Tougher Choices Shaping Florida’s Future

1. February 20, 2014 Tougher ChoicesShaping Florida’s Future Dave Denslow Distinguished Service Professor Emeritus Department of Economics University of Florida Jim Dewey Director, Economic Analysis Program Bureau of Economic and Business Research University of Florida Prepared for the LeRoy Collins Institute

2. 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? Data from the U.S. Bureau of Economic Analysis Tough Choices Revisited, Jim Dewey, EAP-BEBR-UF

3. Relative productivity down in the 1990s and 2000s Data from the U.S. Bureau of Economic Analysis Tough Choices Revisited, Jim Dewey, EAP-BEBR-UF

4. The Tipping Point Tough Choices Revisited, Jim Dewey, EAP-BEBR-UF • 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.

5. The ill effects of the lesser depression drag on • Population growth reaccelerating • Unemployment rate down • Population/Employment ratio has not recovered • Only partially due to demography • 2012 Real GDP per capita • US: 98.4% of 2007 peak • FL: 89.3% of 2006 peak, just below 2002 level Data from the U.S. Bureau of Labor Statistics, www.bls.gov. Tough Choices Revisited, Jim Dewey, EAP-BEBR-UF

6. 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 Tough Choices Revisited, Jim Dewey, EAP-BEBR-UF

7. 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 Tough Choices Revisited, Jim Dewey, EAP-BEBR-UF

8. Revenues hit hard;major tax bases notyeta structural limitation • Florida: FY 2013 real revenues 26% below FY 2006 • US: CY 2012 real state and local receipts per capita 2% below CY 2005 • Over time sales & property tax base kept up with income • Room to raise the sales tax rate • Wider sales tax base would help • Property tax rate roughly 4X sales tax rate Tough Choices Revisited, Jim Dewey, EAP-BEBR-UF

9. 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 Tough Choices Revisited, Jim Dewey, EAP-BEBR-UF

10. Lagging Human Capital Investment K-12 • Investment gap widening • 2000s rise: bubble & CSRA • CSRA • did not boost performance • cost grows with enrollment, teacher experience • Teacher salaries suffering Higher Education • Last in net tuition + state funding per student in FY 2012 • Study time way down Tougher Choices, Jim Dewey & Dave Denslow, EAP-BEBR-UF

11. 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 Tough Choices Revisited, Jim Dewey, EAP-BEBR-UF

12. 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 Tough Choices Revisited, Jim Dewey, EAP-BEBR-UF

13. Higher Education • Allow universities to charge tuition equal to competitors • Better array of cost/quality choices • encourage competition • 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 • include class average on transcript Tough Choices Revisited, Jim Dewey, EAP-BEBR-UF

14. 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 Tough Choices Revisited, Jim Dewey, EAP-BEBR-UF

15. 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 Approaches to the Discount Rate • Expected Return on Assets • Widely used, FRS 7.75% typical • Assume prudent portfolio or becomes meaningless • Liability to Beneficiaries • Assumed almost perfectly safe, 5% typical • Advocated by many public pension economists • Liability to Future Taxpayers • Future taxpayers accept some risk for higher return • Good approximation is 7% Tough Choices Revisited, Jim Dewey, EAP-BEBR-UF