Jane the Actuary General Interest

Another Infrastructure Bill? Lawmakers, Take A Pledge!

It is wasteful and irresponsible to fund infrastructure through grand capital bills.

Consider what happens in your local town, if yours is anything like mine.

City thoroughfares are evaluated from time to time and resurfaced, maybe with state or federal funds, maybe without.  Neighborhood street resurfacing happens each summer, and it’s not a particularly big deal, but just considered to be a routine part of city responsibilities.  Then again, there’s no ribbon-cutting, nothing to be named after a local politician.

Or here’s the example of my local park district.

My suburb had a period of rapid growth in the 1950s and ’60s and, rather than building a single massive community center as would be the case now, they kept their existing pool and rec center as-is and built 5 new sites throughout the village, each with a pool (in one case, indoor), classrooms (in some) and a half-size gym, ball diamonds and athletic fields, playgrounds, and so on. Subsequently, in the late 1990s, following the trend to add zero-depth and spray features to pools, one of the pools was rebuilt in this fashion, which proved to be immensely popular and led to voters approving a bond issue in 2000 for a reconstruction of the remaining pools in similar fashion.

Then the park district tried the same approach with the buildings itself, tearing down and wholly reconstructing one of the buildings with more classrooms, a full-size gym and a more modern design, then asking voters to approve a bond issue for a similar remodel of the remaining buildings, dangling even more goodies like an elevated walking track, a fitness center, and the like.  They used the usual pitches of how comparatively small the increase would be for a house of $X value.  They talked about how super-old all the buildings were.  And they said, “if you voters don’t approve the bond issue, we’ll only have enough funds from our regular tax revenue to rebuild one of these every 10 years.”  To which my reaction — and that presumably of all the other voters unwilling to approve the bonds — was, “good!”  That seems far more responsible, to have, in the long term, buildings that are a mix of ages, rather than leveling and rebuilding everything once every 50 years, then waiting a further 50 years for the next rebuild.  That also means that, whatever the next fashion in rec centers might be, the park district can accommodate that, at least in part, rather than saying, “hey, we just rebuilt everything, you’ll have to tough it out.”

This should be obvious, shouldn’t it?  Have a long-term plan in which you keep your infrastructure maintained over the long term and with adequate spacing and funding that’s appropriate for the long-term pacing?

And I acknowledge that that’s not the way infrastructure spending works at the state level, at least in Illinois.  Here in Illinois, infrastructure spending is accomplished through big spending bills, the total costs of which are inflated by the desire of each state legislator to have something to show his or her district, a ribbon-cutting to attend and, if they’re lucky, a building named after them.

This time around, Gov. Pritzker has proposed a massive $41.5 billion infrastructure plan he’s calling “Rebuild Illinois.”  According to the Chicago Tribune,

Pritzker’s outline includes doubling the state gas tax to 38 cents per gallon from 19 cents; tiered increases in vehicle registration fees based on the vehicle’s age; a $250 annual registration fee for electric vehicles; a $1-per-ride tax on ride sharing; and a 7% state tax on cable, satellite and streaming service.

Other taxes being discussed include a new 6% tax on daily and hourly garage parking, a 9% tax on monthly and annual garage parking, and an increase in taxes on manufacturers and importing distributors of beer, wine and spirits. . . .

Of the proposed $41.5 billion in spending, $28.6 billion would be devoted to transportation projects, including $23 billion for roads and bridges and $3.4 billion for mass transit. The plan also calls for spending $5.9 billion on repair and building projects at schools, universities and community colleges. Another $4.4 billion would go to state facilities.

The largest share of the program, $17.8 billion, would be funded through state bonds, while more than $7 billion would come from regular revenue. The plan counts on more than $10 billion in federal funding and $6.6 billion from local governments and private sources.

And, yes, it appears to be conventional wisdom that Pritzker will win the votes for his graduated-tax plan (see, for instance, this Daily Herald column) and marijuana-legalization plan from recalcitrant legislators by means of constituent-pleasing goodies in the infrastructure plan — political benefits that simply wouldn’t exist if the state had long-term infrastructure maintenance plans rather than periodic big spending bills.

And, what, by the way, happened to prior infrastructure plans?

In 2009, under Gov. Quinn, Illinois passed the “Illinois Jobs Now!” plan — yes, the exclamation point is part of the title.  This was a $31 billion spending plan, though much of the money came from federal matching funds, leaving $13 billion to be funded by 20-year bonds, which were themselves to be paid for by a variety of tax and fee increases as well as video game expansion.  (Fun fact:  among these tax hikes were the expansion of the sales tax to include “hygiene products” — in other words, the now-nefarious “tampon tax,” which was subsequently re-excluded in 2016.)  But this didn’t quite work out as planned, since the revenues from video poker fell far short of projections, requiring the state to use General Funds for debt service instead.

What’s more, the Civic Federation reports that this plan fell short in terms of planning:

IJN’s second flaw [in addition to failed revenue projections] was the lack of a comprehensive plan to prioritize projects and ensure that funds were being spent efficiently and with maximal impact on Illinois’ economy. While Governor Pat Quinn’s office released a list of projects to be included in the plan, it offered no explanation of how they were selected. The last ten years of capital budgets have similarly included project lists, as well as some emphasis on various priorities. But they have fallen far short of offering a comprehensive assessment of capital needs or a clear understanding of how each project fits into the whole plan.

Prior to this plan was Gov. Ryan’s “Illinois FIRST” infrastructure plan of 1999, which set records at the time at $12 billion and which contained provisions explicitly allocating “member initiative grants” totaling $1.5 billion out of that $12 billion and which were wholly controlled by the legislators, to be doled out within their districts so that they would benefit from plaudits from beneficiaries in their communities.  A subsequent scholarly analysis confirmed that exactly what you’d expect, occurred:

Among Illinois’s 118 House districts we show that member initiative monies distributed in the year and a half prior to the 2000 general election were disproportionately allocated to districts that were politically competitive, to districts represented by House legislative leaders, and to districts represented by relatively moderate legislators. We also find evidence that member initiative funds were channeled to quickly growing Illinois House districts.

All of which comes down to this:

if legislators are not willing to establish a long-term infrastructure-funding process to eliminate the need for periodic big-money bill such as these, then I call upon them to pledge that:

  • they will condition their support of the bill on a provision that no construction projects be named after themselves or any other politician,
  • they will ensure that all fund-allocation is based on outside experts’ evaluation of needs and assessment of the need for repair vs. new construction without regard for the political appeal of naming and credit-taking for new construction, or political power of individual lawmakers,
  • they will reject any provision that allows individual legislators any discretion in where money is spent, and
  • they will refuse any invitations to ribbon-cutting ceremonies or other thank-you’s honoring them for bacon they’ve brought home.

Yes, these are low expectations.  But better this than nothing!

 

Image: https://commons.wikimedia.org/wiki/File:Road_construction_in_progress.jpg; Jose Arukatty [CC BY-SA 4.0 (https://creativecommons.org/licenses/by-sa/4.0)]

Jane the Actuary General Interest

What about a Post Office Bank?

So over the past couple days we’ve been getting ourselves in a tizzy about the Bernie Sanders/Alexandria Ocasio-Cortez proposal for a cap on interest rates of 15%, which is intended to be paired with the (re)introduction of a “post office bank” which will, in addition to other hoped-for benefits, also lend at lower rates than traditional credit cards and fill in gaps in the market if they cease lending with these limits.  (The bill’s draft text, is limited only to the 15% interest cap but the “white paper” – a medium blog post – suggest that the post office would provide checking accounts and low interest loans.)

Now, however tempting it is to decry this as an outrage (“I already stand in long enough lines already, and AOC and Sanders want to make the post office lines even longer!” or “those employees are incompetent enough already and you want them to be bank tellers, too!” or “if you get the government into the retail banking business, next thing you know, they’ll be demanding government subsidies or loan forgiveness for people defaulting on their Post Office loans”) it is already the case that the Post Office is a hybrid sort of critter, with a  monopoly on first-class mail delivery to ensure that residents of rural areas receive the same service at the same price as city folk, while trying to compete on package delivery with UPS and FedEx, and all with prices and suchlike fixed by Congress.

And that makes it at least something to consider with an open mind, whether this mandate to deliver mail while not necessarily turning a profit, but in the most cost-effective manner possible, covers whatever ancillary services can make productive use of the postal service’s existing network of facilities so as to benefit from the overhead costs already there due to the provision of mail services.  If, for instance, the lines at the post office are due to small numbers of windows being open (presumably because the employees are hired on a full-time basis and if they hired to accommodate the rush hour periods at lunch and late afternoon, they’d have workers sitting around at other times?), but if having more customers simply meant opening up another window, it could be a win.

Luckily, there are two documents put together by the Post Office’s Office of Inspector General that assess the feasibility with an eye toward addressing whether there were services that could feasibly provided, not as a “welfare benefit” for the poor but as a reasonable business model:  “Providing Non-Bank Financial Services for the Underserved” from January of 2014 and “The Road Ahead for Postal Financial Services,” from May of 2015.  (There may be others, but this is what I am aware of.)

So here’s a quick read of these two proposals because I think it matters to understand this as context — and to remember, again, that the Post Office is already a hybrid governmental body/service provider.

To begin with, they start with the question of the “un-” and “under-banked” — the former being those who have no bank account and the latter being those who have used some sort of “non-bank financial service” such as check cashing, money orders, or payday loans.  Now, I question some of this anxiety about “the underserved” since, as profiled in the 2017 book, The Unbanking of America, many users of these services do so because they provide certain advantages over traditional banks, and, at any rate, some of those classified as “unbanked” — reported to be 8% in the 2014 report — may be using prepaid debit cards which function in a meaningful way as substitute bank accounts.  But nonetheless the author, Lisa Servon, explains that if your credit rating is poor enough, not only will most banks charge you fees, but they may not even allow you a checking account in the first place (or charge higher fees – see my other old blog post), to avoid the hassle of continued overdrafts, however much they might charge in fees.

In any event, the 2014 report provides 4 guiding principles:  a proposed new product must fulfill an unmet market need, must be consistent with the Postal Service’s competencies and assets, must fulfill an important public purpose, and must cover its costs at full maturity.

It observes that the Post Office already has a 70% market share in the US domestic paper money order market, and also sells international money orders, though both these services are paper-based and the future of this product is electronic.  Local Post Offices also sell prepaid debit cards from American Express (as well as various gift cards from retailers, along side their greeting cards).  It would also be a significant revenue opportunity, although this would not be in competition with traditional banks but via partnerships with them.

Because 2006 legislation “prohibits the Postal Service from offering new nonpostal services” (p. 9) the report differentiates between services that would build on existing services and not need new authorization, and those which would be wholly new.  Among these:

  • A “Postal Card” — a reloadable prepaid card.  This appears to be similar to what already exists on the market, except with the convenience (for folks in underserved geographic areas) of being able to conduct transactions such as reloading, withdrawing cash, paying bills, or cashing checks, etc.  This would “likely [be] in partnership with banks” but would offer consumers “a more transparent, affordable option that is tied to a ubiquitous physical distribution network of Post Offices” (p. 11).  This doesn’t sound unreasonable as long as this is done in an unsubsidized manner.
  •  An “interest feature” on the Postal Card to encourage savings.  This sounds great in principle but a bit more questionable in practice, given how low actual interest rates are even at “real” banks.
  • Small loans:  these would be available only to those using a Postal Card and who have a paycheck (or Social Security or other recurring benefit) loaded onto their card; they would borrow up to 50% of their paycheck, and then 5% of their pay would be autodeducted until the loan is paid off.  Note, however, that in their hypothetical example, they would still charge $25 upfront and a 25% interest rate, which is higher than Bernie and AOC’s 15% cap though lower than a payday loan. In addition to the requirement for payroll deduction loan repayment, the Postal Card could be enabled to snag the tax refund of customers who default by removing the direct deposit (or losing their jobs).  (Note that there are a number of companies which low-wage employers use to provide paychecks on prepaid cards already, and presumably they could offer the same service, though I’ve never heard of it and presumably they can’t do it as easily without the pairing with retail locations.) Again, the Post Office might do this in partnership with banks or other financial institutions, not by being a bank itself.

So this doesn’t really sound that outlandish to me — but at the same time, nothing in this proposal is a replacement product for consumers who want to put their new TV on a credit card and pay it off over time; it’s very focused on a very small segment of the market.

At any rate, the follow-up 2015 paper tries to look at the issue with an eye more toward real-world implementation, rather than the focus on rationale of the first paper.  The paper begins by identifying “strategic advantages,” among these, that low-income prospective users viewed the Post Office (both as an institution and as a local office) favorably and were receptive to the idea and that postal clerks everyday work in their usual transactions would be easily transferable to new processes they would need to learn, with automated systems and partners handling more complex work (e.g., helping a consumer apply for a loan would be comparable to helping a consumer submit a passport application).

The 2015 report also addresses the question of which services the Post Office might need additional authorization to provide, rather than merely being an extension of existing sales of prepaid cards and money orders.  For instance, they might already be allowed to provide extended check cashing services but probably couldn’t provide direct deposit of checks into an account tied to a prepaid card; they could provide bill payment only “if determined to be ancillary to sending hardcopy bill payments through the mail.”

In addition, the report assesses financial feasibility of a range of actions from simply providing floorspace for sale of products to a full-blown Post Bank, and concludes that the full-blown Post Bank is “less viable than other approaches.”

So let’s compare this to the oft-touted “public option” for healthcare, in which proponents call for the government to, put charitably, run a nonprofit health insurance agency in which the government’s lack of profit motive and large customer base enables it to offer lower prices.  Why do I cringe at a “Medicare buy-in”?   First of all, because I assume that the government would dictate prices to providers in an unsustainable manner and do more harm than good, and, secondly, because it appears rather likely that the structure of any such program would, even so, be rather indifferent to the actual costs of the program and involve considerable government subsidies.

But if the Postal Service, which is already a hybrid agency, can make a true business case for expanding services in a way that neither requires government subsidies nor meddling with price controls, I’m good with evaluating it on its merits.

And, finally, none of this has anything to do with the Sanders/AOC proposal with its suggestions of checking accounts and “low interest loans.”

Image: https://pixabay.com/photos/mail-truck-mail-clerk-mailman-3248139/