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Averting Fiscal Crises Requires Grandiose Reforms, and More Effective Budget Management - Pacific Research Institute

Averting Fiscal Crises Requires Grandiose Reforms, and More Effective Budget Management

The long-term consequences of irresponsible government spending – federal, state, and local – are quickly becoming near-term realities. That’s the bad news. The good news is that the worst of these consequences can still be avoided if politicians and governing bodies enact grandiose reforms, step up efforts to prevent budget mismanagement, and learn a few lessons from the private sector.

Grandiose reforms are necessary because too many federal, state, and local programs are unsustainable. As an example, state and local public pensions have insufficient resources to meet the retirement benefits offered to current, and future, pensioners. While the estimates vary widely – $1.1 trillion according to the Pew Charitable Trusts, or a much higher $6 trillion according to the American Legislative Exchange Council – analysts generally agree that large shortfalls loom.

Without reforms, the economic costs will be severe. In a 2016 study, I argued that California’s coming fiscal dilemma will require either a drastic 8 percent reduction in all other state spending without an offsetting reduction in the state’s tax burden, or, alternatively, the largest tax increase in the state’s history.

Averting this fiscal crisis will require major reforms. Helping to make reforms easier, the state public pension benefits are overly generous. As my study illustrated, the current pensions promised to teachers in California are 53 percent higher than the average pension that a teacher in the private sector with the same earnings profile can expect to have.

Rather than watch from the sidelines while California’s overly-generous benefit plans grow increasingly unaffordable, we should start by freezing the plans. All future benefits for public employees should be provided through 401(k) and other defined contribution plans, which are the benefits offered to most private sector workers. All currently accrued obligations should then be adjusted as necessary accounting for people’s age, years of service, and current retirement status.

Reforms are only part of the solution. Governments much also address the fiscal mismanagement that plagues many state-run programs. One avenue that should be explored is outsourcing.

Outsourcing non-core services is a common strategy used by private sector firms to increase their efficiency. The public sector should follow suit, wherever possible. The growing trend of outsourcing transportation services for local school districts exemplifies the potential benefits.

Nationally, about 35 percent of school districts outsource their bus services, because the core competency of public schools is educating children, not necessarily providing in-house transportation services. Evidencing the potential benefits, a study by the Mackinac center found that of the seven Michigan school districts that outsourced their transportation services in 2017, five have already reported savings from the contracts.

And, perhaps due to the efficiencies local school districts can gain, there has been tremendous growth in the number of local school districts that are outsourcing their transportation services. According to the trade magazine School Bus Fleet, the proportion of school bus fleets that are privatized has increased 9 percentage points between the 2007-08 school year and the 2012-13 school year.

While the benefits of outsourcing seem uncontroversial from a cost-benefit perspective, there have been calls to reverse these decisions due to unrelated issues. For example, following a week-long strike of bus drivers in Seattle, there has been a growing call to end the outsourcing of bus services. This objection does not make sense for many reasons.

First, government unions go on strike too. The recent strike of public school teachers in West Virginia ended after the Governor was forced to intervene. Insourcing school transportation services will, therefore, not eliminate the risks from future labor disputes.

Second, part of the benefits of outsourcing is the avoidance of costly capital outlays. If Seattle Public Schools were to end the outsourcing agreement for student transportation, it would have to spend hundreds of millions of dollars purchasing a fleet of buses, the land necessary to park and service the vehicles, and provide a pension and family health benefits to the bus drivers, many of whom are part-time. This reverses the benefits so many localities are gaining from outsourcing their busing services.

Third, and perhaps most importantly, the school system would give up the efficiency gains created when public schools focus on their comparative advantage (teaching) and outsource non-core functions to organizations that specialize in providing those services.

The problem of unaffordable government spending is quickly becoming a near-term problem, and far too many programs are fiscally unsustainable. Grandiose policy reforms and fiscally responsible management practices must be adopted to restore the government’s fiscal viability.

Read more . . .

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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