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

2. 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

3. 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?

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

5. 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

6. What’s a “Fair” Tax?

7. Largest Federal Government Tax Expenditures in FY 2015

8. Where Non-Profits’ Money Comes From

9. Where Non-Profits’ Money Goes

10. Where Non-Profits’ Money Goes

11. 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?

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

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

14. Federal Government Debt and the Deficit
Source: Congressional Budget Office

15. Medicaid Spending by Population
Source: Kaiser Family Foundation

16. Medicaid Spending by Population
Source: Kaiser Family Foundation

17. 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

18. 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.

19. 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

20. The Pension Problem: States
Source: Rauh (2016)

21. The Pension Problem: Cities
Source: Rauh (2016)