Borrowing From the Future = ‘The Wimpy Strategy’

Kentucky Senate President David L. Williams and Governor Steve Beshear are locking horns over Kentucky’s Medicaid budget. Beshear’s preferred plan is to simply borrow from next year’s Medicaid spending. The governor is confident that hundreds of millions of dollars in savings from the state’s new managed care plan will emerge and this year’s borrowing will be but a fleeting memory.

Even if those savings emerge, Beshear’s tactic might appropriately be called “The Wimpy Strategy.”

Popeye’s occasional sidekick, Wimpy, is known for offering to repay two hamburgers tomorrow in exchange for a mere one hamburger today. Wimpy is, in all cases, prepared to delay the day of reckoning in exchange for some temporary relief from his pronounced hamburger addiction.

For Beshear, it’s not hamburgers, it’s spending. And though this debate is about Medicaid, this isn’t the first time Beshear has found himself pushing off the difficult choices in favor of immediate gratification. Remember that in early 2008 he justified his bloated budget proposal by claiming that all would be well once the General Assembly legalized and taxed additional gambling in the commonwealth. Lawmakers rightly balked at Beshear’s insistence that the government needed that money more than the productive sector.

But before we declare David Williams a bold exemplar of fiscal conservatism in this struggle over Medicaid, ask this: Why is David Williams only content to cut $139 million out of state spending this year? Isn’t there a wasteful expo center, arena, industrial park, golf course or failing state park that should be on the auction block so the voluntary economy can have its capital back? The answer is clearly yes, but Williams seems content to let these issues fester … at least until after the election.

Eastern Kentucky Exposition Center May Close

Here’s how Kentucky’s state government attempted to sell the construction of the Eastern Kentucky Exposition Center way back in 2003-04:

Excitement is in the air as Pike County anticipates the limitless opportunities arising with the completion of the Eastern Kentucky Exposition Center. Situated in the center of downtown Pikeville, the Center is under construction with an anticipated completion in 2004. During construction, the $29 million project will have an estimated $30 million annual economic impact on the county and will create approximately 130 jobs.

Can you feel the excitement?! Well, it turns out that the center is about to close because of, get this, “lack of funding.” Apparently, having the state build and own the project wasn’t quite the boost that the operators thought it would be. To be fair, none of these people saw it coming. Let’s get some inconvenient truths out of the way that were brushed aside when those same people were pushing hard for the arena’s construction:

  • The East (or Eastern) Kentucky Expo Center has a seating capacity larger than Pikeville’s population.
  • When local officials were selling the idea to the public and state lawmakers, they predicted that the arena would compete with Louisville and Nashville for conventions.
  • Huntington, WV sits 50 miles east of Pikeville which is a more natural venue for any of the concerts that Pikeville claims its arena could attract.
  • The Bluegrass Institute’s Joel Peyton reported in 2005 or 2006 (the article linked is missing the publication date) that Pike County “Deputy Judge-Executive Karen Sue Ratliff told reporters that the county does not own the center and cannot afford to pay the cost of operating it.”

So the question has to be asked: Exactly why did no one expect precisely this kind of failure? From the Herald-Leader story:

Meanwhile, county officials are urging the state to take over more of the operation costs of the state-owned convention center and arena that opened in 2005.

The arena “is in danger of shutting its doors for good because of lack of funding,” Pike Judge-Executive Wayne T. Rutherford wrote in a letter to Gov. Steve Beshear on Nov. 29.

No, Mr. Rutheford. The arena is in danger of shutting its doors because there was never a market large enough to support it.

Here’s a modest solution for Kentucky to save some money. In exchange for giving the arena to Pike County (for free!), the Commonwealth of Kentucky will receive the naming rights to the facility: “Kentucky Public Works Failure #1.”

Moody’s: Kentucky’s Among Worst-Funded Pension Systems

Bloomberg:

Illinois in 2009 had 50.6 percent of the assets needed to meet its pension obligations to retired state workers, according to data compiled by Bloomberg. The other worst-funded states were Oklahoma at 56.1 percent, Kentucky at 58.2 percent, New Hampshire at 58.5 percent and Louisiana at 60 percent.

It’s worth noting that any figure you see that details the holdings of states relative to pension obligations usually entails using a discount rate (an assumed rate of return on assets) that is likely unrealistically high. When you assume that your assets will earn steady returns over the years, then your liabilities seem smaller than they really are. Kentucky is not alone in using these methods. Most states use them.

Steve Beshear Gets a C

Kentucky Governor Steve Beshear landed solidly in the middle of the pack on the Cato Institute’s report card on governors’ fiscal policies:

Governor Beshear pushed through a doubling of the state cigarette tax from 30 cents to 60 cents per pack and an increase in taxes on wine, beer, and liquor. He has focused on redesigning the state’s many tax credits, and he signed into law an expansion of those special interest giveaways in 2009. Beshear’s spending record is not particularly good. He proposed increases the past two years even though governors in many states were cutting spending because of the recession.

Here’s a related podcast.

Some of Beshear’s proposed spending increases depended on legalizing some forms of gambling in Kentucky. Beshear likely knew that the expanded gambling legislation was a dead letter before he proposed it, but he did it anyway. Kentucky does have a weak governor’s office, but that’s no reason to actively support new spending with no credible way to pay for it.

A Modest Proposal for Pensions?

Richard Riordan and Alexander Rubalcava have an op-ed today arguing that the central problem associated with state pensions are the weak incentives to “improve pension performance.” Presumably, they mean that pension returns have been anemic for the past decade and quite bad in the last couple of years and we just need to boost those returns.

But of course, that’s not the central problem with state pensions. The central problem is, in a sense, the maturity mismatch between the pledges to create and enhance benefits to retirees and the actual benefit payments themselves. Lawmakers have for years enhanced pension promises even as the unfunded liability has grown dramatically. Why? Because the short-term benefit to lawmakers of boosting benefits and excessive hiring far exceeds the political costs of the inability to pay down the road.

That mismatch has allowed lawmakers to reap political gains while letting the costs accrue to taxpayers years or decades down the road. Unfortunately for taxpayers, poor economic performance and a wave of retirements mean the bills are coming due sooner than expected.

But that’s really only half of the problem. Riordan and Rubalcava only make a passing reference to the fact that the expected (government-determined) rates of expected return are what pension funds use to determine the size of the liability. The higher the anticipated rater of return, the lower the anticipated liability and vice versa. The incentive problems don’t stop with lawmakers who like to arbitrage political reward from cost. Pension fund managers themselves have a strong incentive to make the liabilities look smaller than they are with a higher discount rate. That is a higher expected rate of return. So what can they do? They can hire consultants who will help them achieve that end. And if taxpayers are on the line for any failure to make adequate returns, that pushes managers to make risky bets with taxpayers’ money in hopes of achieving high returns with little risk.

But Riordan and Rubalcava don’t want the feds to merely bail out state pensions. No no no. They want the feds to only bail out state pensions that make significant changes to their structure, the most important of which is switching all new hires to 401k-style plans that limit the state liability and fix the mismatch problem between promises and payments. They analogize it to the Race to the Top money for education bureaucracies.

Let’s take that comparison seriously. Wasn’t Race to the Top just a handout to state Big Ed in exchange for, not implementing reform, but merely removing impediments to reform? That’s not really the same thing as requiring the implementation of change before providing funds, which is precisely the problem with a federal solution to growing pension liabilities. Any federal solution is unlikely to look like what Riordan and Rubalcava want and could easily do very little to solve the underlying problem.

First, a federal bailout conditioned on switching every new-hire to a 401k is, at best, troubling to those who just want the state to get out of the retirement business as quickly as possible. Second, wouldn’t a credible pledge from the feds to never ever ever ever offer up a pension bailout do as much to get states to make much-needed reforms? Race to the Top demonstrates that the feds face the same public choice pressures that state lawmakers face. After all, Race to the Top didn’t really get states to actually do much of anything. Should we really believe that a federally designed solution to nudge state pensions in a particular direction will really be more effective than the very real threat lawmakers and taxpayers face: being forced to make gut-wrenching choices among paving highways, educating kids, public safety and paying pensioners?

Fancy Farm 2010

For any politico, there may be nothing more refreshing and raw than the Fancy Farm picnic held each year in Western Kentucky. I’ve tried to describe it to people before, but experience it during an intense election cycle and you’ll see that the event defies clear explanation.

C-SPAN thankfully was able to attend this year. Have a taste.

Update: Via a commenter, I learn that C-SPAN used the KET feed.

BBQ in KY

Tyler Cowen needs your recommendations for food in Lexington, Ky. He’ll be visiting in April.

Not being particularly impressed with much of the food I’ve had in Lexington, my recommendation was the best mom and pop BBQ place he can find.

Your thoughts? I’m considering where to live when I return to Kentucky (someday) and good food is critical.