16 years of government work I’ve never heard of it.
This means that it’s easy to argue that federal salaries are “frozen” when they really aren’t. I’m guessing that a “freeze” would mean the OPM salary table would be held constant for one year. But we would still get step increases. Even though it would mean less of an increase than we were accustomed to, in the language of Washington that still counts as a “cut”. Compared to some employees in the private sector who might actually make less money from year to year, or who could lose their jobs through no fault of their own, I think that’s really insulting.
Don’t get me wrong, I could always use more money. I have two kids in college; my tuition payments are two and a half times my mortgage. Clearly I’m insane; I should be living in a much bigger house and sending my kids to cheaper schools.
But so be it. It’s a personal decision, and if my cash flow gets further pinched it’s my responsibility to deal with it.
But I think I speak for many federal employees when I say that if our salaries do get “frozen”, whatever that means, it would mean a lot more if it started a larger, much more substantive national conversation. Something that attempted to build consensus on cutting entitlements and spending in a substantive, across-the-board way. Something that truly held out realistic hopes for restoring fiscal sanity and long-term prosperity to America.
After all, we wouldn’t work for our country if we wanted anything less.
This article originally appeared in the Colorado Springs Gazette, December 8, 2010.
By Barry W. Poulson, Ph.D.
Colorado taxpayers are on the hook for more than $1 billion in unfunded liabilities incurred in the defined benefit retiree health plan administered by the Public Employee Retirement Association (PERA). An additional $79 million in unfunded liabilities was incurred in 2008, reflecting both a rapid growth in retiree benefits and losses in the assets held in the Health Care Trust Fund. Prospects are for continued volatility and deterioration in the funding status of PERA’s retiree health plan.
It’s time for the state to move from a defined benefit retiree health plan to a defined contribution plan. Here’s why.
The $1 billion in unfunded liabilities in the Health Care Trust Fund would not be such a looming fiscal crisis if there was some prospect that the liabilities could be paid off within 30 years to meet Government Accounting Standards Board (GASB) standards. But due to flawed actuarial assumptions used by PERA, the funding status in the Health Care Trust fund is actually worse than reported.
A four year smoothing technique is used to estimate the actuarial value of assets in the plan. This means that some, but not all of the decrease in the market value of assets in 2008 is reflected in the actuarial value of assets for that year. The loss in the market values of assets in more recent years is, of course, not reflected in the actuarial value of assets in 2008. These losses in the market values of assets in the plan will be reflected in the actuarial value of assets over the next four years. Thus, even with recovery in the stock market we are likely to see an increase in unfunded liabilities in the plan over the next four years.
Another flaw is to assume an 8.5 percent rate of return on assets in these plans. Because PERA assumes such an unrealistically high rate of return, they engage in a risky investment strategy, with 70 percent or more of assets in equities. The actual rate of return on assets in these plans has been zero or negative over the past decade. The best economic analysis of public sector pension and health plans, such as PERA, suggests that a more realistic rate of return on assets that is about half or less than that actually assumed by PERA.
The fatal flaw in defined benefit retiree health plans such as PERA’s is moral hazard. The reality is that politicians have promised retiree health benefits they can’t pay for. They offer public sector retirees generous health benefits as an alternative to better compensation because the cost of retiree health benefits is deferred to future generations. Public sector employee unions encourage this because it is less likely to generate taxpayer resistance than higher compensation which must be funded from current revenue.
Most private sector employers have either eliminated defined benefit retiree health plans, or replaced them with defined contribution plans. While most state and local governments have not eliminated health plans for their retirees, they have enacted a number of reforms to reduce the cost of those plans, including replacing defined benefit plans with defined contribution plans.
The Colorado Legislature should replace PERA’s retiree health plan with a defined contribution plan. In the recent Independence Institute study, “How to Save a Billion Dollars in Other Post-Employment Benefit Costs,” we estimate that in the short run this reform would reduce the employer annual required contribution to the plan from $72.6 million to $29.0 million. The annual required contribution from the state would be reduced from $24.6 million to $14.5 million, a savings of $10.1 million.
More importantly, this reform would reduce the accrued actuarial liabilities in the plan, and enable the state to pay off the $1 billion in unfunded liabilities over a 30 year period.
Dr. Barry W. Poulson is a Senior Fellow at the Independence Institute. The study referenced in this article may be found at How to Save a Billion Dollars in Other Post-Employment Benefit Costs.
By Barry Poulson
Denver Mayor John Hickenlooper recently signed on to “Take Root Denver,” a new affordable housing campaign sponsored by the Federal Home Loan Mortgage Corporation, a “government sponsored enterprise” more commonly known as Freddie Mac. Hickenlooper touts this as a new program to assist residents with calling Denver “home sweet home.”
But the federal mandate to provide “affordable housing” is fundamentally flawed, and a significant cause of the financial crisis. In other words, Mayor Hickenlooper and Freddie Mac have prescribed for Denver more of the same bad medicine that got us into our current financial mess.
Freddie Mac subsidizes and guarantees mortgage loans to individuals who do not qualify for loans from private lenders. These loans have very lax standards. Individuals can qualify for loans making a minimal or zero down payment. They do not need a good credit rating, nor need to earn the minimum level of income that private lenders would require to qualify for the loan.
These lax standards induced many individuals to invest in homes they could not afford, loans that are now in default. The government guarantees and subsidies for these loans also induced many financial institutions to invest in mortgage-based securities at the heart of the financial crisis. The federal mandate that Freddie Mac subsidize and guarantee mortgage loans has saddled the institution, and ultimately American taxpayers, with hundreds of billion of dollars in debt.
The origin of the financial crisis can be traced to government policies encouraging unqualified borrowers to assume risky mortgages, and to government mandates that financial institutions extend loans to these borrowers. The Federal Housing Authority (FHA) loosened standards applied in non-prime lending. Through federal legislation such as the 1977 Community Reinvestment Act (CRA), and agencies such as the Department of Housing and Urban Development (HUD), the government pressured lending institutions to extend credit to unqualified borrowers.
The financial crisis was exacerbated by the quasi-governmental institutions Fannie Mae and Freddie Mac. These institutions created a moral hazard by implicitly guaranteeing mortgages. By the time they collapsed in 2008, they together held $5 trillion in mortgages and mortgage-backed securities. They continue to incur billions in losses, requiring government bailouts.
If mortgage lenders had not been forced to abandon traditional underwriting standards on behalf of an ‘affordable housing’ policy, the financial crisis and taxpayer bailouts would not have occurred. Qualified mortgage borrowers would have purchased homes at competitive market prices. Now all homeowners, including qualified mortgage borrowers, must suffer the consequences of the mortgage meltdown and collapse in home prices.
We must end the myth of “affordable housing.” As economist Thomas Sowell has argued, an affordable house is a house you can afford. This means restoring traditional market criteria for mortgage lending: meeting strict income standards to qualify for a loan, and requiring a minimum down payment from creditworthy borrowers.
Residents will call Denver “home sweet home” when the housing market stabilizes. That will only happen when lending institutions write off mortgage loans in default, when individuals are in homes they can afford, and when housing prices stabilize. The best way to achieve that objective is to return mortgage lending to the private marketplace. In the absence of government subsidies and guarantees, private mortgage lenders have an incentive to lend to creditworthy borrowers, and to require minimum standards for individuals to qualify for these loans.
The same Freddie Mac and Fannie Mae that are implementing the “affordable housing” agenda got us into the housing pickle and financial crisis. They should be gradually phased out of the mortgage market. Critics will argue that private lending institutions are not able to perform the functions of Freddie Mac and Fannie Mae. But that is the point: no lending institution should be promoting mortgage lending to individuals who cannot afford to own a home. The Federal Housing Administration should return to the original role of insuring mortgage loans to low-income borrowers who can meet minimum standards to qualify for such loans.
There is no reason why Denver should be the guinea pig in a repeat of failed housing policies promoted by the Obama administration.
Barry Poulson is a Senior Fellow in Fiscal Policy at the Independence Institute
Barry Poulson is a Senior Fellow in Fiscal Policy at the Independence Institute
By Barry Fagin
“Hypocrite! You’re always writing about how government needs to be smaller. But you work for a government institution! Why don’t you write about that?”
I get e-mails like this from time to time, I assume from someone who hasn’t read a lot of my columns and instead just typed my name into a search engine. I’ve never made a secret of what I do, it’s on my home page and is deliberately easy to find out. Still, asking me to write something about government work strikes me as a pretty reasonable request. And with recent studies in the news about federal employee compensation versus the private sector, it seemed pretty timely.
Government compensation, like most compensation anywhere, is divided into salary and benefits (for those of us fortunate enough to have them). Let’s talk about salary first.
Regular readers know that I’m a computer science professor. To see how my salary compares with the private sector, I went to a well-known online database that tracks compensation for faculty in my field. It turns out my salary is well within the range of what private universities pay for computer science professors with my years of experience. Basically, as far as I can tell, my employer is paying market rates to fill a perceived need and meet its mission. If you want an experienced computer science professor, you have to pay us what we’re worth.
So it’s hard for me to get bent out of shape about my salary. I really like my job, but if I had to leave it I think I could get another one at pretty close to the same pay, if not more. That’s pretty good evidence that my salary isn’t out of line.
But what about benefits? Aye, there’s the rub. Benefits are a completely different story. As far as I can tell, they’re completely out of whack with economic reality, and are way more generous than the private sector can possibly match.
I’m approaching my 50th birthday, and I’ve been at my present job for 16 years. If I stay for only 6 more, I can “retire” and collect, according to my calculations, 30 percent of my present salary every year for the rest of my life. All at the tender age of 56. My financial planning software tells me I wouldn’t have to work ever again. And that doesn’t even count Medicare and Social Security. Once those kick in, I can really party.
But why in the world should I be able to coast like that?
You could argue, I suppose, that the government needs to provide this kind of retirement plan in order to be competitive in the marketplace. To which I say “Where’s the evidence?” Where exactly are the data that show applicant quality improves when benefits become that generous? Since there is no private sector retirement plan (that I am aware of) that comes even close to mine, a much more likely explanation is that government employees enjoy these benefits simply because we can get away with them.
So what should I do when I turn 56? Well, for starters, I’m pretty sure I’ll continue to work. If nothing else, it’s not smart to make your entire financial future dependent on the ability of the federal government to meet its financial obligations. Particularly one that’s dug itself into such a tremendous financial hole as ours has. I may stay at my current job, or I may go to the private sector. Hard to say.
One thing that I’d definitely like to do is organize people in my demographic. There must be plenty of newly AARP-eligible people out there who know that just because we’re legally entitled to slop from the public trough doesn’t mean we should stuff ourselves.
I know there are people out there who are prepared to accept cuts in spending, even on programs that benefit them, because they don’t want to contribute to the bankrupting of America. It’s just a matter of finding them and getting organized.
C’mon, everybody. Who’s with me?
This article was originally published in the Colorado Springs Gazette on August 18, 2010
By Barry W. Poulson
In a May 12 Denver Post editorial, “Reforming Wall Street is Essential,” President Barack Obama makes the case for Senator Chris Dodd’s financial reform bill (what the president calls “Wall Street reforms”). The president argues that the financial crisis was caused by irresponsible practices on Wall Street, that the Dodd bill will end too big to fail bailouts of financial institutions and that the cost of this financial market regulation will be paid for by financial institutions, not taxpayers.
But the president’s arguments are based on several myths surrounding both the financial crisis and financial market reform. The financial crisis was not due to irresponsible practices on Wall Street, but rather the result of flawed governmental institutions and financial market policies.
What we really need is some Washington, D.C. reform.
The origin of the financial crisis can be traced to government policies encouraging unqualified borrowers to assume risky mortgages, and to government mandates that financial institutions extend loans to these borrowers. The Federal Housing Authority loosened standards applied in non-prime lending. Through the Community Reinvestment Act, and Department of Housing and Urban Development, the government pressured lending institutions to extend credit to unqualified borrowers.
We must end the myth of affordable housing. As Thomas Sowell has argued, an affordable house is a house you can afford. This means restoring traditional market criteria for mortgage lending: meeting strict income standards to qualify for a loan, and requiring a minimum down payment from creditworthy borrowers.
The financial crisis was exacerbated by the quasi-governmental institutions, Fannie Mae and Freddie Mac. These institutions created a moral hazard by implicitly guaranteeing mortgages. By the time they collapsed in 2008, they together held $5 trillion in mortgages and mortgaged backed securities. They continue to incur billions in losses, requiring government bailouts. The Dodd bill does nothing to reform these institutions.
The solution to this problem is instead to end government conservatorship of Fannie Mae and Freddie Mac, as proposed by Senator John McCain. Over the next decade these institutions would have to liquidate their assets and go into receivership.
The mortgage bubble was also exacerbated by the cheap money policies pursued by the Federal Reserve System under Greenspan. Following the recession in 2001, the Fed reduced the federal funds rate to 1 percent. This easy money policy fueled an unsustainable growth in liquidity, ending in the credit market collapse.
We must end the cheap money policies pursued by the Fed. Discretionary monetary policy should be replaced by a rules based monetary policy, such as that proposed by Stanford University’s John Taylor.
The Dodd bill would greatly expand the resolution authority of the Federal Deposit Insurance Corporation (FDIC). The FDIC would have the discretion to take over financial institutions, using the orderly liquidation fund. In fact, the bill provides for unlimited bailouts of financial institutions. The funding for these bailouts would come from assessments levied on financial institutions. But in reality, American citizens invested in the market would ultimately pay for these bailouts through higher costs on financial transactions and fees levied by these financial institutions.
The FDIC should not be given this greatly expanded power to regulate financial markets because it creates too much uncertainty. What is required is a rules-based, law-based process for dealing with failing financial institutions. Private markets are best at signaling when financial institutions are insolvent or illiquid, and a new bankruptcy code is the best way to address failed financial institutions.
A shorter version of this article originally appeared in the Denver Post on May 23, 2010.