Tougher Choices
Shaping Florida’s Future
February 20, 2014
Jim Dewey
Director, Economic Analysis Program
Bureau of Economic and Business Research
University of Florida
Dave Denslow
Distinguished Service Professor Emeritus
Department of Economics
University of Florida
Prepared for the LeRoy Collins Institute
Florida caught the US in the 1980s, but…
• By the 1980s
– Income per capita on par
with US
– K-12 $/student near US
– Universities rising
– Highly productive
economic future seemed
in reach
• Are the 1990s & 2000s
– fluctuation around parity
or
– decline masked by the
housing bubble?
7/26/2016
Data from the U.S. Bureau of Economic Analysis
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Relative productivity down in the 1990s and 2000s
Relative output per worker in Florida (US = 100)
96
95
94
93
92
91
90
89
88
87
Relative Output per Worker
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
86
Trend 1991-2000
Data from the U.S. Bureau of Economic Analysis
7/26/2016
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The Tipping Point
• Tipping Point: the point where an accumulation of minor
changes turns into a major and irreversible one
• Downward trend very hard to change
–
–
–
–
Low starting point plus feedback effects
Labor market polarization
Baby boom retirees
Lagging investment in education, infrastructure
– No room to invest at current tax rates
– Little support to raise tax rates
• Florida will likely be the subtropical corner of a safe, rich
country, highly specialized in retirees and tourists
– Pleasant enough, but could have been better.
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The ill effects of the lesser depression drag on
– US: 98.4% of 2007 peak
– FL: 89.3% of 2006 peak,
just below 2002 level
13
65
12
64
11
63
10
62
9
61
8
60
7
59
6
58
5
57
4
56
3
55
2
54
2000-01
2000-09
2001-05
2002-01
2002-09
2003-05
2004-01
2004-09
2005-05
2006-01
2006-09
2007-05
2008-01
2008-09
2009-05
2010-01
2010-09
2011-05
2012-01
2012-09
2013-05
• 2012 Real GDP per capita
Unemployment Rate
– Only partially due to
demography
Monthly Employment Measures
Florida Unemployment Rate
US Unemployment Rate
Florida Employment to Population Ratio
US Employment to Population Ratio
Data from the U.S. Bureau of Labor Statistics, www.bls.gov.
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Employment to Population Ratio
• Population growth
reaccelerating
• Unemployment rate
down
• Population/Employment
ratio has not recovered
Labor Market Polarization
• Routine Jobs
– Mid-skill
– Replaced by automation,
information technology
• Non Routine Jobs
– Cognitive: High-skill
– Manual: Low-skill
• Wage gains
– Advanced degrees
– Some STEM fields
• Florida
– low-skill share growing faster
– younger workers less educated
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Growing Retiree Influence
• Age 65+ in 2010
– FL 17%
– US 13%
• Less supportive of
education
• Shift taxes to business
• Age 65+ in FL in 2030
– One third of adults
– 40% of voters
– Variation across locations
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Revenues hit hard;
major tax bases not yet a structural limitation
• Florida: FY 2013 real revenues
26% below FY 2006
(Geometric Mean 1985 to 2003 = 100)
250
225
200
• Over time sales & property tax
base kept up with income
175
• Room to raise the sales tax rate
100
• Property tax rate roughly 4X
sales tax rate
7/26/2016
125
75
Income
Taxable Sales
Taxable Property Value
Trend Income (Exp)
Tough Choices Revisited, Jim Dewey, EAP-BEBR-UF
2011
2009
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
50
1987
• Wider sales tax base would
help
150
1985
• US: CY 2012 real state and local
receipts per capita 2% below
CY 2005
Indices of Income, Taxable Sales,
and Taxable Value
8
Medicaid
• FY 2012 Florida $ per capita
– 72% of US Average
– 67% age adjusted
• Stringent and a leader in cost
containment reforms, little room to
save more
• Eventual expansion likely
• Budget pressure increasing
• Healthcare costs growing, but at a
slower rate
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Lagging Human Capital Investment
K-12
Current Expenditure per K-12
Student ($2012)
• Investment gap widening
• 2000s rise: bubble & CSRA
12,000
• CSRA
11,000
• Study time way down
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Florida
Tougher Choices, Jim Dewey & Dave Denslow, EAP-BEBR-UF
South
US
10
2008-2009
2006-2007
2004-2005
2002-2003
2000-2001
1998-1999
6,000
1996-1997
• Last in net tuition + state funding per
student in FY 2012
7,000
1994-1995
Higher Education
8,000
1992-1993
• Teacher salaries suffering
9,000
1990-1991
– cost grows with enrollment, teacher
experience
10,000
1988-1989
– did not boost performance
Lagging transportation infrastructure investment
• Lane miles per capita half the US
average
– After adjusting for density and
peninsular location
– Especially lack major urban lane
miles
• Gas tax has eroded
– Local tax not inflation indexed
– Fleet fuel economy is improved
• Intermediate density means rail &
bus likely have only modest
potential to help in the near and
intermediate term
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Initial thoughts on making the best of it
• Offer the best training for manual non-routine jobs
– Beauticians, chefs, plumbers, police, CNAs, LPNs, etc.
– State colleges, K-12 vocational tracks
• Also the best training for doctors, PAs, RNs
• High-skill cities are growth engines—empower localities
willing & able to invest to do so
• For example, in K-12 Education
– Reduce RLE, replace with sales tax, count all state $ as FEFP
• Bring down property tax rates, now roughly 4X sales tax rate
• Eliminate inequity & inefficiency caused by 90% RLE cap
– Allow districts unequalized (within state) discretionary millage
until spending per FTE equals the national average
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– Flagship university SAT scores, school
reputation, freshman retention,
graduation rates all improve with
tuition up to about $12,000
• Increases in study time/effort
would boost human capital
significantly
• Reduce grade inflation
1400
1300
– encourage competition
1200
– Better array of cost/quality choices
75th Percentile SAT Scores Rise to Tuition over $11,000
1100
• Allow universities to charge
tuition equal to competitors
1500
Higher Education
5000
7000
9000
11000
In-State Tuition 2011-2012
Fitted values
13000
15000
SAT 75th Percential
– include class average on transcript
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Infrastructure
• Charge sales tax on fuel sales in
addition to motor fuels tax
– reduce excess burden of taxation
– raise general revenue
• Index gas tax for fuel efficiency
• Index local gas tax to inflation
• Unlikely to build enough major
urban roads to curb congestion
• HOT Lanes, congestion charges
– Becoming more accepted
– Encourage efficient use
– Raise funds for marginal infrastructure
improvements in crucial areas
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The Florida Retirement System
Defined Contribution/Defined Benefit Option
• Lower cost than defined contribution as
taxpayers better positioned to bear risk
• Works with prudent political system
State and local government
retirement system funded status
Funded
ratio
Unfunded
liability
per capita
US (126 plans)
74%
$2,882
Florida
86%
$1,050
New York
87%
$2,412
Illinois
51%
$7,206
California
77%
$3,636
– Assumed almost perfectly safe, 5% typical
New Jersey
65%
$4,839
– Advocated by many public pension economists
Texas
78%
$1,835
Virginia
70%
$2,770
Approaches to the Discount Rate
• Expected Return on Assets
– Widely used, FRS 7.75% typical
– Assume prudent portfolio or becomes meaningless
• Liability to Beneficiaries
• Liability to Future Taxpayers
– Future taxpayers accept some risk for higher return
– Good approximation is 7%
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