How We Pay for the Public Sector Justin Marlowe PUBPOL 522 – Public Financial Management and Budgeting Autumn 2017

Recall our Learning Objectives Identify the revenue sources used by the federal, state, and local governments Contrast government revenue sources with non-profit revenue sources like donations and earned income Identify public organizations' main spending areas, and the division of that spending across the government, non-profit, and for-profit sector Show how similar governments pay for similar services in quite different ways Identify some of the "macro-challenges" that will shape public organizations' finances well into the future

Pop Quiz #1 How much money does the State of Washington spend each year? How much money does the City of Seattle spend each year? How much money does Medicare (federal government-provided health insurance for the elderly) spend each day? What is Washington State’s largest non-profit organization, and how much does it spend each year?

Where the Federal Governments’ Money Comes From, and Where it Goes

Where Other Governments’ Money Comes From, and Where it Goes State governments Revenue: Income taxes, sales taxes Spending: “Medication, Education, and Incarceration” OR “Eds, Meds, and Beds” City governments Revenue: Property taxes, local sales taxes Spending: public safety, parks County governments Revenue: property taxes, local sales taxes Spending: courts, elections, public health, rural roads Special districts Revenue: user charges, property taxes, intergovernmental grants Spending: schools, electricity, water, sewer systems, public transit, airports

What’s a “Fair” Tax?

Largest Federal Government Tax Expenditures in FY 2015

Where Non-Profits’ Money Comes From

Where Non-Profits’ Money Goes

Where Non-Profits’ Money Goes

Pop Quiz #2 What percentage of live births in Washington State are paid for by Medicaid? Live births paid for by Medicaid account for what percentage of Washington State’s total budget? In three Washington counties, Medicaid pays for more than 70% of live births? Which counties are they?

The Federal Government’s Structural Deficit Source: Ernst & Young, OMB

Drivers of the Federal Government’s Structural Deficit Source: Congressional Budget Office

Federal Government Debt and the Deficit Source: Congressional Budget Office

Medicaid Spending by Population Source: Kaiser Family Foundation

Medicaid Spending by Population Source: Kaiser Family Foundation

C + I = B + E The Pension Problem – How are Pensions Calculated? Where: C = Contributions; from both an employer and an employee I = Investment Earnings; pension system assets are invested B = Benefits; money paid to retirees in retirement E = Expenses; administrative costs to run the pension system

The Pension Problem – What’s a “Defined Benefit” Many state and local government retirees earn a “defined benefit” pension Defined benefit – Retiree is guaranteed a retirement benefit from retirement until death Defined contribution – Employer guarantees a contribution Annual Required Contribution (ARC) – Required level of “C” given assumptions about “I”, “B”, and “E”; usually from a government’s annual or bi-annual budget Actuarial Accrued Liability (AAL) – An estimate of “B” determined by an actuary; reflects the benefit level, number of retirees, retirees’ health risk profiles, etc.

The Pension Problem – What if the Equation Doesn’t Balance? If C + I < B + E, the pension plan has an unfunded actuarial accrued liability (UAAL) State and local governments combined UAAL is around $1.5 trillion Most pension systems are in reasonably good shape, but there are a few problem children Same concepts apply to other post-employment benefits (OPEB) like retiree health care and disability insurance Most OPEB is unfunded According to Pew Research, state and local government combined “net other post-employment benefit obligation” (NOPEBO) is $1.75 trillion

The Pension Problem: States Source: Rauh (2016)

The Pension Problem: Cities Source: Rauh (2016)