More "Gray" Equals Less "Green"

As I mentioned in my last post , the Census projects that by 2030 one in four West Virginians will be over age 65. As a result, it could cost state and local governments a lot revenue. This is because seniors, in general, are not part of the labor force. This means they pay less in taxes and demand more services.  Today, I want to talk about just one of those potential costs – the loss of property tax revenue due to the Homestead Exemption. 

The Homestead Exemption provides an exemption of up to $20,000 of assessed property value based on age (65 and older) and disability.  If the Census’s estimates are correct,  then counties can expect a sizable reduction in property tax revenue because the number of home owners over 65 will have also increased. My calculation* says that the loss of property tax revenues will cost an additional $20.3 million dollars by 2030. 

   

 

Two-thirds of the expected property tax revenue loss ($13.4 million) will affect state school board budgets while one-fourth of the loss ($5.2 million) will come from county budgets.  Municipalities’ budgets will be reduced by  nearly 8% ($1.6 million) and the state’s budget less than 4/10 of 1%.  The good news for counties is that most of it could be made up via the school aid formula. The bad news is that the state will have to find the additional dollars to send to the counties. This means raising taxes, reducing the exemption, or cutting the budget. 

 

So, for state and local officials more “gray”could equal less “green.” Next time I’ll look at some other tax credits and preferences for seniors, including the Senior Citizens Credit for Property Tax Paid ( -$7.7 million),  the Senior Citizen Property Tax Payment Deferment (-$900,000), and the Decreasing Modification for Senior Citizens which results in a current revenue loss of (-$39.6 million).


 

 

*The West Virginia Tax Department reports the total value of Homestead Exemptions in CY 2008 was $44 million dollars, which included tax filers who qualified based on both aged and disability.  County assessor and state tax department officials estimate that 88% of the total Homestead Exemption revenue lost in the state was due to age, while 12% was based on a qualifying disability. In CY 2008, approximately 185,000 West Virginia tax filers  received $38.7 million dollars in property tax relief under the Homestead Exemption as a result of their age.  According to population data of the US Census, in 2008, there are 285,000 West Virginians aged 65 and older.  The US Census projects the number of residents aged 65 and older will increase to 435,000, an addition of 150,000, or 53% additional “grays” to West Virginia’s population.  Part of this phenomenon is the result of a negative population trend for younger West Virginians (see, The “Graying” of West Virginia’s Population).  A 53% proportional increase in Homestead Exemptions will increase the revenue lost by an additional $20.3 million dollars by 2030, ($38.7 X .526 = $20.3). 

Don’t Hit the OPEB Panic Button

Would you consider it a “crisis” if an accountant told you how much money you owe on your house? Apparently, that’s the rationale Phil Kabler used yesterday when he told people that our state’s $8 billion OPEB  (Other Post Employment Benefits = the state’s retiree health care subsidy for state and public school employees) liability is “the biggest financial crisis facing the state.”  While $8 billion is nothing to gawk at, the number needs context, a lot of context. The $8 billion is based on a shaky estimate and represents what the state would owe if every single vested public employee retired today and demanded the benefit. Furthermore, looking comparatively at other states, we don’t look too bad. According to the Pew Center on States, West Virginia has funded its OPEB liability better than 37 states (4%). Moreover, 22 states have put zero funds toward their OPEB obligations. That’s how concerned they are.

Fortunately for us, there is no “crisis” and the $8 billion figure is based on a misunderstanding of debt. However, what I am most afraid of is that the media and (some) lawmakers are using OPEB as a scare tactic or a red herring to cut future government investments and hurt public employees benefits.  Both of these actions will hurt our state’s economy and its people.  

 The OPEB story is not so simple, but I’ll give it a shot.  Many years ago, state employees and teachers were told that in exchange for pay increases that they “may” receive a retiree health care subsidy (based on salary and years worked) from PEIA once they hit age 55 (I say “may” because the state has no legal obligation to provide health care to retired public workers). This was ok until a bunch of accountants got together and “pronounced” that states need to report this on their balance sheet as a future liability (GASB 45 ) Once this happened, West Virginia went from a pay-as-you-go system to one where we started appropriating ($400 million to date) money into a trust fund to help pay the projected future liability of the entire benefit. So in one fell swoop our balance sheet (liability) changed, reflecting not what we need to pay out in the upcoming fiscal year, but what the state would have to pay if every vested public employee took the benefit today. From a transparency point of view, this makes sense because it is a perceived state liability. However, from a fiscal policy point of view, it gives the false impression that the state owes this money today and it cannot afford other public investments.

Let me explain. Unlike public pensions that are defined, the cost of OPEB plans are unknown. This is largely because we don’t know the present value of those future health care benefits payments in today’s dollars, so we have to make an estimate.To figure this out, the state hires actuaries that use a number of assumptions to calculate the OPEB liability at present value ($8 billion).  The main ingredient they use is projected future health care costs or medical inflation (others include discount rate changes based on assets, turnovers, mortality, and coverage lapse). (One problem with using this variable is that health spending cannot continue to rise at these alarming rates without damaging overall U.S. economic growth and security.)

Let’s get back to the mortgage analogy. Imagine that you owe the bank $150,000 on your home, a payment you’ve “promised” to make based on your net worth and salary. Would you stop putting away money for your kids college, stop making repairs to the house, and not buy a car because your accountant said your total unfunded liability is $150,000? Would you put money in an escrow account to pay for the $150,000 liability? Probably not, because you understand that the debt is “manageable” and that you could sell your home (analogous to reducing the state provided health care subsidy and buying out future retirees) or reduce other costs if you were unable to afford it. This is the same principle that should guide lawmakers about OPEB. As long as the state can afford to pay its share of OPEB, then it should do so and not worry too much about the total liability. If we can’t afford the payment in the future, then changes will have to be made.

The real reason lawmakers are concerned about the OPEB liability is that it has the “potential” to lower our state’s bond rating. A lower bond rating =  higher interest rate = more money that state has to pay to finance capital projects like schools. The power of the bond market to control policy decisions is immense and it can stifle the state’s ability to invest in things like infrastructure. As James Carville quipped back in 1993, “I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the  bond market. You can intimidate everybody.”

If our state’s bond rating is the key concern of policymakers, then they shouldn’t be concerned. Last year, West Virginia’s bond rating was upgraded to AA . The truth is bond rating agencies have already considered the OPEB liability on state’s balance sheets and they don’t rank it as a critical factor in determining a state’s bond rating.

So, back to the problem of what to do. Kabler notes in the article that the Legislature is considering funding the liability for three years at $600 million so the fund can hit $1 billion – which would increase the discount rate (or investment return) and reduce the liability. This is a (somewhat) reasonable approach, but the real question should be: Do we invest $600 million in the stock market (trust fund) or do you investment the money in our future workforce that could yield even higher returns? One of the key problems in this debate is that too many legislators don’t recognize that spending money on education often yields greater revenue returns in the future than the stock market. 

As John Maynard Keynes said, “Once we allow ourselves to be disobedient to the test of an accountant’s profit, we have begun to change our civilization.”

Jobs Watch Update

BLS released regional and state unemployment figures today. West Virginia ranks in the middle of the pack, with the 23rd highest unemployment rate at 9.2%. As Paul showed in his previous post, the “real” unemployment rate is probably closer to 13%.

Since the national recession began in December 07, the unemployment rate has increased by 5.2 percentage points. During this time, the state has lost about 3% of its job base or 21,700 (non-farm) jobs. Construction has taken the biggest hit, losing 14.6% or 5,600 jobs. The manufacturing base has declined by 13.1% by losing 7,600 jobs. Based on working age population growth trends (0.8%), the Mountain State has a jobs shortfall of about 27,750 (the number of jobs we’d need if the recession didn’t happen).

While the current recession is clearly the worst in recent times, it’s not as severe as the 1980-81 Recession (see chart below).

As we showed in our 2009 SWWV, the effects of the 1980-81 recession lasted for 13 years, measured from employment peak to employment trough, with job losses bottoming out at close to 100,000. It appears were heading toward another jobless recovery. I don’t expect we’ll see the state unemployment rate drop below 8% until (at least) next year.

A good gauge for tracking the end of a recession is by looking at new weekly unemployment insurance claims. The chart below shows initial UI claims in April for the last 11 years. The average over this period is about 6,600, or about 20 percent higher than April 2010. For us to be out of the weeds, we need to see this number move closer to the 6,500 mark by this time next year.


Source: US DOL

Is West Virginia’s Unemployment Rate 9.2%?

Earlier this week Workforce West Virginia revealed that our state’s unemployment rate (seasonally adjusted) for April was down slightly,  from 9.5 percent to 9.2 percent, with about 72,000 “unemployed” workers. However, these figures do not reveal the number of workers who’ve dropped out of the labor force either because they’ve can’t find work, have  gone back to school, or have left the state.  These workers are no longer counted  in the labor force because they are not actively seeking employment.

So, is West Virginia’s unemployment rate really 9.2% or, does this latest figure underestimate the true number of people who would take a job, if one were available? 

Since the recession started in December 2007, West Virginia’s labor force has shrunk 3.8 percent from peak to trough, a loss of 30,791 workers.  If we included the 31,000 workers who have dropped out of the state’s labor force, the unemployment rate would  increase from 9.2% to 13%, representing a total of 103,300 jobless workers in West Virginia. This figure is probably a lot closer to the  “real” jobless rate in West Virginia.

How many “Coal Miners”?

This picture in yesterday’s Charleston Daily Mail got me thinking about how many workers in West Virginia wear a hard hat with a lamp each day. While the best estimates (see here and here and here, and here ) say about 20,000 people work directly in the state’s “coal industry,” most of these workers are not “coal miners” per se.  They are truckers, supervisors, engineers, electricians, office workers, CEOs, and other occupations.  I could be wrong, but I think a lot people might mistakenly believe that there are 20,000 workers that put on a hard hat with a lamp.

While the coal mining hard hat lamp is symbolic of the mining industry and our culture, the number of workers who wear one everyday is probably less than 5,000.

While it’s impossible (at least I can’t find it) to find out how many miners do work directly in underground and surface mining, the BLS’s Occupation Employment Statistics program can provide some insight.

The table above lists several occupations in the “coal industry” and several that could be described as “coal miners.” Continuous mining machine operators, roof bolters, and loading machine operators are occupations that involve direct extraction in underground mining (3,320 workers).  Surface mining occupation “could” include mine cutting and channeling machine operators, explosives workers, and dragline operators (4,220).  The table above also offers some insight into pay. In 2008, underground coal miners made between $45,000 and 50,000 a year on average. However, this doesn’t include overtime pay, deferred compensation (401k plans), and health care subsidies.  According to the West Virginia Coal Association , the average annual pay in 2008 was $62,700.