Saturday, May 16, 2020

New Jersey's Fiscal Disaster and Education Cuts



What a different world February 25th, 2020 was, the day Gov. Phil Murphy gave his budget speech for FY2021.

There wasn't Coronavirus. There wasn't talk of state bankruptcy. There wasn't Depression-level unemployment. Phil Murphy proposed a FY2021 Budget with 4.3% (+$1.7 billion) revenue growth, for which PreK-12 education was slated for a boost of 3.7% (+$577 million).

We all understand today's reality and the crashing of state revenues. New Jersey has already cut $1 billion from its remaining FY2020 budget and has redirected federal COVID-19 money to sustain K-12 state aid. Phil Murphy is also proposing that New Jersey borrow as much as $9 billion.

I assume that New Jersey will get additional federal support and make some borrowing, but New Jersey fixing the short-term problem of the 2020-21 recession won't be enough, because New Jersey was already the most indebted state in the US before the Coronavirus appeared, and had not honestly balanced a budget since the early 1990s.

New Jersey must fight for federal aid and borrowing might be justified in this emergency, but we also have to seriously rethink our budgeting and that includes making cuts to some sacrosanct programs, including state aid for all school districts and "free" PreK.
There are taxes New Jersey could increase (see below), but there are going to have to be cuts, and education cannot be spared.

Spending Cuts
PreK-12 Education Spending has be ON the Table

New Jersey's "fiscal effort" on education is the second highest in the country.

Under an analysis that did not include the $800 million New Jersey spends on PreK, even the Education Law Center acknowledged that New Jersey spend 5.39% of GDP on education, compared to a national average of 3.79%.

To put NJ's state education spending in terms of NJ's budget, $15.74 billion of NJ's $39.96 billion FY2020 budget (39.4% of New Jersey's budget) is devoted to PreK-12 education, compared to spending 31% of the budget on education in 2001. Thus, ruling out cuts to education would force deeper cuts on budget categories that have been far more neglected by the state for 20 years.

But if New Jersey accepts the necessity of making education cuts, it cannot repeat the method Chris Christie used in 2010, when he cut state aid equivalent to 5% of a district's budget and totally ignored how much state aid a district got compared to its SFRA target and what its tax base was.

Cut State Aid from High Tax-Base Districts

"High Tax-Base" has a subjective threshold, but for 2019-20, districts whose Local Fair Share was 150% or more of their full Adequacy Budgets got $118 million in opex aid, of which only $8 million is Adjustment Aid. (See Note 1 on definitions of Adequacy Budget.)
If you scale down the threshold of "high tax-base" the savings to the state are greater:
  • Districts where the Local Fair Share is 140% of their Adequacy Budget, got $148 million in 2019-20.
  • Districts where the Local Fair Share is 130% of their Adequacy Budget, got $178 million in 2019-20.   
If the tax cap law were loosened, New Jersey could cut their state aid to $0 and the districts could have budgetary stability.

These districts also indirectly get tens of millions more in state-paid TPAF and Social Security, although I do not know the exact amounts. The districts whose Local Fair Share is over 150% of the full Adequacy budget have 87,000 students, or 6% of NJ's total. If they received 6% of New Jersey's TPAF and Social Security spending (a combined $3.5 billion for FY2020), that would be $211 million.

Cutting at least $300 million from New Jersey's highest tax-base districts is a large amount, but deeper cuts will likely be necessary.

We Can't Afford PreK
Since FY2008, New Jersey has spent at least $8.35 billion on PreK.

Source, Budgets in Brief.

This is despite New Jersey hÆ’aving a deeper deficit than any other American state and indeed is a reason why New Jersey has had a deeper deficit than any other state.


New Jersey's Fiscal Balance is even worse than Illinois', the second most irresponsible state. Whereas New Jersey has only taken in 91.1% of necessary revenues, even Illinois has taken in 94.1%.

Alabama, Mississippi, and Louisiana, three states that New Jerseyans mock and falsely present as representative of Red States, have all had positive balances during this period.

New Jersey's rainy day fund has been well below national averages in the 21st century. The three state-funded pension funds, the Judges, State Police, and Teachers Pension and Annuity Fund are all expected to zero-out this decade.

For the entire post-2004 period that the Pew Fiscal 50 provides data on how states have covered their expenses, New Jersey has been in last or second to last place every single year.


New Jersey's Fiscal Balance is Palpably Worse than Illinois'.

New Jersey's fiscal mismanagement has persisted despite taxes that are among the USA's highest, that tax brackets have not been indexed for inflation, and that New Jersey has underfunded K-12 opex aid and municipal aid against statutory targetsand underfunded public higher education against New Jersey's recent past and national averages (see more below about higher ed).

Whatever federal aid NJ gets and whatever borrowing we do, New Jersey's economic weakness is likely to last longer than the national average based on the fact that New Jersey took an additional three years to recover from the Great Recession (2017 vs 2014 nationwide).

New Jersey cannot afford to spend $800 million (plus associated FICA, construction aid, and TPAF) (2% of the budget) on a service that other states don't provide when New Jersey has chronically slow growth and  and cannot balance its budget.

Although in no year have PreK's costs been greater than New Jersey's budget deficit, one has to remember that liabilities mount over time, so failing to put $x money into something now means needing to put $2x or $3x money in the future. 

TPAF Unfunded Liability, from TPAF Actuarial Valuation Report
2018.


I acknowledge there are downsides.

Many people would contend that cutting PreK could exacerbate achievement gaps, but the Abbotts do not outperform DFG A and B non-Abbotts, so the long-term academic benefit of PreK is undemonstrated to me.


New Jersey also need not cut all of PreK to have large savings.  We could eliminate it for 3s and restrict it to low-income families to save at least $400 million.

The academic loss from restricting PreK to 4s only would be less than the academic loss of total elimination.  Even the pro-Abbott APPLES study acknowledged that the benefits of two-years of PreK are not significantly greater than two years.

Some would say that we cannot cut any PreK since the beneficiaries are mostly low-income and minority, and therefore any cuts should be off the table, but the whole of New Jersey's operations disproportionately (and correctly) benefit low-income people, including minorities.  Thus, preserving PreK cuts hurts low-income New Jerseyans in other ways. 

For instance, how can anyone claim that the cuts to municipal aid that have occurred in part due to crowding-out by education spending as anything other than a negative for low-income persons and communities?


Municipal Formula Aid 2007 (millions)Combined Equalized Tax Rate 2007Taxes Per Household 2007Municipal Formula Aid 2018 (millions)Combined Equalized Tax Rate 2018Taxes Per Household 2018
Newark$113.71.586$4,352$101.32.567$6,481
Elizabeth$29.21.75$5,069$29.23.148$9,869
Paterson$40.91.741$5,337$32.94.326$8,087

New Jersey's high-foreclosure and tax-lien rates also disproportionately affect low-income and minority populations, and foreclosure and tax liens are undeniably linked to our extremely high property taxes, so redirecting PreK money into clear-cut tax offsets would help low-income minorities in other ways.

It's also not PreK versus Other State Obligations. It's PreK versus K-12 aid and PreK versus and Post-Retirement Healthcare. Preserving New Jersey's $800 million PreK expense and hiking it to $900 million takes resources away from other services that also disproportionately benefit New Jersey's low-income residents and communities. It also takes money away from severely underaided school districts.

Further, not all recipients of state-funded PreK are poor. The large majority of PreK students in Hoboken are affluent (which got $14.2 million in PreK money in FY2020), and a majority in Jersey City ($69.3 million) are. As PreK has been expanded to middle-class suburbs under Phil Murphy, even more non-poor students are included.

Don't Cut Other Property Tax Relief Fund Items

An underlying reason that education spending, including aid to high-wealth districts and PreK must be on the table is that the other Property Tax Relief Fund items have been so neglected in the last 20 years.
Of items paid for by the Property Tax Relief Fund, municipal aid, "other local aid," and direct tax rebates as areas that should not be cut except from very high-wealth towns due to the fact that they've been flat-funded since 2001, despite New Jersey gaining 700,000 people since that year.




Don't Cut Public Higher Ed
I also think that cutting funding for public higher education would also be a mistake, since New Jersey's higher education funding in dollars per student or dollars per resident is quite low as it is, even lower than Alabama and Mississippi's.





See "New Jersey Underfunds Higher Education"

Don't Cut NJTransit
Self-evident.

Tax Increases
I don't think NJ can survive this crisis solely with cuts and borrowing, so there are taxes New Jersey could increase.

These are the ones that often come up:
  • Lower the threshold for the 10.75% bracket from $5 million to $1 million.
  • Expand the sales tax to services.
  • Increase the sales tax to 7%.
  • Legalize marijuana and tax it.
New Jersey has several progressive organizations whose mission is to argue for these tax increases, so I will say nothing more about them.

I suggest the following rarely-proposed, more politically difficult, items:

Conclusion
New Jersey is in a fiscal catastrophe and must make difficult choices and education should not be spared.  The amount in new revenue that New Jersey can likely raise will not be sufficient to bring out budget into balance, let alone reduce debts and build a Rainy Day Fund for the next recession.

Among the cuts should be cuts to the highest-wealth districts that can absorb the lost of state aid, plus PreK, a program that other states do not pay for and which has contributed to our budget disaster.


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Friday, May 1, 2020

Mitch McConnell and the Irrelevance of Bankruptcy for New Jersey, and Necessity for Illinois

Since the Coronavirus lockdown has forced states to shut down their economies and lose tens of billions of dollars of expected revenue, there have been many requests for federal assistance to allow states and localities to fulfill basic services and avoid mass layoffs.

Among the requests for money to pay for ordinary operations is one from the president of Illinois' State Senate for $10 billion for Illinois' and its localities' disastrously underfunded pension funds.

When asked about federal aid to cover ordinary shortfalls in revenue, US Senate Majority Leader Mitch McConnell conflated the two requests and  said that he preferred a solution where states be able to declare bankruptcy:  

“I would certainly be in favor of allowing states to use the bankruptcy route,” he said Wednesday in response to a question on the syndicated Hugh Hewitt radio show. “It’s saved some cities, and there’s no good reason for it not to be available.” 
The host cited California, Illinois and Connecticut as states that had given too much to public employee unions, and McConnell said he was reluctant to take on more debt for any rescue. 
“You raised yourself the important issue of what states have done, many of them have done to themselves with their pension programs,” he said. “There’s not going to be any desire on the Republican side to bail out state pensions by borrowing money from future generations.”

 McConnell publicly called the idea of federal relief a "Blue State Bailout," and specifically referred to the pension crises of the states with the most inadequate savings:
We’re not interested in solving their pension problems for them. We’re not interested in rescuing them from bad decisions they’ve made in the past. We’re not going to let them take advantage of this pandemic to solve a lot of problems that they created for themselves with bad decisions in the past.”
First of all, I think for the federal government to not help states deal with revenue losses from an epidemic they cannot control would be catastrophic economically and morally.  McConnell's statements are also politically stupid, because all states are going to need relief, not just Blue States.

Realizing his mistake, McConnell backtracked and indicated that he does favor relief.
“The fundamental point I was trying to make is that we’re not interested in borrowing money from future generations to help states solve problems that they created themselves. The bankruptcy suggestion would have been optional anyway. I wasn’t assuming many of them were going to take that option.
Secondly, allowing states to file for bankruptcy is irrelevant to New Jersey.  Bankruptcy would be a moral and economic nightmare for New Jersey, but New Jersey doesn't need a federal bankruptcy process for debt reduction because New Jersey has far more legal flexibility on debt repayment than Illinois.

New Jersey also has room to save money by cutting state aid to the richest districts and cutting some of its utopian goals for "free" PreK, but that will be discussed in a future post.

Regarding debts, New Jersey's Constitution lacks a clause protecting pensions (except for judges), and these two categories of debt unambiguously lack legal protection.

  1. Post-retirement healthcare
  2. Contract Debt, aka Appropriation Debt

Illinois' constitution, on the other hand, does have a pension protection clause, which its Supreme Court has interpreted in an extremely broad way, and is further protected by the venality of Illinois' political system and by problems inherent to a two-party system.   Thus, Illinois is in a fiscal straitjacket that only Congress can free it from.

People have sharply criticized McConnell for even considering allowing states to use bankruptcy to reduce debts, but the point remains that Illinois and New Jersey, are already bankrupt in a colloquial sense, ie, they are broke and have debts they cannot pay.  Their debt already have the lowest ratings of the states from the Wall Street ratings agencies.  At some point in the next five years, both are going to seek ways to reduce those debts and for Illinois, federal legislation to ease that process is necessary.

New Jersey Has Debts It Doesn't Legally Have to Pay
Unlike an individual, corporation, a municipality, or school district, a state is legally a sovereign entity that can, through its own electoral process, legislation, constitution, and court system, stop paying its debts.

Hence, the bankruptcy code doesn't apply to states: It doesn't need to.

If an individual, corporation, municipality, or school district runs out of money, it cannot unilaterally stop paying its debts, hence bankruptcy is intended as an orderly procedure to allow different creditors to get a share of remaining assets.  Bankruptcy is also intended to let an individual or institution recover without being permanently chained to unpayable debts.

As David Frum wrote in The Atlantic:

To understand why Republicans want state bankruptcy, it’s necessary to understand what bankruptcy is—and what it is not. 
A bankruptcy is not a default. States have defaulted on their debts before; that is not new. Arkansas defaulted in the depression year of 1933. Eight states defaulted on canal and railway debt within a single year, 1841. The Fourteenth Amendment required former Confederate states to repudiate their Civil War debts. 
A default is a sovereign act. A defaulting sovereign can decide for itself which—if any—debts to pay in full, which to repay in part, which debts to not pay at all. 
Bankruptcy, by contrast, is a legal process in which a judge decides which debts will be paid, in what order, and in what amount. Under the Constitution, bankruptcy is a power entirely reserved to the federal government. An American bankruptcy is overseen in federal court, by a federal judge, according to federal law. That’s why federal law can allow U.S. cities to go bankrupt, as many have done over the years. That’s why the financial restructuring of Puerto Rico can be overseen by a federal control board. Cities and territories are not sovereigns. Under the U.S. Constitution, U.S. states are.

The only thing to restrain a sovereign's ability to stop paying its debts is its own moral scruples, plus the knowledge that to cut payments to bondholders would lock a state out of the bond market and to cut pensions and post-retirement healthcare would infuriate public sector unions.

However, even on top of spending savings and tax increases New Jersey could make, the state has two major debts that unambiguously lack legal protection and which New Jersey would not require federal permission in order to reduce payments on. It would still be problematic to cut them, but legally, New Jersey could.

Post-Retirement Medical

The 1997 statute (Chapter 113), made pension benefits "non-forfeitable," explicitly exempted post-retirement benefits from any protection.

C.43:3C-9.5 "Non-forfeitable right to receive benefits" defined, contributions; construction of act.
5. a. For purposes of this section, a "non-forfeitable right to receive benefits" means that the benefits program, for any employee for whom the right has attached, cannot be reduced. The provisions of this section shall not apply to post-retirement medical benefits which are provided pursuant to law.

 And Chapter 113 also explicitly allows future changes to pension formulas:

"nothing in this act shall be deemed to (1) limit the right of the State to alter, modify or amend such retirement systems and funds."


Christine Todd Whitman and Senate President/Governor Don DiFrancesco made several extremely short-sighted fiscal decisions, but at least they gave New Jersey a back door out of unaffordable promises New Jersey made.

Post-retirement medical spending was a $1 billion expense in FY2020. Legally speaking, it could be reduced.

New Jersey's Post-retirement medical debts actually exceed its pension debts.

Even the public sector unions in the Berg v Christie case over suspending COLAs acknowledged that healthcare plans and post-retirement healthcare could be cut, and said that the lack of a specific exclusion in Chapter 113 of COLAs indicated that COLAs were protected.

Some people would consider reducing Post-Retirement Medical to be equivalent to bankruptcy because it's breaking a promise to retirees, but legally speaking, it wouldn't be "bankruptcy" any more than any other budget cut would be.

Contract Debt
Another form of debt that New Jersey doesn't legally need to pay is bonded debt that was never approved by New Jersey voters. This is called Contract Debt or Appropriation Debt.

Although there is an overwhelming assumption that these debts will be repaid, when the bonds were sold, the state included a disclaimer that repayment depended on legislative action and could not be legally compelled.

As was held in Holster v. Board of Trustees of Passaic County College and then used in the Lonegan I case (which was over Abbott construction bonding), the New Jersey Supreme Court said that this debt wasn't really debt.

Although there is doubtless a strong likelihood that payment of the bonds will in fact be met by legislative appropriations, we find nothing in the statute compelling the State to make such payments as a matter of law.   Hence, both issuing counties and purchasing bondholders are on notice that the faith and credit of the State will not be pledged in respect of bonds issued pursuant to this enactment, but that payment on the part of the State will be dependent upon appropriations provided from time to time.   Lacking such appropriations, recourse can be had only against the county which will have no recourse over against the State.
 It is a basic tenet of Holster that “a projected or anticipated future legislative appropriation is not a present debt or liability ․ [because a] future legislature is not bound to make the appropriation.”  Id. at 71, 279 A.2d 798.

"Although there is doubtless a strong likelihood that payment of the bonds will in fact be met by legislative appropriations, we find nothing in the statute compelling the State to make such payments as a matter of law."

Items that are Contract Debt in New Jersey are

  • The Whitman-era Pension Obligation Bonds.
  • The McGreevey-era Tobacco Bonds. 
  • SDA debt for school construction. 
  • The Christie-era statehouse debt.
I think that non-payment of bondholders is morally tantamount to bankruptcy and would destroy New Jersey's future ability to borrow, but New Jersey wanted to commit fiscal suicide, it doesn't need federal bankruptcy courts' permission.

Illinois

Illinois is different. 

Although Illinois is theoretically a sovereign too, it would be more realistic to see its constitution, as interpreted by its Supreme Court, as sovereign. Illinois is theoretically a democracy in that it has free elections, but the it is not a viable two-party system either.  The Assembly Speaker has been Mike Madigan since 1983 (except for a two-year hiatus), and the public sector unions have influence over the Democratic Party, especially Governor Jay Pritzker, who, despite the Coronavirus plague, refusing to suspend $261million in salary increases for state workers.

Unlike most other state, local, and private sector pension systems, Illinois cannot even cut pension benefits that haven't been earned yet. Whatever pension plan was in place on the day an employee was hired, that remain's the employee's plan until retirement, without any diminishment. Although pension formulas can ratchet up -- retroactively -- the formulas cannot be reduced.

And indeed, Illinois has ratcheted up those pensions without any thought to their affordability:

Consider the Teachers’ Retirement System. In 1971, the basic benefit formula was increased, the maximum benefit was increased from a range of 60 - 70% by age, to 75%, and early retirement reductions were eliminated for retirees with 35 years of service. In 1972, the COLA was increased to 2% and in 1978, it was increased to 3%. In 1979, an early retirement program was established, the provisions of which changed and were renewed periodically in the coming years. In 1984, credit for up to one year’s accrual via sick leave was implemented and in 1988, employees could use sick leave credit from former employers. In 1991 and 1993 early retirement incentives were implemented. In 1998, the basic benefit formula was increased again. In 2003, teachers were permitted to use two years of sick leave to count towards pension accruals. In other words, the pension benefits being guaranteed in 1970 were considerably less than now.

And Illinois' pensions are among the most generous in the United States, allowing workers to receive pensions that are much greater than what they put into the system and could have gotten by investing that money:

Data from Illinois’ six largest pension systems show 19,158 former government workers collect annual pensions of more than $100,000, costing those systems nearly $2.4 billion combined in fiscal year 2018. 
Six-figure pensioners enrolled in those systems contributed an average of $160,100 toward their own retirements over the course of their careers, and retired on average at age 59.
https://www.illinoispolicy.org/more-than-19000-illinois-government-retirees-receive-pensions-over-100k/




Illinois also has guaranteed minimum 3% COLAs, so that someone retiring with a $40,000 pension would see the pension grow to $53,756 after only ten years. Since inflation has averaged only 2.2% since 2001 and 2020 will be a deflationary environment.

Illinois pensions are also exempt from state taxation.

The Illinois Supreme Court has said that if Illinois' budget was so ruined it could not exercise police powers, pensions would still take priority.

Even as Illinois' fiscal crisis deepened to the point of true emergency, the legislature and governor tried again to fix it but were blocked by the Illinois Supreme Court under a reading of the "shall not be diminished or impaired" clause of the 1970 Illinois Constitution:
SECTION 5. PENSION AND RETIREMENT RIGHTS Membership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.  
That clause is now momentously important to Illinois' fiscal future, was barely debated in 1970 when the Illinois Constitution was re-written.


This is not a part of some grand principle, but tossed in as a miscellaneous item among the text of the oath of office, the authorization of state funding of public transportation, and the requirement of a supermajority for the authorization of branch banking by the General Assembly.

Although the Illinois Supreme Court has decided unanimously that pension formulas cannot be changed, the jurisprudence behind those decisions depends on an extremely broad reading of Illinois' pension protection clause and is controversial.

Max Schanzenbach, a professor at Northwestern University’s Pritzker Law School, says the Illinois Supreme Court has removed the state’s retirement systems almost entirely from traditional contract law.
For agreements between most American employers and employees, future benefits and salaries that haven’t been earned yet by the employee are not guaranteed. “There’s been no promise or exchange made that would be a contract,” Schanzenbach says.

However, in California, Arizona, and Illinois, he says that “for whatever reason, [those] courts have interpreted similar provisions to protect not just accrued benefits but to actually freeze in place the benefits you were promised as of the date of your employment,” Schanzenbach says.

Indeed. Illinois' 2013 attempt at pension reform was unanimously gutted in 2015:

“The law was clear that the promised benefits would therefore have to be paid, and that the responsibility for providing the State’s share of the necessary funding fell squarely on the legislature’s shoulders. Accordingly, the funding problems which developed were entirely foreseeable. The General Assembly may find itself in crisis, but it is a crisis which other public pension systems managed to avoid and ... it is a crisis for which the General Assembly itself is largely responsible.”
 To the Illinois Supreme Court, a crisis was no "excuse" for reform.

It is our obligation, however, just as it is theirs, to ensure that the law is followed. That is true at all times. It is especially important in times of crisis when, as this case demonstrates, even clear principles and long-standing precedent are threatened. Crisis is not an excuse to abandon the rule of law. It is a summons to defend it. [my emphasis]
New Jersey's Constitution (1947) doesn't have an equivalent pension clause except regarding judges. Thus, the New Jersey Supreme Court could make a totally different decision than Illinois'.

Hence, in Berg vs Christie the New Jersey Supreme Court allowed COLA suspension to be implemented under a doctrine that since COLAs were not unequivocally protected, COLAs were legally equivalent to a legislative appropriation.

As NJ Justice Jaynee LaVecchia wrote:
HELD: To construe a statute as creating a contractual right, the Legislature s intent to limit the subsequent exercise of legislative power must be clearly and unequivocally expressed concerning both the creation of a contract as well as the terms of the contractual obligation. In this instance, proof of unequivocal intent to create a non-forfeitable right to yet-unreceived COLAs is lacking. The Legislature retained its inherent sovereign right to act in its best judgment of the public interest and to pass legislation suspending further COLAs.
And so the COLA cuts were allowed to stand, saving New Jersey tens of billions over thirty years.

Some Illinois Democratic politicians like Rahm Emanuel have supported changing Illinois' constitutional protection for pensions, COLAs, post-retirement healthcare, and its pension formulas.

“Think about it. What kind of progressive, sustainable system guarantees retirees 3 percent annual compounded pay increases when inflation has been at basically zero and current employees have at times been furloughed, laid off, or received 1 percent raises?
“There is nothing progressive about 3 percent compounded raises for retirees and furloughs for workers. The mantle of progressivity must not just be more taxes on the wealthy, it must be more respect for our workers’ paychecks. I applaud our labor unions for being willing to fix this inequity in 2012 with me."
Although in 2013 the Democratic legislature and Democratic governor Pat Quinn did pass legislation to change pensions for Illinois and its localities, they haven't attempted to change the Constitution to allow changes to go into effect.

Changing the Illinois constitution has been blocked by Illinois' venal legislature and new Democratic governor Jay Pritzker, who instead seek to pass an insufficient income tax increase and also get the aforementioned federal bailout.

Chapter 78 in New Jersey was thus able to reduce future benefits for workers. Although Chapter 78 was passed in 2011, it made retroactive reductions in pension generosity for workers hired between July 1, 2007 and June 28, 2011. All workers, except judges, now had to pay more for their pensions too (the exception for judges was later authorized via constitutional amendment.)

New Jersey and Illinois are Both Fiscal Disasters, but Illinois has a Judicial Straitjacket that New Jersey Doesn't

There is no equivalent to this judicial mercy in Illinois. The only legal hope to cut benefits for retirees in Illinois would be Congressional action. The only legal hope to reduce unearned benefits is a state constitutional amendment, but that is blocked by the influence of public sector unions on the Democratic Party and the Democratic Party's entrenched majority.

Illinois predicament also demonstrates several problems of constitutions and the two-party system.

Illinois' pensions were not as underfunded in 1970 as they are today, and the delegates wrongly thought pension protection language would force future legislatures to fully fund pensions.  The people of Illinois, even if they opposed the pension clause, could not vote against it, since ratifying the Illinois constitution was an all-or-nothing decision, and the vote was a low-turnout December with only 37% participation.  Further, if the "earth belongs to the living," how can the people of 2020 in Illinois be in a suicide pact created in 1970?

The voters in Illinois also lack a realistic power to change Illinois' politics due to the perversions of the two-party system.  If a voter believed Illinois needed pension reform (which a majority of Illinoisians do support), but was horrified by the Trumpified Republican Party, that voter faces a dilemma between a corrupt state Democratic Party that would rather see East Saint Louis' services be further gutted than reduce pension obligations and a Republican Party that might be realistic on pensions, but is misguided on everything else.

Since Mitch McConnell made his foolish declaration about state bankruptcies, he's been rightly criticized for how stupid a general policy allowing state bankruptcies would be as opposed to federal grants to mitigate the Coronavirus Recession. However, attacking the disaster of state bankruptcies doesn't mean that Illinois isn't effectively bankrupt.  Illinois' debts are $52,600 per person and it has suffered six years of accelerating population loss.

Hence, the best hope for Illinois is federal action to give its governor and legislature the option of making emergency pension reductions.

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See Also:


Thursday, April 2, 2020

US Senate Apportionment and the Distortion of Federal Spending


I don't need to waste words describing how terrible the Coronavirus Epidemic is for the United States and how it is likely going to end the lives of tens of thousands of people.  I don't need to waste words  about how quarantine attempts to slow Coronavirus's spread has shut down the US Economy, decimating state and local finances and wrecking lives.

What I want to write about here is how sickeningly unjust the apportionment scheme of the US Senate makes the distribution of federal relief money and how the US Senate's idiotic rule of two-Senators per state means that residents of low-population states are getting DRAMATICALLY more federal assistance than residents of large-population states.

At the Constitutional Convention, all of the major Founding Fathers, including Hamilton, Madison, and Franklin, supported allocating Senate seats by population, since the intention was to form a republican government, a term which then meant majority rule, but in contradistinction to the direct democracy of Athens..  Hamilton called the notion that the states were equal "sophistry."  Madison said a Senate with equal-by-state representation "shocked every human feeling and justice."

It was only by blackmail by small state delegates, such as Gunning Bedford, Jr of Delaware, to re-invite Britain back into the colories, "the small ones would find some foreign ally of more honor and good faith, who will take them by the hand and do them justice" that induced what we unfortunately call the "Great Compromise," where the weaker chamber, to be known as the House of Representatives, would be allocated by population, and the more powerful chamber, to be known as the Senate, would be allocated on "equal suffrage."

Opponents of "equal suffrage," such as Franklin, Hamilton, Madison, James Wilson, George Mason, and even George Washington eventually accepted having two states per Senators, but the country they imagined was basically a free trade zone with an army. They never imagined the sprawling federal government we have now, where the federal government would have the primary fiscal responsibility for citizens' welfare, and even extend to areas like healthcare and education, which at the time barely had any governmental involvement at all.

And so this brings us to 2020, the Coronavirus Epidemic, and the Coronavirus Relief Act, whose $150 billion relief package for the states is as follows:

The $150 billion in the Coronavirus Relief Fund is mostly allocated by population, but with $3 billion reserved for U.S. territories and the District of Columbia and $8 billion set aside for tribal governments, along with a guarantee that each state receives at least $1.25 billion even if its population share would otherwise indicate a lesser amount.

Here's how the money breaks out.


July 2019 PopCoronavirus MoneyCoronavirus Money Per CapitaExtra Money or Lost Money Compared to Allocation by Population
Wyoming578,759$1,250$2,160$988,400,932
Vermont623,989$1,250$2,003$967,956,972
Alaska731,545$1,250$1,709$919,341,660
North Dakota762,062$1,250$1,640$905,547,976
South Dakota884,659$1,250$1,413$850,134,132
Delaware973,764$1,250$1,284$809,858,672
Rhode Island1,059,361$1,250$1,180$771,168,828
Montana1,068,778$1,250$1,170$766,912,344
Maine1,344,212$1,250$930$642,416,176
New Hampshire1,359,711$1,250$919$635,410,628
Hawaii1,415,872$1,250$883$610,025,856
Puerto Rico3,193,694$2,241$702$797,450,312
District of Columbia705,749$495$701$176,001,452
Idaho1,787,065$1,250$699$442,246,620
West Virginia1,792,147$1,250$697$439,949,556
Nebraska1,934,408$1,250$646$375,647,584
New Mexico2,096,829$1,250$596$302,233,292
Kansas2,913,314$1,250$429-$66,817,928
Mississippi2,976,149$1,250$420-$95,219,348
Arkansas3,017,825$1,250$414-$114,056,900
Nevada3,080,156$1,250$406-$142,230,512
Iowa3,155,070$1,250$396-$176,091,640
Utah3,205,958$1,250$390-$199,093,016
Louisiana4,648,794$1,803$388-$298,254,888
Wisconsin5,822,434$2,258$388-$373,740,168
Michigan9,986,857$3,873$388-$641,059,364
Ohio11,689,100$4,533$388-$750,473,200
Washington7,614,893$2,953$388-$488,931,636
Virginia8,535,519$3,310$388-$548,054,588
Minnesota5,639,632$2,187$388-$362,113,664
Illinois12,671,821$4,914$388-$813,663,092
Missouri6,137,428$2,380$388-$394,117,456
North Carolina10,488,084$4,067$388-$673,613,968
Georgia10,617,423$4,117$388-$682,075,196
Colorado5,758,736$2,233$388-$369,948,672
California39,512,223$15,321$388-$2,538,524,796
Pennsylvania12,801,989$4,964$388-$822,499,028
Florida21,477,737$8,328$388-$1,379,937,124
Texas28,995,881$11,243$388-$1,863,138,212
New York19,453,561$7,543$388-$1,250,009,572
New Jersey8,882,190$3,444$388-$570,749,880
Maryland6,045,680$2,344$388-$388,647,360
Alabama4,903,185$1,901$388-$315,239,620
Arizona7,278,717$2,822$388-$467,980,084
Indiana6,732,219$2,610$388-$432,962,988
Kentucky4,467,673$1,732$388-$287,388,196
Oklahoma3,956,971$1,534$388-$254,550,892
South Carolina5,148,714$1,996$388-$331,218,728
Oregon4,217,737$1,635$388-$271,417,124
Connecticut3,565,287$1,382$388-$229,509,724
Tennessee6,833,174$2,648$388-$440,594,648
Massachusetts6,949,503$2,673$385-$468,175,356
There is nothing unusual about the Senate forcing the House to accept unfair distribution of federal spending.  This is how federal block grant formulae typically work for ordinary expenditures in education, state grants etc. What is only unusual is the severity of the crisis that the Coronavirus Relief Act responds to.

The same ripoff is happening with Education Stabilization Fund moneys.



There is also a gratuitious deprivation of large cities of their fair share of Coronavirus Relief money.
Local governments with populations of 500,000 or more are also eligible for aid, and any aid they receive is subtracted from the amount otherwise available to their state’s government. This too is apportioned by population, but localities may only receive 45 percent of the amount associated with their population. 
By way of explanation, consider Chicago, with a population of about 2.7 million, representing about 21 percent of Illinois’ total population. Illinois is eligible for up to $4.91 billion in funding under the Coronavirus Relief Fund (see table below), and $1.33 billion of that is associated with Chicago’s population. Chicago, however, cannot claim all $1.33 billion. The city can claim 45 percent of it, or about $600 million, which would come out of the state’s cap.

Although Chicagoans would be eligible for state services, what is happening is that Chicago has 21% of Illinois' population, but it can get 12.2%, or $600 million, of Illinois' Coronavirus Relief Money.  If Illinois also distributes money to non-Chicago localities, Chicago is getting ripped off.

New York City has 44% of New York State's population (8.6 million out of 19.5 million), but it can only get 45% of its 44%, or 20% of $7.54 billion, or $1.5 billion.

This actually isn't the worst malfeasance of the Senate.  Here every state was guaranteed at least $1.25 billion, but sometimes the formula is that every state gets at least 0.5%, and then, after 25% of the money is allocated that way, is a population-based allocation used.

The US Constitution is THE Problem

Many Americans are cynical about our government, about outcomes, about waste, about corruption, but the tendency is always to blame our politicians themselves, or the media, or donor interest groups.

All of that has a place, but the Constitution itself is also a major problem is its numerous veto points, creation of an overly powerful executive branch, overly powerful Supreme Court, exceptional rigidity against amendment, and grotesque maldistribution of power between different groups of America depending on arbitrary lines drawn on maps known as "states."

Also, just as the original US federal government had almost no functions, we must also remember that the inequality of the Senate was not as severe in 1787 as today.  In 1787, states with a third of the (free) population elected half of the Senate, now states with 16% of the population do.   In 1787, Virginia had twelve times the population of Delaware, now California's population is about 70 times that of Wyoming.

Finally, some democratic comparison is necessary, and the US Senate

The so-called "Great Compromise," was neither great, nor a compromise.  The constant unfair distribution of federal spending is just one of the many unequal consequences we get from equal representation.

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