Over the past three posts I’ve documented how today’s and tomorrow’s Americans have had their future sold out and cashed in with regard to state and local government debts, inadequate past infrastructure capital construction, and retroactively increased and underfunded public employee pensions. Over and above the generational inequities at the federal level in government, in the private sector, and even in many families. Adding it up, on average today’s and tomorrow’s Americans have inherited a sold-out future due to past state and local government deals and non-decisions equal to 46.9% of their personal income in FY 2016. That is virtually unchanged from the 47.1% I found when I did the same analysis for FY 2012, despite a much stronger economy and another asset price bubble. A mortgage at nearly half your income, my income, everyone’s income that will have to be carried indefinitely into the future, before any public services are provided, before any public benefits are paid, before taxpayers spend a nickel on their own needs.
Unlike the other generational inequities in our society in the wake of Generation Greed, the state and local government burden is greater or smaller depending on where you live. It attaches to the people there now, unless they move away from it, and may eventually attach to each place’s real estate, since real estate cannot pick up and move. This final post in the series will rank states, and New York City and the Rest of New York State separately, based on how sold out their futures are.
The worst off state in FY 2016, out of 50 states plus the District of Columbia (a rank of 51 in the “Sold Out Future Ranking” table), was Rhode Island, where debts, past capital construction shortages and pension underfunding totaled 82.1% of Rhode Island residents’ 2016 personal income. Rhode Island is a triple threat. Its state and local government debt burden ranked 45th as a share of state residents’ personal income, with an unusually high share of that debt in the “private purpose” category. Not surprisingly, therefore, its average past infrastructure capital construction expenditures for the FY 1982 to 2016 also ranked 45th, despite those high debts. And its pension funding level ranked 48th. Just to round things out, its past education building capital construction ranks 51st, dead last.
Other states where older generations have most victimized those coming after include (in order from the worst) Illinois, with a burden of 75.8% of that state’s residents’ personal income in FY 2016, Connecticut at 72.9%, Ohio at 68.7%, Michigan at 66.0%, and Kentucky at 63.5%. After adjustments to credit it with a share of Port Authority of New York and New Jersey investment, New Jersey comes next at 63.1%, with Pennsylvania at 61.5%, and Massachusetts at 56.2%. California, with a sold out future burden at 50.7%, ranked 38thfor FY 2016 after having been in the worst ten back in FY 2012.
Most of these states also show weakness across the board, but New Jersey, Pennsylvania, Michigan and Ohio have total state and local debts that are below the U.S. average as a percent of their residents’ personal income. All of those states have particularly bad rankings in the infrastructure spending department, with Michigan worst in the country.
If the New York City were a separate state it would have had a total sold out future burden equal to 80.6% of its residents’ personal income in FY 2016, which would have ranked 50thor second worst. It would have 51st first for FY 2012, the prior time I did this analysis, so there was some improvement. New York City’s pension funding ranked 46th, sixth worst, despite NYC taxpayers putting in more than taxpayers anywhere else, as a result of all the retroactive pension increase for those cashing in and moving out. NYC’s debts were the worst of all, by some way, but its FY 1982 to 2016 average infrastructure construction spending was 26th, not as bad as the U.S. average. That time period, however, followed a long period of infrastructure disinvestment in NYC, culminating in a near collapse.
The Rest of New York State, taken together, would have been better than average with a sold out future burden of 44.8% of area residents’ 2016 personal income. It would have ranked the 29thif it were a separate state. While the State of New York has high debts, these are half on the backs of New York City, which accounts for half of the state’s personal income tax revenues. Most localities elsewhere in the state have not run up the sort of debts the City of New York and its affiliated agencies such as the MTA have. The state borrows for the rest of the state’s needs instead and as a result of a share of state debt Rest of New York State ranked 40thin debt, the 12thworst. But its past infrastructure investment was 22nd, much better than the U.S. average. The New York State pension system is one of the best funded in the country, but even so there are so many former government workers in New York State that its deficit was 22.9% of the personal income of everyone living in the rest of the state, worse than the U.S. average and ranked 31st.
A Trump voter might note that most of these states are Democratic leaning, at least at the state and local government level, and are or were heavily unionized. As someone who has followed state and local government for more than 30 years, however, I can tell you that many of the deals to run up debts, disinvest in the infrastructure, underfund pensions and retroactively increase them were made, or at least signed off on, by Republican Governors and Mayors.
If the Republican goal has been to make government such a bad value and so unjust for the less well off and younger and future generations that even those with an egalitarian frame of mind give up on it, I can say that at least in my case they have made great progress. So why did the Democratic Party, the party of government, go along with deals to cash in for the short term and destroy the future of state and local government in the long term? Because its special interests, notably public employee unions and contractors, are pigs with a tremendous sense of entitlement, little empathy for other workers, little capacity for long term enlightened self-interest and an enormous gift for deception and rationalization, and they couldn’t help themselves.
Many of the most sold out states also have slow growth and aging populations, which is to say a large share of their populations in the most affluent and entitled generations in U.S. history, Generation Greed. But Wisconsin and Maine are slow growth and aging as well, and the burden shifted to the future residents of those states is much closer to the middle of the pack. Maine ranked 33rd with a sold out future burden of 47.8% of that state’s residents’ personal income, and Wisconsin ranked a mere 22nd at 27.9%.
The states with the least sold out futures include a lot of large, rural, low-population states that get a very good deal from the federal government on infrastructure funding – Wyoming, Nebraska, South Dakota, Alaska, North Dakota, Utah, Idaho, Iowa and Montana. The District of Columbia is also on the list. Most of these states rank near the top due to high past capital construction spending on infrastructure and education buildings as a share of their residents’ relatively low personal incomes. Alaska thus finishes near the top overall despite the worst pension funding of all states, a rank of 51st. On the other hand the fact that the District of Columbia had its pensions bailed out in 1991 and was then put under a financial control board, ending up with the best funded public employee pensions, helps its cause. As for Nebraska, with a sold out future ranking of 3 and a burden of just 11.1% of state residents’ personal income, it appears that Warren Buffet was a savvy investor in value and quality management once again.
The list of states that are least-worst-off also includes some fast growing Sunbelt states – Washington, ranked 8th with a burden equal to just 22.2% of state residents’ personal income, Georgia, ranked 12th at 28.7%, and in order from there Florida at 30.4%, Texas at 31.3%, Arizona at 31.3%, North Carolina at 31.8%, Nevada at 32.9%, and Tennessee at 33.0%. Both people and businesses, other than those that need to be located in the bi-coastal educated labor centers, have been moving to these states on a large scale for a couple of decades. In fact, that is a list of the most booming states with the most booming cities in the country.
People may not understand why, but perhaps they sense that in these states the state and local government services and benefits they get seem to be a good deal compared with the state and local taxes they pay. Not because of efficiency, as they might claim. Not because, as in the past, the federal government is draining the Northeast and Midwest to subsidize them, because they are richer now and less subsidized. But because past residents and politicians robbed them less.
Some of these states have state and local debts, compared with the national average of 18.6% of personal income, that are above average, if nowhere near the level of New York City. These include Nevada at 22.3%, Texas at 21.7%, and Washington at 21.0%. Bonds are being issued to pay for the new education buildings and infrastructure their growing number of state residents require. But all of these states have a lower off-the-books debt from state and local government pension underfunding than the U.S. average, based on the standard that benefit payments should be no more than 4.0% of pension assets in any year.
We can’t, however, be sure that the fast growing states don’t have sold out futures until their pace of population growth slows, their number of retired public employees soars, and we find out if, in reality, enough money is being set aside to fund promised pension benefits. California was once a fast growth state. In FY 1972, the pension benefits paid to former state and local government employees who were retired at the time equaled just 5.7% of the payroll of active public employees. There were few retired public employees from a past with fewer people, and more active public employees for a present with more people. Then population growth slowed, and the pension fund “matured.” In FY 2016 public employee pension benefits equaled 35.8% of the payroll of active employees.
It may be that a more sophisticated analysis, one that incorporates the rising number of state and local government workers (and thus future retirees) in these fast-growth states, would hold that their pension benefit payments should be no more than 3.0% of their pension plan assets, or 2.5%. Making them seem worse off on pension funding than they do now.
In other words, these fast growth Sunbelt states may not have sold out futures – yet. But that doesn’t mean that the politicians and interest groups running those states today aren’t in the process of selling, to temporarily offer decent public services at a lower current tax rate, in order to portray themselves as saints, heroes and geniuses.
There are some places that have improved from the last time I did this analysis, for FY 2012, to this time, for FY 2016. The biggest improvement was in New York City, where the burden of the past shrank from 94.5% of state residents’ personal income in FY 2012 to 80.6% in FY 2016. The key factors here are the stock and bond market bubble, which increased the value of City of New York pension fund assets by 28.0% despite rising payouts, and lots of capital gains income for the city’s rich, which boosted total personal income by 18.0% over four years despite modest average wage growth. The personal income of all U.S. residents increased 15.1% over those years. There has, in addition, been a significant increase in transportation capital construction expenditures in NYC starting in FY 2012, though not yet on the subway.
One finds the same factors at play in California, where the burden of the past fell from 56.5% of state residents’ personal income in FY 2012 to 50.7% in FY 2016. The personal income of all California residents jumped 21.9% over four years, boosted by another information technology bubble, and its public employee pension assets soared 30.5%, for the same reason. However, both personal income and pension assets are volatile for New York City and California, and in the same direction. A recession would make their sold out future ranking much worse.
Michigan improved, with a sold out future burden falling from 70.6% to 66.0%. Its total state and local debt fell substantially from FY 2009 to FY 2016, perhaps in part for a reason some might remember – Detroit’s bankruptcy.
It seems likely that more states will end up taking Michigan’s road to a smaller sold out future burden than California’s.
In order of improvement, the sold out future burden fell from 60.0% to 56.2% in Massachusetts, another state with an intellectual-capital-driven economic boom, from 45.2% to 43.4% in Indiana, from 26.5% to 24.9% in Iowa, from 49.1% to 47.8% in Maine, from 83.4% to 82.1% in Rhode Island, from 40.0% to 39.0% in Vermont, and from 45.6% to 44.5% in Colorado.
The burden fell from an already light 11.9% to just 5.5% in the District of Columbia, a city that has been booming for more than a decade. The Rest of New York State improved from 46.3% to 44.8% and New Jersey improved from 64.4% to 63.1%, despite the pension situation getting worse. Infrastructure investment was up.
With the national average unchanged, however, if some states got better, others had to get worse. A significant number of relatively poor Southern and Southwestern states have a greater sold out future burden than they once did, even if not much more than the U.S. average. The three biggest burden increases were in West Virginia from 40.5% of state residents’ personal income to 48.5%, Louisiana from 45.8% to 52.4%, and Arkansas from 31.8% to 37.0%. These states don’t have New York City’s or California’s generational equity burdens, not yet, but neither do they have those areas non-governmental advantages.
Some of those booming, low burden from the past, fast growth Sunbelt states also saw their sold out future burden increase from FY 2012 to FY 2016. From 28.5% to 33.0% of state residents’ personal income in Tennessee, from 30.0% to 31.8% in North Carolina, from 28.7% to 30.2% in Georgia, and from 30.0% to 31.3% in Arizona. Evidently, cutting taxes by shorting pensions and the infrastructure and running up debts isn’t something Republican Governors and state legislators only do in the Northeast. Texas improved, for now.
In addition, three states that were already in deep trouble in FY 2012 got in deeper trouble by FY 2016: Ohio, where the sold out future burden increased from 63.5% of state residents’ personal income to 68.7%, Connecticut from 69.4% to 72.9%, and Illinois from 74.2% to 75.8%. This ranking doesn’t even include an additional off the books debt in Illinois – money that it failed to pay contractors, including social service agencies, that are owed for work in past fiscal years.
What does this mean? It means that for the next few decades people will face an unending series of state and local government tax hikes, fee increases and benefit cuts, making them poorer individually, and public service cuts, making them worse off collectively. In my first post in this series, I noted that nationwide Americans had yet to begin paying that price, since rock bottom interest rates had reduced the burden of past debts and an unwillingness to pay up had limited the current burden of public employee pensions.
But in some states the level of public employee pension contributions plus interest on state and local government debts was already high in FY 2016.
In FY 2016 U.S. total state and local government tax revenues equaled 9.9% of U.S. residents’ personal income. About the same level as has been the case for many years, though slightly on the low side. Taxpayer contributions to public employee pension funds plus interest on state and local debts equaled 1.62% of personal income, or just under one-sixth of the total. But some places were much worse off than that.
Worst of all? For New York City, where the cost of interest on state and local government debts and taxpayer pension contributions in FY 2016 equaled 3.67% of city residents’ personal income, which would be ranked 51st (highest, or worst) if the city were a separate state. At the national average state and local government tax burden, nearly four tax dollars in ten would be sucked into the past here. But of course the NYC’s state and local tax burden is much higher than the national average.
If the Rest of New York State were a separate state it would have ranked 41st, with an interest plus taxpayer pension contribution of 1.83% of the personal income of the residents of that area, or almost exactly half the burden of New York City.
New Jersey was far below the U.S. average with an interest plus pension contribution burden of just 1.23% of state residents’ personal income. Residents of that state are just not willing to pay the taxes required to get out of the hole.
Illinois is the worst off individual state as measured by interest on debts and taxpayer pension contributions, with 2.73% of its residents’ personal income sucked into the past. That is followed by Rhode Island (2.23%), Louisiana (2.14%), Connecticut (2.10%), California (2.07%), Nevada (1.98%), Alaska (1.92%), West Virginia (1.92%), and Kansas (1.91%). Kansas has started to pay for its public employee pensions, after not doing so for decades, but its total sold out future burden still increased from 43.6% of state residents’ personal income in FY 2012 to 45.5% in FY 2016, so there is a long way to go to get out of the hole.
Getting out of the hole often requires higher taxes, but raising taxes is problematic if the state and local tax burden is already high, and has already gone higher. For the U.S. as a whole, the state and local tax burden was 9.9% of U.S. residents’ personal income in FY 2012 and also 9.9% in FY 2016.
New York City’s state and local government tax burden was 16.2% of city residents’ personal income in FY 2016, up from 15.7% in FY 2012. The Rest of New York State was at 13.4%, up from 13.2%. There are continual calls for even higher taxes and fees in New York, particularly in the city, but always on someone else. Meanwhile, the District of Columbia was at 14.0%. No other state was at or over 13.0%. New York is in a class of its own.
New Jersey’s state and local government tax burden fell from 11.1% of personal income in FY 2012 to 10.8% in FY 2016. Connecticut’s decreased from 11.5% to 10.4%. You’d never know it from the press. The tax burden held at 9.8% in Pennsylvania, edged up from 9.8% to 9.9% in Massachusetts, and increased from 11.6% to 11.7% in Vermont, where the burden of the past is small but state residents get universal health care in exchange for a tax burden that high. Not even close to New York.
Nor are Midwestern states in New York’s league. Minnesota’s tax burden was 11.5% of state residents’ personal income in FY 2016, up from 11.0% in FY 2012. After having been below average for decades, in part due to not funding its public employee pensions, the Illinois tax burden increased to 11.2% of state residents’ personal income in FY 2012, before falling back to 10.8% in FY 2016. More increases have occurred since, and will show up in data for later years if accurately reported. Wisconsin’s burden fell from 10.9% to 10.1% after having been much higher earlier. Perhaps that’s why its pensions are so well funded. Ohio fell from 10.1% to 9.9% despite weak income growth, and Michigan from 9.5% to 9.1%. At that rate, Michigan’s residents shouldn’t complain about the roads they are leaving behind as they drive off to retirement in Florida.
California’s state and local government tax revenues increased from 9.9% of state residents’ personal income in FY 2012, an unusually low point for tax revenues in a year with a big spike in income due perhaps to realized capital gains losses that year, to a more typical 10.6% in FY 2016. That state passed a referendum for higher income taxes “for education” in 2012, but the money actually went to pensions.
More and more localities in the state are also passing tax increases for pensions, described as higher taxes for something else. But other Sunbelt states could certainly increase their state and local taxes to prevent the kind of pain seen in California because their current tax burden currently is relatively low. At 8.8% in Colorado, down from 8.9%. At 8.7% in Texas, up from 8.6%. At just 7.5% in Florida, lowest in the country, down from 8.3%, with much of even that collected from non-residents in the form of sales tax payments by tourists, and property tax payments by second homeowners. At 8.6% in Georgia, down from 8.8%, and 9.2% in North Carolina, up from 9.1%.
They could increase taxes, but will they? When times got tough most of those states chose service cuts instead. If state and localities will not increase taxes, or cannot increase them further, the result is what has recently been called service insolvency.
Service insolvency is a fair description of what New York City was put through in the 1970s. Yes, the excessive debts and retroactively increased public employee pensions were paid, but the infrastructure fell apart, the school system collapsed, garbage piled up in the street, and crime and fires spun out of control.
Or Detroit in the 2000s, when the equivalent of a Great Depression for the entire state of Michigan caused the state government to cut the already dying city off, leading to collapsed schools, semi-paved roads, dark streets due to broken streetlights, and an emergency service situation that was so bad that if you dialed 911 no one might show up for days.
Are the rock bottom past living conditions for these cities the standard other places will have to achieve before going bankrupt? Will suburbs, or entire states, be put through he equivalent degradation of the quality of life and public safety? Well, life expectancy fell in New York City in the 1970s. For those born after 1957 or so, it is falling nationwide today.
As for the wages and salaries of state and local government workers still on the job and providing services, for the nation as a whole the three lowest years since 1977 (and probably since much earlier) as a percent of the personal income of all U.S. residents were the 5.9%, 5.7%, and 5.8% in FY 2014, 2015, and 2016.
Some of that is explained by the large Millennial generation exiting school, and committing far fewer street crimes than Generation Greed did in its youth, leading to less need for elementary and secondary school and police employees at the local level, and college and university and corrections employees at the state level. With most publicly-funded health are dollars going to private and non-profit health care providers, these are the largest groups of actual public employees.
Some of this is explained by having the private sector do more work paid for by the government, with more Charter Schools for example. Something that is going to become more and more popular as taxpayers are presented with huge bills, in the form of higher pension contributions, for work by public employees that was done and taxpayers thought they paid for five, 15, and 25 years ago.
Some of it is explained by the fact that people don’t really expect state and local government to do anything it didn’t do 50 years ago, aside from (in New York City) universal pre-kindergarten. So if there were any productivity gains in government, or even if there weren’t but the rest of the economy grew, then the wages and salaries of state and local government workers would naturally fall as a share of the total economy, just as the farming industry has.
But much of it is not explained by any of these benign trends. It means fewer public employees, with lower wages and benefits if they were newly hired, doing less work and less good work than in the past.
For one thing, state and local government wages and salaries are also way down as a percent of everyone’s personal income compared with the 1980s, another era when a much smaller generation was in school. Comparing FY 2016 with 1986, the wages and salaries of active state and local government employees is down from 6.9% of personal income to 5.8% in the U.S, from 7.0% to 6.1% in California, from 7.3% to 5.7% in Colorado, from 6.8% to 5.8% in Texas, from 6.2% to 4.6% in Florida, from 7.0% to 5.3% in Georgia, from and 7.0% to 6.1% in North Carolina.
The wages and salaries of state and local government workers have fallen from 7.4% of the personal income of state residents in Michigan FY 1986 to 5.6% in FY 2016, from 6.6% to 5.8% in Ohio, from 6.0% to 5.7% in Illinois, from 6.3% to 5.1% in Indiana, from 8.1% to 5.8% in Minnesota, and from 7.4% to 5.6% in Wisconsin.
High and rising taxes, and public employee unions on steroids, haven’t altered the trend in New York, because those unions only actually represent their own needs, the needs of the retired and soon to be the retired, and the interest of grifters and goldbricks who don’t their job. The wages and salaries of state and local government workers have fallen from 10.1% of the personal income of state residents in New York City in FY 1986, when the city was still struggling to recover from the 1970s fiscal crisis, to 7.2% in FY 2016. It has fallen from 7.4% to 6.6% in the Rest of New York State, from 6.3% to just 4.8% in Massachusetts, and from 5.8% to 4.9% in Pennsylvania. It was up slightly from 5.8% to 6.0% in New Jersey, and flat at 5.1% in Connecticut, but probably as much do to falling income as anything else.
One place where public employees are definitely doing less with less is the Governments Division of the U.S. Census Bureau, both due to diminished resources and diminished co-operation from state and local governments with things they don’t want people to see. So there haven’t been many improvements in state and local finances data recently, or even from the first Census of Governments in the 1950s, a time when non-pension employee benefits were a much smaller share of the total state and local government expenditures. Benefits such as health insurance for active and retired workers generally end up in General Expenditures Not Elsewhere Classified.
But as best as can be determined, the City of New York is not spending less on its public employees. It is spending less on those who are working, and more on taxpayer pension contributions and benefits for the retired, as the wages and salaries of those working for the city or its transit authority are down from 7.9% of city residents’ personal income in FY 1986 to 5.7% in FY 2016. And bear in mind, 1986 was AFTER most NYC social services were contracted out, along with many other NYC public services, due to the failures of public employees in the 1960s and 1970s. Due in part to service insolvency caused by the first round of retroactive pension increases during the Lindsay Administration.
Thus the 1990s Republican idea that government functions should be shifted to the states is shown to be a joke. State and local government is ebbing away, and for the same reason that the federal government is going away.
All the money is going to things Generation Greed promised itself but was unwilling to pay for. And public services that Generation Greed took for granted when it needed them are ebbing away for those coming after.
The big conservative idea over the UK, as services for non-seniors were slashed in the wake of the financial crisis, was the “Big Society.” People should form voluntary organizations and do for themselves what the government had done for Generation Greed, the Tories decided. While also working two jobs to pay the mortgage on the sky-high price they paid Generation Greed for it’s houses, and higher taxes for Generation Greed’s old age benefits, benefits they will never see as that country goes broke too.
The non-profit sector would pick up the slack, it was assumed, but without any funding. It is what I called the institutional collapse.
In New York, turning to non-profits may not work either.
As I noted in the second post in that series…
As I have described in as many ways as I can, an inevitably rising share of public spending will be going to debts run up by past generations, rich pension and other retiree benefits for those cashing in and moving out, workers with seniority who are no longer required to work, and those in places like New York’s suburbs and upstate New York who need a “job” to be able to live the way they “deserve.” At the federal level, thoughtful people of all political views understand that the “debt” implied by having younger generations provided with the same health care and Social Security benefits that older generations have handed themselves (but were unwilling to pay for when working) is so high that it can never be paid. The financial debts are on top of that.
If you live in New York State, the situation is actually much worse, because it is necessary to anticipate future increases in benefits for those who are already in on the deals, on top of those deals that have already occurred. At the same time, more and more potential tax revenues are lost to special tax deals and breaks. And as a result of similar self-dealing and future-selling in the private and personal sectors, people are about to get a whole lot worse off, reducing tax revenues overall. Actual public services, benefits, and infrastructure will be crushed between these two pincers.
I have described the future of public services and benefits as “privatization” and “placardization.”
By placardization, I mean that to the extent that public sector has anything worthwhile to offer, it will not be able to afford to offer it universally, and it will be allocated instead to insiders and those with connections by a variety of means. The way scarce public on-street parking is allocated to those with the connections to get placards, legal and illegal.
And as the New York City subway system collapses, and as “school reform” is abandoned because in Trump-voting place people don’t want to pay for schools and in New York, where we have paid through the nose, the teachers’ union is nonetheless powerful enough that we got nothing for it, guess who is getting more placards?
By “privatization” I do not mean that the government will provide universal, equal benefits by hiring private contractors rather than public employees, as it does in the Medicare program or under a school voucher program. I mean that those who have the resources to provide what were once public services for themselves will be permitted to do so (as long as they are grateful for that permission), while those who lack such resources will be left to do without. In other words, we’re heading for a pre-Progressive era level of public services and benefits, at a Swedish tax rate (because those who matter have received Swedish-plus benefits while paying Reaganite taxes or less).
I guess the Charter Schools aren’t grateful enough, so the city’s teachers’ union is trying to kill them off. As for transportation, I’m a former New York City Transit employee and railfan, but I get around mostly by bike now.
Is there any way for disadvantaged later born generations to take anything back from Generation Greed? Only one. If you haven’t bought any real estate, don’t do it until the price that you will pay to older sellers is so low that it makes up for all the other disadvantages you will be inheriting.
Real estate can’t run and can’t hide. During the 1970s, when prior a prior generation had dumped debts, inadequate infrastructure investment, and retroactively increased pensions on New York City and then decamped to the suburbs or Florida, taxes soared and public services collapsed. NYC arguably had a worse sold out future ranking then than now, with lower debts and pension burdens due to retroactive increases, and a lower tax burden, but an even worse infrastructure situation and bad public safety as well.
But real estate was dirt cheap. To the point that some members of the 1960s generation who were affluent and unattached enough to be unaffected by the profound suffering of most city residents, and indifferent to that suffering, look back on those days when New York was “cool,” and one could afford to be “creative,” with nostalgia. They could even afford to live in parts of Manhattan, in a loft somewhere like Soho or a rotting tenement on the Lower East Side, on a low and episodic income. And in some buildings even squat.
Middle class Windsor Terrace, Brooklyn, where I live, was redlined, and housing prices were only as high as those who were willing to live here could afford to pay in cash. Many were passed down within families, or given to the local Catholic Church for a cut-rate sale to a parishioner willing to stay. Today the children of those who stayed, in contrast, are being pushed further out in Brooklyn by higher housing prices. Back in 1970s in less well off neighborhoods fleeing people either burned their residential or commercial buildings down for the insurance, or left with nothing after whole sections of the city became uninsurable.
The solution is to add up all that sold out future debt and think of it as an extra mortgage that you didn’t get anything for, and yet will be forced to carry, over and above the mortgage payments or rent you’ll need to pay. And reduce the mortgage payment you are willing to pay accordingly, or don’t buy. Rent is temporary, but once you buy at a high price so a member of Generation Greed can retire richly to Florida and take lots of cruises, you are stuck. Better to move to new multifamily housing, the construction of which produces jobs for the next generation, or hold out until housing is so cheap you can afford private school for your kids, or to work part time and home school them in a co-op, and engage in other “Big Society” adaptations.
This, after all, is what economists at the Federal Reserve Bank of Chicago recommended for Illinois’ pension debt.
There are several good reasons to pay off Illinois’s pension debt through a statewide residential property tax:
Fairness: Illinois residents who have benefited most from the past services of governmental employees are more likely to be homeowners, so it seems reasonable that they should pay a larger share of the costs.
Efficiency: Standard economic theory predicts that home values go down in response to new property taxes (that is, they are “capitalized” into home values).
Current homeowners would not be happy about this, but it would be a good result for the Illinois economy. That’s because the new taxes wouldn’t affect people thinking of moving to Illinois. While they would have to pay higher property taxes, that would be offset by not having to pay as much for their new homes. In addition, current homeowners would not be able to avoid the new tax by selling their homes and moving because home prices should reflect the new tax burden quickly. (We included this “tax penalty” effect in our calculations below.)
Transparency: The payment amounts and duration of the tax would be known in advance.
Certainty: The property tax would be dedicated solely to paying for the state’s unfunded pension liability.
Why just state level pension liabilities? Why not all the disadvantages foisted upon later-born generations by Generation Greed?
Paid off as a mortgage over 30 years at the current 4.57% APR mortgage interest rate, and compared with the total property tax revenues of each state and place in FY 2016, paying off the entire sold out future amount would raise property taxes by 94.1% (nearly doubling) on average nationwide. Lower residential and commercial real estate prices could offset this.
The increase would be 125.1% in New York City, 56.4% in the Rest of New York State, and 76.7% in New Jersey. Along with 233.3% for Alabama (more than tripling), 199.9% for Kentucky, 155.1% for New Mexico, 152.4% for Ohio, 147.8% for Louisiana, 131.8% for Oklahoma, 131.8% for Pennsylvania, 130.5% for Missouri, 130.3% for Arkansas, and 130.0% for Michigan.
And 116.6%, also more than doubling in California.
Perhaps this is a little extreme. After all, Generation Greed didn’t inherit zero state and local government debt and cannot be expected to bequeath it either. But for the pension hole, the infrastructure hole, and some of that debt that is in excess of the national average, the idea is reasonable.
People and seem to be investing in commercial and residential real estate, and making business location decisions, in blithe indifference to what might happen to their property taxes or public services due to the extent to which the future has been sold out. Seeking, for example, transit-served properties and locations at a time when rail transit systems have been disinvested in and are degrading nationwide. I asked my wife about this, and she said that the financial markets aren’t good at pricing in “long tail” events and problems that build up slowly over time. But this isn’t a trade for a financial trader. This is people’s lives. To my mind, property prices ought to reflect the state and local government assets and burdens that come with each plot of land.
Don’t want to pay that extra mortgage? Don’t buy until the price is so low it hurts for the seller to sell. Or move to Nebraska with Warren Buffett, or pay up for real estate in Jackson Hole, Wyoming, where Federal Reserve economists have their annual conference.
Of course there have been all kinds of desperate federal policies to keep housing prices high, as if that was good for everyone rather than good for some already-advantaged people at the expense of others.
They’ll have to sell eventually, however. Or their heir’s will have to dump the property if they hold out to the end. Hold out to age 60 if you have to, live four to a room if you have to, rather that being trapped into paying their debts. And don’t buy their overpriced stocks either.
They say travel is broadening. So I’ll end this post with words of wisdom from America’s favorite European travel guide, Rick Steves, from the 2013 edition of his book Europe Through The Back Door. (I suppose these Sold Out Future posts add up to America Down the Toilet).
Europe’s economic problems are much like ours here in the U.S. It seems on both sides of the Atlantic we’ve conned ourselves into thinking we are wealthier than we really are.
Note: conned ourselves with the help of the financial sector (“live richly!”), the advertising industry, and politicians pandering to interest groups, up to and including President Trump.
Enjoying wild real estate bubbles, we’ve had houses that were worth half a million suddenly worth a million. Then, when they dropped in value by 50 percent, we felt like we’d lost half a million dollars or euros. Truth be told, we were never millionaires to start with, and what we “lost” we never honestly gained in the first place.
But we already spent it. Or, in the case of inflated pension plan assets in 2000, used it as an excuse to cut funding and/or retroactively increase benefits.
As societies, we’ve been consuming more goods than we’re been producing for a long time. We import more than we export—and things are finally catching up with us. Here in the U.S., or priorities are warped. Many of our best minds are going to our finest schools to become experts in finance: rearranging the furniture to skim off the top…aspiring to careers where you produce little while expertly working the system in the hopes of becoming unimaginably rich. Recently, surveying the extravagant chateaux outside Paris—such as Vaux-le-Vicomte—I was struck by home many of them were the homes of financiers. Lately, the U.S. is reminding me of old regime France. It is striking that more than 10 percent of the U.S. economy is tied up in the financial industry.
Europeans and Americans have some of the most generous entitlements in the world, combined with aging societies.
Note: in European countries for everyone more or less equally, here in the U.S. for some one hell of a lot more generous than for others.
Because of that, our comfortable status quo is not sustainable. Whenever a society gets wealthy and well educated, it has fewer children. That’s simply a force of nature. Western Europe, being one of the wealthiest and best-educated parts of the world, logically has one of the lowest birth rates.
Europe’s generous entitlements were conceived in a post-war society with lots of people working, fewer living to retirement, and those living beyond retirement having a short life span. That was sustainable…no problem. Now, with its low birth rate, the demographic makeup of Europe has flipped upside-down: relatively few people working, lots of people retiring, and those who are retired living a long time. The arithmetic just isn’t there to sustain the lavish entitlements.
Here in the U.S. Generation Greed also wants (and got) tax breaks, and special tax breaks for seniors, too, even as spending on them soars.
Politicians in Europe have the unenviable task of explaining to their citizens that they won’t get the cushy golden years their parents got. People who are working diligently with the promise of retiring at 62 are now told they’ll need to work an extra decade—and even then, they might not have a generous retirement waiting for them. Any politician trying to explain this reality to the electorate is likely to be tossed out, since people naturally seek a politician who tells them what they want to hear rather than the hard truth. And any austerity programs necessary to put a society back on track are also tough enough to get people marching in the streets.
Rick Steves is an upbeat, optimistic kind of guy. Then again he lives in Washington State, which has a sold out future ranking of 8, the eight least sold out state in the country. So he can afford to be optimistic, especially if he bought a house in metro Seattle before the wild bubble hit there.
General strikes, anyone? With the political/union class, the executive/financial class, and Generation Greed running everything in their own interests and “telling people what they want to hear” rather than the truth, those are more than justified. I expect we’ll see them eventually, some time in our sold out future.
The spreadsheet with all the data used in this series, and tables showing the results for every state, is once again here…
If you found this four-post overview of state and local government finances illuminating, and you are new to “Saying the Unsaid in New York,” you might also want to also read my series of posts on federal government finances from 2016. It’s something I do in Presidential election years.