45 posts categorized "Government"

Correct me if I’m wrong: State corrections spending up

States will spend $40 billion to incarcerate and supervise offenders in fiscal year 2014, according to a new report by the National Conference of State Legislatures. That’s 2.5 percent higher than the previous fiscal year, but there is a wide divergence in corrections spending among states.

North Dakota, for example, is seeing the second-highest spending increase this year among states, at 8.2 percent (see Chart 1), according to the NCSL report. South Dakota and Minnesota were other district states that saw costs rise faster than the national average.

Corrections CH1 -- 4-1-14

The reason for North Dakota’s big increase is largely tied to its booming economy, which is drawing many new people to the region, especially among a demographic (younger males) more prone to have run-ins with the law.

Data on prison population and other corrections activity are not as up to date as budget figures. But leading up to this year, North Dakota’s corrections system was seeing increased pressure. The state saw its prison population increase 25 percent from 2003 to 2009, a trend that has subsided somewhat more recently, rising 3.5 percent from (fiscal years) 2011 to 2013, according to the state’s Department of Corrections. But the number of offenders on parole or probation (and needing supervision) has risen 12 percent from June 2011 to June 2013 (see Chart 2).

The mix of inmates housed has also changed, with a sharp rise in violent offenders and an increase in sex offenders, while the number of inmates with drug offenses has declined considerably (see Chart 3; 2012 data are the most recent available). Among drug offenders, the number incarcerated for drug dealing has risen slightly (8 percent), while the number in prison for simple possession has been cut almost in half.

Corrections CH2-3 -- 4-1-14

A budget breather: FY2013 more favorable to state budgets

State lawmakers have the difficult task—aided by forecasts—of setting budgets based on expected tax revenues and expenditures for the coming year. Changing economic conditions mean they come close but often miss the mark, sometimes substantially.

In fiscal year 2013 most Ninth District states missed on the favorable side, with higher revenues and lower expenditures relative to the approved budget (see Chart 1).

State budgets CH1 -- 3-25-14

Much of the higher revenue came from rising individual and corporate income tax collections. For instance, Minnesota and Montana saw general fund revenues exceed the budget by $500 million and $244 million, respectively. In both states, better than 90 percent of the variance came from higher corporate and individual income tax receipts. In the case of North Dakota, income tax collections were up 13 percent ($169 million) over the 2011-13 biennium.

On the expenditure side, public spending was also lower than budgeted in district states. A large part of the savings came from lower expenditures on health and human services. In Minnesota, for example, spending by the state’s Department of Human Services was $201 million lower than budgeted; more than two-thirds of that savings came from the Medical Assistance program. South Dakota’s actual expenditures fell $33 million short of budgeted figures, almost a third of which came from lower-than-planned spending by the Department of Social Services.

Savings in North Dakota, by contrast, came from the Department of Transportation, where expenditures were about $160 million (60 percent) lower than budgeted. The only district state that did not see expenditures come in lower than budgeted was Montana. General fund expenditures there exceeded the original budget by $160 million, most of which came from higher spending on education.

Many of the district’s larger cities have also experienced better-than-expected finances in fiscal 2013 (see Chart 2). Billings, Mont., and Sioux Falls, S.D., have both posted higher revenues and lower expenditures than budgeted. Though FY2013 results are not yet out for Minneapolis, the largest city in the district expects actual revenues to exceed budgeted amounts by $17 million based on year-to-date Q3 data.

Going forward, growing local economies are leading to higher revenue projections. Approved budgets for FY2014 show higher general fund revenues for St. Paul, Sioux Falls and especially Minneapolis, which expects budget revenue to increase by $95 million, or 26 percent.

In all of this analysis, it is important to keep in mind that budget versus actual comparisons are based on the cash method of accounting, which may not indicate the true strength of state finances if, for instance, large amounts of debt have been issued or major capital projects started during the fiscal year.

Even taking this method into account, state finances have clearly improved in 2013. One measure is net position, which is the difference between a state’s assets and liabilities, including capital assets and long-term obligations. Changes in net position indicate whether the financial position of the state is improving or deteriorating, and in FY2013, all district states posted positive increases in their net positions, particularly North Dakota and Minnesota (see Chart 3).

State budgets CH2&3 -- 3-25-14

March madness: ACA enrollments racing to sign-up goal

The March 31st deadline to sign-up for private health insurance plans as part of the Affordable Care Act is fast approaching, and enrollments in some states are sprinting toward their projected goals while others are lagging, according to data released last week by the U.S. Department of Health and Human Services.

As of March 1, enrollments in Michigan and Wisconsin are at 90 percent of enrollments projected by HHS before the new law’s launch (see chart). In contrast, fewer than 7,000 people have enrolled in South Dakota, or just 36 percent of its 19,000 projection. Minnesota is the only district state that constructed its own health plan exchange (all others are using the federal healthcare.gov exchange). Enrollment in private plans to date through the MNsure exchange was just 48 percent of the goal of 67,000.

States and the federal government are also keeping a close eye on the number and proportion of young people signing up. For health insurance markets to work efficiently, the number of younger (and healthier, actuarially speaking) enrollees has to balance out the number of older, less healthy enrollees. It was originally estimated that 18 to 34 year olds would make up 35 to 40 percent of all enrollees. So far, it’s just 25 percent, and has remained fairly consistent in monthly reports. Among district states, only about one in five Wisconsin enrollees are in this young age bracket, while South Dakota has one of the highest rates, at 29 percent.

ACA March update -- 3-17-14

Unemployment insurance: Slowly mending in most district states

While unemployment rates continue to fall, if slowly, employers in many states are still grappling with higher tax rates for unemployment insurance (UI), which fund unemployment benefits in each state. Recent data from the U.S. Department of Labor suggest a mixed bag of improvements this year among Ninth District states.

Employers pay UI taxes for every covered worker on payroll, but every state does things a little differently. For example, the amount of income subject to UI taxes varies widely among states. In Michigan, employers pay UI taxes only on the first $9,500 of wages paid. In Wisconsin, it’s $14,000, and in North Dakota, almost $32,000 (see Chart 1). As a result, UI tax rates tend to be inversely related to how much income is subject to UI taxes, with Michigan’s rate the highest and North Dakota’s the lowest (see Chart 2). Higher UI rates tend to reflect benefit generosity as well.

But the direction of UI rates are heavily influenced by each state’s economy, and the Great Recession gave UI systems in most states a one-two punch: It put many out of work, thus greatly increasing unemployment benefit spending; it also lowered overall employment, which lowered the amount of UI taxes coming into UI trust funds (which pay unemployment benefits). As a result, UI tax rates on covered employees had to go up for most UI systems to maintain adequate cash flow during the recession and subsequent recovery.

The greatest increases in UI tax rates came between 2009 and 2011, once the full effects of the recession had settled in and states had exhausted their UI trust funds. Since then, average UI tax rates have moderated; half of district states saw a slight decline in 2013 as a percentage of taxable wages, and the other half increased, with Michigan seeing a significant rise (see Chart 2).

In the Dakotas, strong economies and high job growth, coupled with low unemployment and modest jobless benefits, have pushed UI tax rates to exceedingly low levels (see Chart 2). Wisconsin’s rate has also started to bend lower. But rates for Minnesota, Montana and especially Michigan have continued to increase. (Technically, only the northwestern portion of Wisconsin and the Upper Peninsula of Michigan are in the Ninth District, but the whole of both states are included in this analysis.)

UI rate charts 1-2

In some ways, the ultimate cost of UI taxes to state businesses is easier to see as a percentage of total wages. Here, the rank among district states still generally holds, but the Dakotas set themselves off even further for the low cost of their UI programs, while other district states bunch more tightly together (see Chart 3).

There are other good-news stories outside of the Dakotas. While Minnesota’s UI rates have continued to increase in 2013, the state has managed to wipe out a $770 million loan from the U.S. Treasury that it needed to keep paying unemployment benefits a few years ago. Wisconsin has done that one better: UI rates inched down this year, and though the state UI trust fund still has a $300 million loan with the federal government, that’s down from $1.4 billion just two years ago.

(Update: On Tuesday, November 19, the Minnesota Department of Employment and Economic Development announced that UI rates will drop in 2014, thanks to growth of the state UI trust fund to $1.2 billion. It's  estimated the move will save state businesses almost $350 million in UI taxes.)

UI rate charts 3

 

After snowstorm, ranchers still surveying damage

Ranchers in the western Dakotas who were hit hard by a freak fall blizzard got some welcome news Tuesday—they can get some assistance from the federal government while they wait to find out if more aid is on the way.

For readers who are unfamiliar with the story, a little background: In early October, Winter Storm Atlas dumped several feet of snow on some parts of South Dakota, North Dakota, Montana and Wyoming. The storm came on the heels of heavy rains that left grazing lands a muddy mess, and many cattle were left exposed to a quick freeze and extremely high winds before they had a chance to grow thicker winter coats.

Reliable estimates of the number of cattle killed due to freezing, drowning or trampling aren’t available yet, but early estimates suggest that the number is easily in the tens of thousands. Anecdotal reports indicate that the devastation varied widely; some ranchers were barely affected, while others may have lost their entire herds.

The damage assessment itself has been complicated and delayed by muddy conditions created by melting snow. Immediately after the blizzard, South Dakota Gov. Dennis Daugaard announced an executive order waiving the standard requirement that ranchers dispose of carcasses with 36 hours under normal conditions. That waiver was set to expire on Friday, but was extended this week until the end of November.

Ranching is big business in the region—South Dakota is the nation’s fifth largest beef producer, and the state has five cattle for every one person. Grown cattle sell for $1,400 to $2,000. Added to cattle losses are the cost of cleanup and losses due to animal injury or sickness, all which will have a major economic impact on the state.

The other tough part about the timing of the storm is that it came during the federal government shutdown, delaying any action on a possible disaster declaration. In addition, funding for livestock disaster relief programs has expired because of the holdup over the passage of a federal farm bill.

However, on Tuesday USDA Under Secretary Michael Scuse announced that ranchers can apply for assistance under the Environmental Quality Incentives Program, a conservation subsidy that will help them pay for carcass removal and infrastructure repair.

This story will continue to develop as the extent of the destruction becomes clearer. The fedgazette Roundup will be following it, so expect updates in the future.

Black fiscal gold: North Dakota oil taxes expected to keep pumping

In the midst of a federal government shutdown over raising the debt ceiling, it’s hard not to stop and gawk at North Dakota’s fiscal position stemming from rapidly rising oil and gas production in the western part of the state.

As recently as the 2003-05 biennium, oil and gas production taxes totaled just $120 million. A decade later, this tax revenue is expected to hit $5.2 billion in the current biennium through fiscal year 2015.

Comparatively little of that money—$300 million, by state statute—goes to the state general fund for lawmakers to spend as they please. Property tax relief has also been championed in recent budgets, but allocations for this priority remained unchanged at $342 million despite the rise in oil and gas tax revenue.

North Dakota has taken the unique step of funneling a significant amount of oil and gas taxes to permanent trust funds. This biennium, the state expects to divert $2 billion toward the Legacy and the Common Schools trust funds and does not include several hundred million in expected royalties from production on state lands that will also go to the school trust. (For more background and discussion on permanent trusts in North Dakota and other top energy producing states, see the recent fedgazette article, “Saving for a rainy, oil-free day.”)

But there was still plenty left over to finance new roads, schools and other infrastructure to deal with breakneck development across the Bakken oil-producing region. But rather than dramatically increase departmental budgets, the state has preferred to allocate money to special-use funds (which can be tapped for a variety of purposes), and to send more money directly to local governments to deal with local needs. These allocations also saw the largest increases in the current state budget. (For more on the fiscal trends among North Dakota local and state governments, see “Congratulations on your oil boom” in the July fedgazette.)

This tax revenue shows little sign of slowing. In late September, Department of Mineral Resources Director Lynn Helms told an audience of industry and local government officials that he expects the state’s daily oil production will double to 1.6 million barrels by 2017.

Oil & gas allocations -- 10-8-13

City employment: Help wanted, maybe

While the evidence is modest, there are small signs of recovery in public employment, at least among some larger Ninth District cities.

Public employment is typically quite stable over time. During the Great Recession, it lagged the downward spiral of private employment thanks largely to the federal stimulus of 2009. Once those funds to local governments were spent, employment levels started falling across the nation and district and continued through 2012 (see January fedgazette for more discussion).

With many public budgets now rebounding, or at least getting out of serious deficits, some local governments appear willing to entertain the idea of adding staff. Employment figures were investigated for larger cities in the Ninth District with employment levels over 200 (the list is not exhaustive, as not all cities post recent budgets or employment figures online).

Among 20 cities with available data, employment estimates for fiscal year 2013 show the job bleeding has stopped, at least temporarily, and for some (see Chart 1). The combined employment of the 20 cities grew 0.4 percent—70 jobs—in FY2013 compared with a loss of about 275 jobs over the previous two fiscal years. Bismarck, N.D., saw easily the highest job growth, at 4.2 percent, but eight other cities saw modest growth, including both Minneapolis and St. Paul.

But it appears that many local governments are not quite out of the fiscal woods yet. Two cities saw no growth, and the balance of 18 cities was split evenly between positive and negative job growth in FY2013 (see Chart 2). Grand Forks, N.D., took the biggest hit, as city employment dropped 1.4 percent, according to city budget figures.

William Thomas, Minneapolis Fed intern, contributed data to this report.

  City employment charts 1-2 -- 7-23-13png

 City employment table (2) -- 7-23-13

A leaky drinking water system

The heat of summer is probably the best time to let you know your drinking water infrastructure is badly in need of some upgrades.

In 2011, the Environmental Protection Agency began a nationwide assessment of drinking water systems, randomly surveying more than 2,700 medium and large community water systems. The survey collected data on capital improvement projects that system respondents deemed necessary over the coming 20 years. Improvements included replacement or rehabilitation of existing infrastructure due to age or deterioration, as well as new or expanded infrastructure necessary for current population needs or to comply with regulatory requirements.

Last month, the EPA released its final report, which estimated nationwide needs of $376 billion, a slight increase in the amount identified in a similar 2007 survey ($369 billion). Among Ninth District states, the report pegged capital investment needs for Minnesota and Wisconsin at $7 billion and $6.7 billion, respectively. (These were the only district states with enough surveys to allow for a state-based breakdown.) Needs in Minnesota rose more than 8 percent from the 2007 survey, while Wisconsin drinking water needs rose by almost 2 percent.

The report broke down needs by system size as well as capital investment categories (distribution, treatment, etc.). The needs of the two states were very similar in terms of categories—for example, the majority of investment needs in both states lie in transportation and distribution systems (see Chart 1). But Minnesota has a larger need among medium-sized drinking water systems (see Chart 2).

Drinking water -- 7-17-13

The economic impact of closing Minnesota's achievement gap: A theoretical construct

An education achievement gap by race and income has long persisted in the nation and in Minnesota. While there is a clear moral argument for closing the gap, there are some compelling economic ones as well.

Differences in high school graduation rates and achievement scores between white students and Native American, black and Hispanic students in Minnesota are some of the largest in the country. The chart below shows a substantial difference in average math scores of white and black eighth grade students since 2003.

Achievement gap charts -- 4-12-13

If test scores of black and Latino students and low-income students could be raised to those of white and higher-income students, presumably graduation rates would increase, as would the overall skills of the workforce, leading to productivity gains and stronger economic growth. But by how much, and what net effect would it have for closing these gaps in Minnesota?

A 2009 McKinsey report, using a methodology developed by Eric Hanushek in a 2008 study in the Journal of Economic Literature, projects that national GDP in 2008 could have been 2 percent to 4 percent higher had the United States bridged the racial achievement gap by raising the performance of black and Latino students to that of white students by 1998 after a successful 15-year reform period. The report estimates that GDP could have been 3 percent to 5 percent higher had the United States closed the income achievement gap by raising the performance of students with household incomes below $25,000 to that of students with higher household incomes.

The same framework discussed in the McKinsey report was applied to Minnesota using National Assessment of Educational Progress (NAEP) data for the last five survey years. Closing the racial achievement gap for eighth grade students in Minnesota would improve the state’s overall average math scores by about 2 percent; closing the income achievement gap would improve average math scores by about 3 percent.

Using Hanushek’s estimate – that long-run GDP growth rate increases by 1.3 percentage points per standard deviation improvement in test scores (about 0.6 percentage points per 10 percent increase in average test scores) – closing the achievement gap in Minnesota would translate into a 0.1 to 0.3 percentage point increase in the long-run economic growth rate.

Even a small change in a growth rate over time adds up. For example, if a hypothetical 15-year reform plan could close the achievement gaps, the level of Minnesota’s GDP would diverge from trend, raising the GDP level by 1 percent or more after 30 years and by more than 3 percent to 6 percent after 50 years (see table below).

Achievement gap table -- 4-10-13

In terms of dollars, these increases translate to a few hundred million dollars per annum after 15 years from the start of the reform period to a couple of billion dollars after 30 years to more than $10 billion after 50 years. In 2011, Minnesota’s real GDP was $282 billion. However, caution should be used with these projections because it’s unclear whether Hanushek’s estimate applies at the state level.

The calculated economic impact of closing the achievement gap in Minnesota is smaller than the national estimates by McKinsey. One explanation is the lower percentage of black and Latino students in Minnesota (22 percent) relative to the national average (45 percent). Likewise, low-income students also comprise a smaller percent of population in Minnesota than in the nation.

Another explanation could be different assumptions used in McKinsey’s and Hanushek’s models. Although details are not clear, the McKinsey report seems to assume that after the 15-year reform period, the entire workforce achieves the projected gains in cognitive skills commensurate with the closing of the achievement gap in test scores. Hanushek’s paper assumes a more gradual displacement of the existing workforce with higher-quality graduates. Correspondingly, estimates for Minnesota using this assumption yield a smaller impact of bridging the gap.

Even if the economic impact of closing the gap is estimated to be smaller in Minnesota than nationally, it is by no means a trivial one. As anyone planning a retirement learns, small changes in growth rates can have a big impact on the future value of investments, more so for longer-term investments.

Furthermore, this analysis doesn’t take into account benefits to government from closing the achievement gap, such as reductions in remedial education and crime costs, and eventually higher tax revenue, nor does this analysis estimate the cost of a 15-year education reform. Both of these data points are needed to assess whether the government would achieve a positive rate of return from investing in education reform. An analysis by Henry Levin and colleagues suggests that investments in early childhood education and some reforms for school-age children do just that.

And, finally, this is not the only achievement gap whose closure would likely lead to faster economic growth. Nationally, for example, Asian students have the highest average test scores. If, hypothetically, educational reform could boost the performance of white students to the level of Asian students, overall average math scores would increase by about 2 percent, with about a 0.2 percentage point increase in economic growth. Furthermore, if test scores of all non-Asian students were raised to the average of Asian students, average math scores would increase by over 6 percent, with about a 0.6 percentage point increase in economic growth, almost 70 percent larger than the effect of closing the black-Hispanic and white achievement gap. This particular analysis, however, isn’t relevant to Minnesota, where average test scores for Asian students are lower than both Asian students nationwide and Minnesota white students.

Wisconsin public pensions: Retirees gasping, taxpayers exhaling

When the Wisconsin Retirement System released its annual annuity adjustment for pensioners earlier this month, members groaned while taxpayers breathed a sigh of relief.

The WRS is the ninth largest pension fund in the country. It is also among the country’s best funded plans in terms of long-term assets and liabilities; since 2004, its funding ratio has been near 100 percent. Yet starting May 1, certain WRS retirees will see their monthly checks fall by almost 10 percent—unheard of among the millions of public sector pensioners. In fact, it’s the fourth consecutive year of annuity cuts for some retirees. There are several sources behind this seeming financial contradiction. But the most important is that WRS retirees assume the large majority of investment return risk.

Along with worker and employer contributions, pension funds depend heavily on investment returns on their assets. Pension plans assume a certain rate of return—7.2 percent for the WRS, while many others hover around 8 percent—to project member annuities upon retirement. Most pension plans also average returns over five years to “smooth” volatility. But two of the past five years’ returns have fallen well short of the WRS benchmark, including 2008, when two WRS pension funds lost roughly 30 percent of their combined value (see charts).

WRS two charts -- 3-13-13

When investment returns fall short of this benchmark, all other things equal, unfunded liabilities accrue. For most plans, this gap typically requires additional contributions from government employers (via taxpayers) and often existing workers; by and large, retirees are financially exempt.

In sharp contrast, WRS retirees bear the majority of investment risk and therefore reap both more benefits and more hardship. Unlike many public pension plans, the WRS plan offers no automatic cost-of-living adjustment. Instead, it uses investment returns to pad monthly pension checks on a compound basis. Such a policy worked well for retirees during the 1990s, when heady investment returns led to annual pension adjustments (called dividends) averaging almost 7 percent.

But when investment returns go south—which they did during the 2001 and (especially) 2008 recessions—those dividends can be clawed back to ensure the plan’s long-term financial solvency. But a retiree’s annuity can never go lower than the original amount established at retirement. The investment drop in 2008 was so severe—and compounded by a weak 2011—that the WRS has been forced to take back dividends from its Core Fund (which funds roughly 90 percent of annuities) for four consecutive years. (The smaller Variable Fund has no such annuity floor, and investment gains and losses are fully recognized each year.)

The amount of annuity decrease for a retiree depends on the dividends previously earned. Given three previous years of negative adjustments, the Wisconsin Department of Employee Trust Funds anticipates that close to half of all WRS retirees will see no downward adjustment this year because they have no dividends left to take and are back at their original retirement annuity. This year’s clawback also was larger on a percentage basis because of the shrinking pool of retirees with dividends remaining. After this year’s adjustments, virtually anyone who has been retired since 2000 will be back to his or her original annuity level, according to WRS's latest actuarial report.

The good news for retirees is that this is the last year that 2008 returns will be averaged into investment returns for the Core Fund. Barring another market downturn, retirees should see a little more on their monthly checks next year.

 

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