Thinking Minnesota: Summer 2012
Summer 2012
Printer-friendly versionCONTENTS
A WORD FROM THE PRESIDENT
Helping Minnesota’s Strongest Students Be All They Can Be
HEALTH CARE FOCUS
Federal Elections Will Determine How Minnesota Must Respond to Obamacare
PENSIONS FOCUS
Everything You Always Wanted to Know about Public Pensions, But Were Too Bored to Ask!
By Kim Crockett
CAE FOCUS
American Experiment Adds New Directors
A WORD FROM THE DEVELOPMENT CHAIR
By Ron Eibensteiner
A WORD FROM THE PRESIDENT
Helping Minnesota’s Strongest Students Be All They Can Be
By Mitch Pearstein
Asserting that education—more specifically, its improvement—is critical to Minnesota and the nation’s well-being is Cliché Central when it comes to stating the obvious.
Yet while I’ve long been of this mind, my research and writing in recent years about family fragmentation and income mobility have accentuated it, as it’s increasingly clear that unless many millions of young, and not-so-young people learn much more than they are currently learning, they will find it painfully difficult to succeed in an increasingly demanding worldwide economy. This, in turn, will lead to even greater numbers of women viewing even greater numbers of men (in sociologist William Julius Wilson’s famous term) as “unmarriageable.”
An enormous amount has been written about achievement gaps in the United States, with even more energy and dollars devoted to reducing them for decades now. Not only has seeking to help low-income and minority children do better been an essential quest—one which must continue—it’s also fair to say it has been at the very core of attempts to significantly improve American elementary and secondary education.
Yet it’s also fair to say that another large achievement gap has been mostly ignored over this same long period: The dangerous distance between America’s strongest students and their talented counterparts around the world—with the latter consistently coming out on top. Just one
illustrative example, as reported by economist Eric Hanushek at Stanford: Only six percent of U.S. students perform at what’s called in the trade as “advanced proficiency” in math. This is a share that lags behind boys and girls in 30 other nations.
But if the “relationship between cognitive skills and individual productivity and incomes is strong,” he writes, “the relationship between measured labor force quality” and economic growth for a nation overall is even stronger, as a “more skilled society may lead to higher rates of invention, enable companies to introduce improved production methods, and lead to faster introduction of new technologies.”
Or as the National Academies (Science, Engineering, and Medicine) have argued in the ominously titled The Gathering Storm: Rapidly Approaching Category Five, “A primary driver of the future economy and concomitant creation of jobs in the 21st Century will be innovation largely derived from advances in science and engineering.”
This is another way of saying that both as a state and nation we will continue depending on seemingly miraculous technological breakthroughs wrought by brilliant men and women. But it’s likewise clear (here’s the problem) that in our incumbent efforts to help struggling students, we have insufficiently helped our most talented young people be all that they can be.
Nearly three decades ago now, in 1983, the iconic “Nation at Risk” report put pertinent tensions this way:
The twin goals of equity and high-quality schooling have profound and practical meaning for our economy and society, and we cannot permit one to yield to the other either in principle or practice. To do so would deny young people their chance to learn and live according to their aspirations and abilities. It also would lead to a generalized accommodation to mediocrity in our society on the one hand or the creation of an undemocratic elitism on the other. Our goal must be to develop the talents of all to their fullest.
Right from American Experiment’s start in 1990 we have focused on better ways of helping poor students, and we will continue doing so, needless to say. As for what I'll be writing about in coming months in helping Minnesota’s strongest students be all they can be too, please stay tuned. ■
HEALTH CARE FOCUS
Federal Elections Will Determine How Minnesota Must Respond to Obamacare
Where does the Supreme Court’s decision to uphold Obamacare’s individual mandate to buy health insurance leave Minnesota’s health care system? If Congress fails to repeal or amend the federal health care overhaul, how can Minnesota best respond to this dramatic expansion of federal control over health care? If Congress does repeal or amend the law, how should Minnesota respond?
These are some of the questions that American Experiment—and, in particular, our health care expert Peter Nelson—will be working on in the foreseeable future.
Like many, we were surprised and more than a little confused by Chief Justice John Roberts’ decision to uphold the individual mandate. To be clear, Roberts didn’t exactly uphold the mandate. A mandate by itself, according to Roberts, would not be constitutional. Instead, Roberts upheld the penalty for violating the mandate as a valid exercise of Congress’s taxing power. To get to this holding, Roberts essentially rewrote the statute to be a choice between buying insurance and paying a tax versus the plain language of the statute that established a mandate with a penalty.
Most legal experts agree that Roberts’ opinion is poorly reasoned. According to New York University School of Law professor Richard Epstein, Roberts’ position is “confused at its core.” From the left, Jeffrey Toobin, staff writer at The New Yorker and senior legal analyst for CNN, concludes that Roberts’ taxing power argument “is not a persuasive one.” To Toobin, “this should have been an easy case,” just another valid exercise of the commerce power.
But no matter how unconvincing Roberts’ argument might be, the immediate legal outcome is the same: The mandate and most of Obamacare remain the law of the land.
The fate of the law is no longer in the hands of the Court. The people are now in control and the upcoming federal election will largely determine the future of the law, which, in turn, will determine what we must do in Minnesota to respond to the law.
For Minnesota—a state that regularly tops the nation on nearly every metric of health care quality, access and cost—there’s a high risk that Obamacare’s new federal regulatory regime will upset what’s already working. As federal rules take control, Minnesota might find itself being dragged down to the national mean.
While Minnesota might have more to lose, no state will escape the negative consequences of Obamacare. The law failed to address the number one problem—rising health care costs—and, instead doubled down on what’s wrong with the current system. Obamacare makes people more dependent on employers for health care, creates a new entitlement the federal budget can’t afford, and escalates Medicare’s disruptive role in the health care market.
If Republicans run the table in federal elections, the law will be substantially amended and possibly repealed. That would be great news for Minnesota, considering the risk the law poses to what’s already working in the state.
Even if President Obama is reelected, there will remain a strong likelihood that important parts of the law will be amended. Though Obama is certainly committed to implementing the law, certain features—no surprise—are proving difficult to implement, such as the health insurance exchanges. Exchanges are being sold as simple one-stop-shops for insurance like Expedia.com, but they’re more likely to become a new and unaccountable insurance regulator that limits market choices and increases costs.
Moving forward, American Experiment is committed to providing timely, nonpartisan analysis and policy recommendations on how the federal government should amend Obamacare and how Minnesota should respond to it. We just have to wait and see whether or not theAmerican people, who have opposed the law all along, vote to ditch it in November. ■
PENSIONS FOCUS
Everything You Always Wanted to Know about Public Pensions, But Were Too Bored to Ask!
By Kim Crockett
Public pensions are front page news. Cities in California are declaring bankruptcy in part because the bill for past pension promises has come due—and there is not enough cash in the kitty. No more “kicking the can down the road”. The proverbial can has gone off a cliff into the Pacific Ocean.
But not in squeaky clean, good government Minnesota, right?
When I talk to folks about this vital but nerdy subject, it only takes about 5 minutes—OK 2 minutes—before their eyes start to roll back into their heads. And so, I asked some pension colleagues, “What are the top five things people want to know?”
- “How much are we on the hook for?” It depends on who you ask. As of January 2012, the long term obligation is $86 billion and growing. The State of Minnesota is short about $19 billion in today’s dollars. Pensions are paid over 30 years (or longer because Minnesota keeps re-amortizing) but just like a mortgage, the amount actually paid will be much more. Defenders of the status quo often try to sooth us with a pension lullaby, pointing out that the liability is spread over many years. Critics argue that we should double or triple the current shortfall to $40-60 billion because we do not put enough money aside and we assume we are going to earn more than we actually do.
- “Who has to pay for that?” In Minnesota, the employee and the state/taxpayers both contribute to pensions; the money is invested by the State Board of Investment. Short of bankruptcy, once a pension is set, the state (e.g. taxpayers) has a contractual obligation to pay until the retiree dies (plus survivor benefits). If expected investment returns (approximately 8.5% per year in perpetuity) fail to materialize and the fund runs short, taxpayers are the backstop.
- “How generous are these things, really?” Commonly reported “average” pension benefits significantly lowball what career public service employees actually receive because this “average” includes the much smaller pensions for those who have made government service only a brief part of their working careers. For career public employees Minnesota pension plans are designed to guarantee 85%-90% of their pre-retirement income (in combination with any social security) based on the five highest earning years, plus cost of living increases (COLAs) when fund conditions permit. I’d call that generous.
Note: we used to pay out “excess” returns (over 8.5%) by bumping current retiree pensions instead of reinvesting for future retirees. The result? Inequity among retirees and significant unfunded liabilities that must be made up by future taxpayers—and perhaps lower pensions for future retirees (because you cannot change current pensions).
- “Who let this happen?” Voters and public employees did—through elected representatives, public unions, and pension bureaucrats—and over many decades. But we should not be surprised. What else can you expect when you guaranty pensions and then put politicians in charge of a long term retirement obligation that comes due after the politician is gone? It’s time to follow other states and shift to a model commensurate with the private market that puts employees in charge of their own retirement (e.g. defined contribution plans).
- “We’re not going to end up like those cities in California, are we?” California makes us look good. As a result, politicians see plenty of road left before they have to do something courageous. But consider this: Minnesota has not made its actuarially required contribution (ARC) since 2007—a fancy way of saying, we are quickly falling further behind. We tweaked the system in 2010 but we do not have enough set aside to sustain the promises made to current and future retirees—and we have shifted the cost of government onto future taxpayers.
Something is going to have to give, the question is what and when—and who will pay.
The Minnesota Free Market Institute at the Center has been educating Minnesotans about the pension system since 2010. We are seeking funds to support research that measures the long-term sustainability of our pension plans and a follow-on educational effort. Contact me if you would like to support this effort. Thanks! ■
CAE FOCUS
American Experiment Adds New Directors
In the first six months after joining forces with the Minnesota Free Market Institute (FMI) the Center added six impressive leaders as new board members at our January and April board meetings. A short bio of each of these new board members is printed below. We are also very pleased to report that eight additional board members were elected at our July board meeting, including Tara Anderson, Molly Cronin, Mike Hayden, Scott Honour, Sheila Kihne, Scott Peterson, Brent Robbins, and Tim Walsh. We’ll introduce you to these board members in our next newsletter.
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Our new Vice Chairman is Thomas O. Kelly, III, a partner with Dorsey & Whitney. Mr. Kelly had been FMI’s Chairman, and continues to be an American Experiment Senior Fellow. |
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Carolyn Erickson is a partner with CSM Investments and previously worked as legal counsel for Holiday Companies. She also serves on the boards of the Children’s Cancer Research Fund and the Jungle Theater. Ms. Erickson is a graduate of the University of Colorado and the University of Minnesota Law School. |
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Dr. Eduard Michel co-founded Virtual Radiologic Corp in 2001 and served as the Company’s Chief Medical Officer until 2011. During this period Virtual Radiologic became the largest radiology practice in the country, employing over 400 physicians and providing radiology professional services to more than 2,700 hospitals in the U.S. |
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Richard G. Morgan is partner with Bowman & Brooke. Acknowledged by his opponents as “one of the best cross-examiners” in the practice, he honed his reputation for efficiency as a federal prosecutor, and currently serves on the Univerity of Minnesota Law School board. |
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Rick Penn is Senior Vice President at Hutchinson Technology and President of its Disk Drive Components Division. He began his career with Hutchinson Technology in 1981 and has held management positions in marketing, sales, product development and operations. Mr. Penn holds bachelor’s and master’s degrees in business administration from the University of Minnesota. |
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Bruce Taher was born in Iran and immigrated to the U.S. alone at the age of 19. The dishwashing position he took while in college ultimately led to his successful career in the hospitality industry and his founding of Taher, Inc., a food service management company in 1981 that currently employs over 1,500 employees dedicated to a single mission: Every day Taher strives to make its food unforgettable. Mr. Taher also serves on the TwinWest Chamber board. |
A WORD FROM THE DEVELOPMENT CHAIRMAN
By Ron Eibensteiner
As the Development Chair, I have encouraging news to report as the Center and Free Market Institute enter the second half of 2012 with great momentum. We welcomed eight new directors at our July board meeting. These directors bring financial support but just as importantly, they bring a wealth of experience from both business and other non-profit experiences. Welcome to the board!
We have also maintained support with existing benefactors and added a few new ones who are excited about our renewed mission to build a culture of prosperity in Minnesota and the nation. Free market policies that reward honest, hard work are under attack but our members are not giving up—instead they are making a commitment to push back by supporting American Experiment.
I am writing to you from Tbilisi in the Republic of Georgia. My wife Laurie is spending the summer here teaching English—and I tagged along for a few weeks. I mention this because there are parallels worth noting. Kim Crockett asked me about my adventure and how Georgians felt about the USA. Here is what I told her:
The Georgians LOVE Americans. They despise the Russians; so therefore, my enemy’s enemy is my friend. Near Freedom Square is a rather large statue of RONALD REAGAN. And the road from the airport to the center of the city is George Bush Boulevard! I have met several members of Parliament during my stay here, and they all want to talk about building closer relations with the U.S. They uniformly reject President Obama’s policies. The government is working very hard to inject more “free market” reforms or policies in the economy. Also, two big government initiatives are to fight government corruption and require all school children to become proficient in English at an early age.
I laugh and cringe when I realize that we, too, are trying to encourage free market reforms, fight corruption (crony capitalism) and teach children to read and speak English by third grade! As Reagan advised us, the struggle for freedom is never won.
If you are supporting the Center, you have my thanks. If you are not, please consider becoming a member today. ■