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Long Awaited Criminal Justice Reform Bill Expected This Week

Mike Klein

Georgia’s criminal justice reform initiative has flown stealth-like under the radar since November when a special council delivered its report.  That will change soon, perhaps this week, with the introduction of legislation that will propose the greatest change since get tough policies enacted in the 1980’s and 90’s caused the Georgia prison population to swell beyond its walls.

What you should expect from legislation – we are hearing it could be almost 100 pages long – was the focus of an American Legislative Exchange Council criminal justice reform panel held last week in Atlanta.  “Eighty million dollars to build one prison in Georgia – that is the cost of bricks and mortar, not the cost of staffing,” said Georgia Court of Appeals Judge Michael Boggs.

“This may have come about as the result of a fiscal crisis in this nation and in this state.  Maybe that’s why we got where we got, because we recognize we don’t have the money,” said Boggs, who serves on the state special council.  “But at the end of the day, these are laudable goals.”

The goals to which Boggs referred are primarily these: Slow down exponential growth in the state prison population, treat rather than incarcerate people who have addiction issues but not criminal issues, do both in such a way that public safety is not threatened, reinvest dollars that are currently going into prisons into treatment programs, and then continually re-evaluate it.

(Click here to review the Special Council on Criminal Justice Reform report.)

Criminal justice system reform has become one of the better examples of national political bi-partisanship as states realize budgets can no longer accommodate ever expanding corrections costs. Georgia’s annual expense has swollen from $500 million per year to $1.1 billion in 20 years.  Almost 20 states have enacted or are currently considering substantial reforms.

ALEC, the Pew Center on the States, the National Conference of State Legislatures and other public policy organizations are all focused intently on criminal justice.  Last week the Georgia Public Policy Foundation published a state-focused issues analysis that is available online.

Criminal justice reform has its own rock stars – Texas Republican state Rep. Jerry Madden and his Democratic counterpart Sen. John Whitmire.  Starting five years ago they put conventional partisan politics aside to craft a new corrections model that enabled Texas to slow down prison population growth and reduce anticipated state outlays by hundreds of millions of dollars.

ALEC brought Madden to Atlanta – one of several visits he has made since last year to confer with state legislators, the judicial branch and others who are designing Georgia justice reform.

“How many of you would rather spend money on things like schools and highways or tax reduction or something other than spending it on building prisons?” Madden said.  “It is easier for a Red State to do this than a Blue State.  It’s easier because nobody thinks Georgia is soft on crime.  I don’t believe it and nationally nobody is going to believe it.” (Madden discussed criminal justice reform at the 2010 Public Policy Foundation legislative briefing conference.)

Georgia’s prison population – less than 30,000 twenty years ago – is anticipated to reach at least 60,000 within five years if nothing about the state criminal justice system changes.  Prison system expense is the second fastest growing segment of the state budget behind Medicaid.  “This is sucking up a lot of our money,” state Sen. Bill Cowsert told the ALEC gathering.

Two popular get-tough ideas are being challenged; A) Do the time, do the crime, and; B) Lock them up, throw away the key.  That is because another idea – you can rehabilitate almost anyone by having them do time – has proven wrong.  “They don’t learn their lesson,” Cowsert said. “It is not working to just lock them up and throw away the key for a certain length of time.”

Georgia has a 30 percent recidivism rate – almost one-third of released inmates return to prison within three years of their release date.  Or to consider that from another angle, our $1.1 billion annual corrections investment has a 30 percent failure rate.  Recidivism rates are lower – between 7 and 13 percent – when approved offenders participate in accountability courts that are most often used with personal drug use offenders who are not considered a threat.

“We all know you don’t throw water on a grease fire,” Rep Jay Neal told the ALEC audience.   “Now we know you don’t throw the addict into prison and think you’re going to correct behavior.”  Mandatory treatment combined with very strict – sometimes electronic — monitoring and drug testing are possible options with incarceration still on the table for noncompliant offenders.

Georgia currently has just 33 accountability courts; one reason is because public and private sector treatment options are insufficient.  “You can’t have a felony post-adjudication drug court without having treatment options,” said Judge Boggs.  “In rural Georgia, that’s hard to come by.”

The state also has just 13 day reporting centers capable of serving about 200 people each.

Governor Nathan Deal’s criminal justice reform cards are on the table in his proposed budget: $35.2 million for additional prison beds, $10 million for accountability courts expansion, $5.7 million to convert three pre-release centers to residential substance abuse treatment centers and $1.4 million to fund additional parole officers.

Much greater use of parole is another idea whose time might have come.  Georgia has 22,000 on parole, dramatically fewer than its 156,000 on probation population.  Mandatory sentences that must be fully served are the reason for the disparity.  But in the wake of do the crime, do the time sentencing inmates have been routinely released without post-prison support.

“We lock them up with criminals and when they get out five years later they’re still addicted, except now they have a felony on their record which makes it more difficult for them,” Neal said, “and they spend the last five years in graduate school learning how to be a true criminal, and they weren’t a criminal when we sent them there.  Then we wonder why the recidivism rate continues to be a problem.”

Neal said slightly reducing some prison sentences and combining that with mandatory parole would be preferable to simply releasing inmates into the community “with no guidance, no direction, no accountability, no supervision, you’re just turned loose.”

The special council on criminal justice reform worked for six months. “Criminal justice reform is not a one-time fix in this session of the General Assembly,” Judge Boggs acknowledged.  “It is an ongoing process.”  In fact, Governor Deal kept the council intact for further unspecified work ahead.

“It’s probably not going to be a package where everybody is going to say I like everything in here,” state Rep. Neal said.  “We have to be careful that we don’t let individuals who don’t like one piece convince us that because of that one piece it’s not a good package.”

“The last thing we want to do is be light or easy on crime,” state Sen. Cowsert said. “We have to keep public safety as our top priority.  We want to lower the crime rate in the process and we want to do this in a fiscally responsible manner.”

(Mike Klein will moderate a criminal justice reform conversation on Saturday, February 25 at the Georgia Bar Media and Judiciary Conference in Atlanta.  Panelists include state Supreme Court Chief Justice Carol Hunstein, state Rep. Wendell Willard and Douglas County District Attorney David McDade.)

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February 20, 2012 Posted by | Uncategorized | , , , , , , | Leave a comment

Do Public Sector Pensions Teeter on the Edge of Financial Collapse?

Mike Klein

What do you know about your pension plan?  Is it defined benefit, defined contribution or some hybrid version?  Does your employer match your contribution?  Is it portable, meaning you take it along when you change jobs?  Who makes the investment choices?  How much do you have in bonds, equities and cash?  What about the municipal bond market downturn; did that cause a volcano inside your pension plan?  Do you even understand how to read the statement?

Most people are not financial wizards but today almost everyone is more personally responsible than earlier generations for knowing something about retirement and pension plans because the good old days of guaranteed lifetime income have come and gone in nearly all professions.

“At the base level, we know there’s fiscal illusion.  That is, people don’t even understand how much they are paying in taxes,” said Georgia State University professor Bart Hildreth.  And when it comes to understanding pension plans, “Most of them could not tell you what they expect to get out of a defined benefit plan.  They know it’s some share of their current salary.”

Georgia State’s Andrew Young School of Policy Studies recently gathered public sector pension and financial analysts for a daylong conference that sought to put some clarity under scary headlines that all pension plans are either insolvent now or they will become insolvent soon.

“There are systems out there; they shouldn’t panic but they should worry,” said Segal Company vice president Leon (Rocky) Joyner.  “They should worry because they have gotten themselves into a mess.”  Segal has managed private, non-profit and public sector accounts for 70 years.  Joyner said pensions are 4 percent of state spending.  “That’s not exactly bankrupting the budget.”

Mercer University economist Roger Tutterow offered this somewhat different long range view: “It is probably time in the public sector to have a candid discussion and indicate to employees that the ability to fund the post-retirement contributions, such as health care going forward, we probably will have to talk about how we restructure that.”

How Bad Is the Pension Problem?

Leon (Rocky) Joyner, The Segal Company

“We get lots of quote information on the media outlets,” Joyner said.  “Some of it is true.”

This spring a Pew Center on the States analysis said state pension and health care retirement accounts are at least $1.26 trillion underfunded.  Deeper into the analysis Pew said the real figure might be much larger, perhaps $1.8 to $2.4 trillion if investments do not earn 8% annually.

A  Congressional Budget Office report published last month estimated current state employee pension fund and health care liabilities at between $700 billion and $3 trillion.  The reason for the vast range is because actuaries use different methods to predict investment returns.  The CBO said, “By any measure, nearly all state and local pension plans are underfunded.”

That includes Georgia.  The Pew Center ranked Georgia among the 2009 calendar year’s best performers because the state pension system was 87% funded vs. liabilities and the state made its 100% ARC – annual required contribution.  But not so the health care obligation, just 4% funded, and Pew said Georgia made just 30% of the annual required health care contribution.

A Mercatus Center study published last December said “governments have set too little aside to fund future benefits; pension portfolios have shifted toward riskier assets in order to discount their liabilities at higher interest rates; and, basing the discount rate on expected asset returns gives plans the illusory appearance of full funding in years when investment returns are robust.”\

Roger Tutterow, Mercer University

Writing in March, the fiscally conservative policy group State Budget Solutions said, “One of the most insidious aspects of pension liability is its stealth nature. Pension obligations don’t appear on state balance sheets.  As such, states with billions in unfunded pension liabilities may technically brag of ‘balanced’ budgets while being swamped by pension debt.”

Colorado faced the possibility of state bankruptcy within 15 years before it enacted reforms last year.  “They changed and lowered the benefit for people who were already drawing a pension,” said Joyner of the Segal Company.  “Is that going to stand in the court system?  It’s my understanding that as soon as the governor signed the papers the lawsuit was filed.”

Do public sector employees understand their plans?  “As a general rule, I believe not and I think that’s a fault of our industry,” said Steve Vaughn, who manages 250 public sector plans for the Association County Commissioners of Georgia.  “Once you begin telling them the differences (between plans) and the contribution levels that it’s going to take, it becomes a culture shock.”

Boring Pension Plans Became Real Headline Makers

Not long ago you would be hard-pressed to find traditional news media covered up with pension plan stories.  “Retirement stories” were about fun and travel and the good life.  Today pension stories are major headline makers as public sector employees from Utah to Wisconsin to New Jersey and Georgia engage in often volatile debate about benefits and rights.  Atlanta Mayor Kasim Reed made reform a priority because pension benefits are 20% of the city budget.

Steve Vaughn, Association County Commissioners of Georga

The Georgia state government employees plan was reworked three years ago.  New state hires no longer qualify for exclusive defined benefits retirement compensation.  Now they participate in a hybrid model that includes a small defined benefit and a 401(K) option that enables them to decide how much they will save and then manage their own assets.  Georgia actually administers several public sector plans tied to an employee’s hiring date.

“What they have done is they have spread the risk of retirement more between employer and employee and less of it being on the employer,” the Segal Company’s Joyner said about the Georgia’s three-year-old state employees plan.  “I would argue they’ve done a pretty good job.”  New state employees still receive a match, but they cannot plan on a defined monthly benefit.

Corporate and public sector defined benefit plans were built on the premise there would always be money coming into the system to satisfy the obligations.  That worked well in private industry when there were few retirees, lots of growth and profit and strong investment returns which all were true over the past 65 years while America was unchallenged as the world’s best economy.

Public sector plans were financially strong because economic expansion fueled rapid increases in government revenue.  Americans bought lots of things including houses; they paid lots of sales, income and property taxes and U.S. stock markets clicked along at an 8.8% annual gain, allowing for booms and downturns.  Local and state governments satisfied enormous appetites to spend more money by selling bonds, incurring debt to be paid off in later years.

Bart Hildreth, Andrew Young School of Policy Studies

It looked for all the world like the perfect scheme (like Social Security).  The contraction of the U.S. economy ten years ago was a warning light for the worst recession since the Great Depression.  The 2008 downward spiral caused radical declines to government revenues, including in Georgia.

States like Georgia that must balance budgets created “balance” with federal stimulus dollars – more than $3 billion in Georgia since fiscal 2009 — and by draining their savings.  Georgia’s $1.7 billion shortfall reserve in fiscal 2007 dipped below $200 million in fiscal 2010.  The state is under significant pressure to rebuild the reserve fund or see its AAA bond ratings downgraded.

“We have been through downturns before and governments have weathered them pretty well,” said Tutterow, the Mercer University economist who served on last year’s Georgia tax reform special council.  “But we have not been through one in which the job loss and the implications for sales tax collections were as pronounced as they were in this recession.”

The Role of Investment Return Predictions

Pension plan fiscal health is very tied to the financial markets.  There’s no getting around that.

Three months ago the U.S. Census Bureau published data that tracked securities and all other financial instruments held by large public retirement systems during six years ending in 2010.   The systems owned $2.92 trillion in assets in December 2007.  Fifteen months later assets were $2.1 trillion, down almost one-third.  They recovered to $2.63 trillion at the end of last year.

Last month the Center for Retirement Research at Boston College reported that state and local government pension plans were just 77% fully funded when 2010 ended, down from 103% funded in the year 2000.  Reduced investment earnings, increased long-term obligations and the inability of some states to fully fund required annual contributions were among the factors.

The Segal Company’s Joyner told the Andrew Young Policy School conference that pension funds have returned 8.8% annually for 25 years.  “We can ask the question, because of 2008, have the dynamics changed?  Is there something we should look at?  The answer is yes, we should always be looking… but to say 8.8% is unrealistic… is a little fanciful,” Joyner said.

Degas Wright, Decatur Capital Management

Degas Wright respectfully disagrees:  “The key question is should we be using that historical picture going forward and I would say, probably not.”  Wright is a U.S. Military Academy trained mathematician, also owner and chief executive officer of Decatur Capital Management.

Wright’s illustration: A pension plan that holds a 60/40 equities/bonds split would need to earn 11 percent annually in equities to post an 8 percent overall gain if the bonds earned 4 percent.  He thinks that equity earnings percentage cannot be sustained.  The Mercatus Center would appear to agree with Wright; Mercatus says pension plan earnings estimates should be tied to U.S. Treasury bond returns, which currently earn 4 percent.  Georgia estimates 7.5 percent.

Wright also noted that pension plans were heavy on bonds several decades ago but now they are primarily heavy on equities.  The Standard and Poor’s 500 Index that tracks 75% of all U.S. equities returned 3.32 percent during the five-year period that ended May 31.  The 10-year tracking return is even lower at 1.99 percent through Friday June 10.

Pension Reforms Will Play Out Over Decades

This April the National Conference of State Legislatures said 21 states enacted pension plan reforms last year.  Most states adjusted existing defined benefit plans.  Utah became the first state to adopt a full defined contribution plan for public sector employees since Alaska in 2005.  Michigan created a hybrid with elements of defined benefit and contribution plans.

States will continue to owe defined pension benefits for several decades.  Defined benefits are owed to millions of retirees who receive benefits now, and millions who will receive them later.  New public sector employees in defined contribution or hybrid plans will not retire for decades.  That is why states and local governments must remain pro-active with their benefit plans.

“You’ve got to ask some basic questions about what you are trying to accomplish,” said Steve Vaughn of the Association County Commissioners of Georgia.  “What do you think is the right blend of cost-sharing?  What do you think is the right blend of risk sharing?  Most of the time, I find policy makers haven’t thought about those issues.”

For the final word we return to Leon Joyner of the Segal Company:  “As a society we are going through a fairly significant change to our mindset.  This includes how long we work, how long we live, how much longer we should work because we live longer, how much any pension plan should replace.  The big issue is not financing these programs.  It is financing the whole entity government.”

(Mike Klein is Editor at the Georgia Public Policy Foundation)

June 13, 2011 Posted by | Uncategorized | , , , , , , , , , , , , , , , , , , , , , | Leave a comment

Long-Term Unemployed Are Now Majority of Jobless Georgians

Mike Klein

Georgia’s new unemployment data proves the state’s weak economic recovery has missed nearly half a million people who worked and claim they want to work again.  The Atlanta metro area’s 10.2% jobless rate announced Wednesday is identical to the state percentage, and both are nearly one full percentage point higher than the 9.4% national percentage.

The most significant trend in Georgia Department of Labor data is continuous growth in the percentage of long-term unemployed, defined as persons without work more than 26 weeks.  They now represent 54% of the state’s jobless population, up from less than 35% one year ago.

Georgia reported 76,635 initial claims for unemployment insurance in December and 478,833 total unemployed.  The number of long-term unemployed rose dramatically from 168,200 in December 2009 to more than 259,000 twelve months later.

The national recession that began about three years ago also caused Georgia to burn through its entire $1.2 billion unemployment insurance trust fund.  Thirty one states including Georgia now borrow federal dollars to write their weekly unemployment checks.

A report posted online this week by the National Conference of State Legislatures said 31 states have borrowed $42.2 billion since September 2006.   NCSL said Georgia has borrowed $588.5 million since December 2009.  Principal and interest will be owed back to Washington.

Mike Klein is Editor at the Georgia Public Policy Foundation.

January 27, 2011 Posted by | Uncategorized | , , , , | Leave a comment