and john convince si adams is he, okay, i'm not going to get involved. harlan's point with the economic strictures that are placed on us and the war weariness on us and i think the war debate will be we're going to be prepared except in extraordinary cases to use american military force or to ask the alliance to use military force to overturn evil and despotic regimes or even totalitariani totalitarianism. >> i would like to add i agree with all of those points but would add we should have a more coherent policy in the transatlantic policy on the use of the broad range of civilian instruments. that we could use in a much more strategic fashion to make it clear to those who share our values and who live in a region that presents the greatest source of terrorist threat to the transatlantic community that we are on their side and we're

not as hypocritical as some would make us out to be. we have time for one last brief question. i see a hand, yes. >> i'm also from the atlantic council. i wanted to go back to annette's point on political will. i don't think we'll be able to make the case for another intervention. and sometimes you cannot make the case for another intervention until you have to intervene. and that refers to syria 'cause talking about libya will make the case and we use the responsibility to protect argument to go in, if syria gets ugly how do we avoid double standards? if we can go into syria but then we decide not to, then we have a bigger problem there. we can use the capacity and we're not going to do it in this case and how do you explain that? or we just cannot go into syria and then, you know, we put it

out of the table. i think the political will -- it's kind of a tricky argument 'cause sometimes i would say after afghanistan i wouldn't have seen nato going into libya at all until we had to. what's going to happen if syria gets ugly? >> you're absolutely right. in a way you can also say there's no difference between libya and syria because innocent people have been already killed on the streets of syria. children have been slaughtered on the streets. so you can actually make a case for a military intervention here but we also know syria is not libya when it comes to the capacity of the west to intervene militarily. i think at the moment we have to speed up in whatever way we can right now. first and foremost with partners like turkey who have what i've heard so far are the best channels, germany as well. we have kept always open

channels to a lot of the opposition forces over the years to see if there's any kind of diplomatic solution possible right now. this is the only possibility that i can think of at the moment. i think nobody is thinking that a military intervention is feasible and possible when it comes to the political will of europe and the u.s. >> well, i just wanted to thank all of my panelists for a very interesting, very provocative and very important discussion that we hope will catalyze a debate that's just beginning here and in other capitals around the world on the issues of libya itself and as well as the future of our military alliance. thank you very much. [applause] [inaudible conversations]

is there [inaudible conversations] [inaudible conversations]

[inaudible conversations] [inaudible conversations]

>> this afternoon we'll show the

>> i began to discover just faith individuals.

-- fascinating individuals whose marks on the presidency and whose marks on the white house were virtually unknown except for a few scattered stories here and there and everyone kind of knew that george washington and thomas jefferson had slaves but most people probably didn't know that 8 out of the first 12 presidents had slaves. >> sunday night on c-span's q & a. >> some of the plans in washington in tackle the deficit and debt problems include changing the nation's tax code, eliminating or phasing out the mortgage interest tax deduction. the tax policy center and the reason foundation hosted a discussion about that idea. speakers at this 90-minute event includes a former congressional budget deputy director and a former irs research director. >> hi my name is donald marron i'm the director of the urban brooks tax policy center and it's my pleasure to welcome you

here today. today's event about rethinking the mortgage interest deduction, we're cosponsoring it with our friends from the reason foundation as you all know washington today is focused on a very urgent pressing fiscal challenge which is the need to increase the debt ceiling. but here at the urban institute also for our friends at the reason foundation like to think ahead of the long-term challenges we face like get away from the day-to-day fighting but also thinking of the long-term policy challenges and one of the things we face is our broken tax code. america's tax code is in very sorry shape. it's excessively complicated. it's inefficient, harm's the economy. it's unfair. and it doesn't, frankly, raise enough money to fund our government. and so for all those reasons it makenshat things can we do to fix our tax code? the thing that is most noticeable about our tax code is how many tax breaks are embedded

in it. those tax breaks deserve a close review and so the spirit of today's undertaking is take a look at the most famous one deductibility of mortgage interest, the interest people pay on their mortgages. to do that, i would like to revisit that large tax break in the code we put together a panel of four experts. the first is eric toder my colleague here at the urban institute where he's an urban fellow. second dean stansel who teaches at florida gulf coast university. and jeff hanlon and lauren yun who's vice president of research at the national association of realtors. we're also very lucky to have ed andrews as our moderator who's currently the moderator for economic and taxes and budget at the "national journal." thank you again for joining us today.

let me turn it over to you. >> it's a great pleasure to be here. i can't think of a better forum for powerful conversation than here at the urban institute and i think this is a great, great way to attack the whole tax reform, the mortgage interest deduction is, you know, one of the very, very biggest and certainly the most popular tax deductions out there. it's expensive. critics say it's unfair. and if we're going to tackle tax reform dealing with it in microcosm, if you will, will bring to light all of the issues that we -- you know, we have to grapple with in talking about tax reform. so i really look forward to getting underway. i just want to cover a small housekeeping details.

the way we're going to work this is that each of our panelist is going to speak -- give an opening presentation that will hopefully last about 8 minutes. that will get us off to a very good start on the discussion. crystallize a lot of the issues. and then i will take a few minutes -- a bit of time to fire my own questions at the panelists. and in our third section of this, i will open it up to questions from you hear in the room, the audience in the room as well as our online audience and to those who are watching online, i urge to you email questions to the panelists at public affairs at urban.org. and we will try to handle as many as we can. so with that, why don't we

proceed with our speakers. we're beginning with -- sorry. derek, yes. >> okay. well, thank you very much. i'm pleased to be here. my role on this panel is to provide a little bit of an overview of the mortgage interest deduction and then would go to get the straightout opinions later. i want to talk about four things very briefly. one a little bit about the background in history of the deduction. second, where it fits in, in an income tax system, how it relates to tax neutrality principles. and then i'll go on to who claims it and who benefits from it and there are some tables in your package which i will be referring to. so first on the background in history, i think we could possibly call this an accidental tax subsidy when the modern income tax started, all interest was deductible. interest payments were viewed as an expense of earning business and investment income.

however, the congress made no distinction in 1913 between interest used to produce taxable income and interest that was used to generate nontaxable income such as the return from a home. at that time the deduction had very little effect on the housing market, the mortgage market was not that well developed. and more to the point, while only the very highest incomed individuals paid any income tax. so the deduction really wasn't important. things changed in world war ii and the aftermath. the income tax became a mass tax instead of a class tax. the availability of long-term low interest mortgages fueled a large post-war expansion in homeownership and by the 1970s when people first started to count tax expenditures, the mortgage interest deduction was one of the largest loans in the tax code and it remains so. 1986 tax reform act made some other important changes.

it eliminated the deductibility of consumer interest which left mortgage interest sort of standing alone as the only form of the nonbusiness interest that was deductible. it limited the deduction to loans to a million dollars and -- up to a million dollars of loans and allowed taxpayers to deduct an additional 100,000 of interest on home equity loans. an interesting side light when treasury was developing tax reform proposal in 1984, we were given full rein to look at anything we wanted to except the mortgage interest deduction. president reagan specifically said hands off that. however, things have changed. and when you look at recent tax reform proposals the bush tax reform panel in 2005 proposed of converting it to a 15% credit and imposing a tighter caps and geographic base caps and both the president's fiscal

commission and the bipartisan policy center in their debt reduction plans have proposed replacing the mortgage interest deduction with a refundable tax credit. so while nothing has happened in response to any of these ideas, it is definitely now on the table. as it's never been as before. let me discuss a little bit about the policy under an income tax the general rules interest income is taxable and interest investments are deductible but housing generates nontaxable returns so there's always the question should you allow a deduction for something that generates nontaxable returns? and there were two separate issues. one, if you deny the deduction for mortgage interest, you would be giving a preference to people who could finance their homes by equity who didn't have to borrow over those who had to borrow. one group would face the

after-tax costs and the others of pretax cost of capital. but on the other side, if you extended the preference to borrowers, then you would be increasing the amount to which you favor owner-occupied over rental housing. so you had these two competing neutrality issues. however, the mortgage interest deduction over time has become more of an anomaly in the income tax than it used to be partly because other forms of consumer debt are no longer deductible. and i think more importantly, because most people don't have to pay taxes on their interest income anymore. people have access to 401k plans, those who don't have access to iras so it's no longer the case that at the margin for most interest income is taxable is true at the very high end. so there's much less under this kind of consumption tax treatment justification or none really for allowing interest deduction on tax policy.

so i'll go on now to who came -- claim the credit. table one in your handout, this comes from 2007 s.o.i. data. the next to the most recent year for which irs data on this are available. and also the most recent year in which before the crash. in 2007, people who earned between 50 and $200,000 were 31% of all tax returns but they were 65% of returns claiming the mortgage interest deduction. they counted for 46% of adjusted gross income but 64% of mortgage deductions. so that's where the deductions are concentrated in that kind of upper middle incomed group. only taxpayers who itemize can claim the deduction. so only 28% of tax filers claim the deduction in 2007. but in each group with income

over 75,000, more than 62% claimed the deduction as you look at the table in some it was over 70%. another thing not in the table -- the benefits of the deduction are highly concentrated geographically. a study done by some years ago estimated the net benefit of what you would get from having the deduction rather than the money being contributed equally to people per capita. they made this calculation of which regions benefited and which didn't. and found the deduction provided net benefits to only 20% of the space and 10% of the metropolitan areas and that 75% of the net benefits came to 3 metropolitan areas, new york city, new jersey, the los angeles area and riverside county and the san francisco oakland san jose. it's really kind of amazing how it's some parts of the country

that gets such a large share from this benefit. and the question is how is it distributed by income group? the benefits distributed by income group. we did some stimulations in the tax policy center this on tables 2 and 3. one is looking at current law as a baseline assuming the tax cuts expire. one is current policies assuming everything is extended. these are numbers for tax year 2015. i'll just summarize briefly our findings, but to put this in perspective, we don't assume any behavior when you eliminate the mortgage interest deduction. we don't assume any real behavior. we don't assume people change the way -- how much house they buy or whether they buy houses and store but we do make two assumptions. one, obviously, is a tax optimization if people switch from the standard deduction do and the other is a financial

optimization. we assume people who have other sources of capital income will not continue to pay tax on that income and have nondeductible mortgages if they have other taxable capital income, they will avoid the elimination of the deduction by paying down their mortgages and reducing their tax burden on that income. so when we go through these calculations, we show that eliminating the mortgage deduction would raise in most of the distribution would raise taxes for only a minority of taxpayers. it would raise for a majority only in the top quintile of the income distribution. the taxpayers between the 80th and 95th percentile that is in the lower three-fourths of the top quintile has the highest eliminating the deduction and the taxpayers in the bottom three quinn tiles and in the top

1% experience a smaller tax increases in burden than average. what's driving these results? one, only itemizers -- there's benefits from the deduction and most people don't itemize. most people use the standard deduction so it's only most people in higher brackets who are itemizers. only homeowners benefit, again renters are concentrated in the lower brackets. the benefit per dollar of interest paid is larger for those in higher marginal tax brackets and that's at higher rates and finally at the top, people are relatively less hurt by the elimination of the deduction. the very richest people, for two reasons. one they can avoid a good part of the tax increase by paying down their mortgages by equity and the second as income rises, hire costs become a higher share of income. so those are some basic facts

and i look forward to participating back and forth. >> thanks a lot, eric. let's hear next from dean stansel from the reason foundation. >> hi. when anthony first came to me with the idea of look at the mortgage interest deduction one of the questions was well, we both have this vague idea if we get rid of the mortgage interest deduction there would be a lot of impact on taxpayers so we wanted to look at -- well, who benefits by who much and we looked around we couldn't find good independent analysis and we went out and collected a bunch of data. i have six things i want to talk about and i have 8 minutes and i may have talk a little bit fast. we have a study that came out today. there's a link on the last page of the slide and there's a summary on your chair. the six things how effective is the idea of a tool to increase homeownership? how big is the m.i.d.? who benefits? how much? a little bit of market effects and tax policy. first of all, how effective is

it? you would think if the mortgage interest deduction were an effective tool for increasing homeownership rates that you would see some sort of relationship between the amount of the m.i.d. intake and that's the red line rate. the homeowner rate has been fairly stable between about 64 and 69% over the last couple decades. so it could be if your goal is to increase the homeowner rate maybe this isn't just the right tool. but the larger point is how big is the mortgage interest deduction? if you just look at the irs data, they say it's nearly $500 billion and that's certainly the total amount claimed on tax returns. there's nothing inaccurate about that number in particular. but the problem with that measure is, it's important to consider, say your john or jane doe and you have average -- the itemized deduction of $19,000 that's just based on the irs average, and that includes mortgage interest of 10,000, okay. we repeal the mortgage interest deduction what are you going to do? are you just going to claim then

the 9,000 that you have left in itemized deductions or are you going to look the standard deduction is higher than that? you're going to take the standard deduction of 11,400. so the point is that the jct addresses this fact. you got to take into account the fact that you don't lose the whole m.i.d. if you get rid of it. you only lose the amount by which it exceeds standard deductions. joint committee on taxation addresses that. incorporates that in their estimate that's 5.5 times smaller so how big is the m.i.d.? well, it's only about 5.5 billion and furthermore we teach -- i teach economics and we teach students first chapter. people respond to incentives. even that number is too high. here's why. let's say you are a john and jane -- john and jane richie, okay. and you have just -- your empty nesters and you just sold your house on long island and you're sitting on about $500,000 in liquid assets. you go buy a condo in palm beach, find one for 300,000. what do you do? do you pay cash for it or do you look at the fact mortgage

interest rates are at record lows and you have this tax incentive so you take out a mortgage and you get rid of the tax mortgage they're going to have a lower invest. so it's not just the 85 billion that you supposedly would gain by getting rid of the m.i.d., it's going to be smaller because it's going to be less revenue from the tax income. who claims -- who benefits from the m.i.d.? well, it turns out it's been fairly consistent. it's about 25% or actually lower for most of this period but i would say roughly one-fourth of taxpayers actually benefit from the m.i.d. what does that mean. 75% don't. 75% of the taxpayers don't benefit from this at all. it's varied by income level. the national association of realtors claim that two-thirds of the people who claim mortgage interest deduction are middle incomed earners. well, the median household

income median by definition is the middle is about 50,000. if you look at the middle group there, it's nowhere near the two-thirds. about 8% of the m.i.d. claimants earn between 40 and 50,000 about 30% if you span it out about 60% of the beneficiaries earn over 75,000. it varies by annual, of course, as well because when you're younger you have a bigger mortgage that you haven't paid as much of the principal off of. how much do they benefit? well, the issue here is income level. and eric did a great job summarizing this as well so i won't spend a lot of time on this but in the paper we use this data which is publicly available and it's transparent. you can find it and replicate what we've done here but the biggest benefits in dollar terms are at the top, of course, but to be fair if you measured in percentage terms the disparity

is smaller on this table which gives way too much detail for a powerpoint slide which does show you some of that here if you look on the far right column average tax savings as a percentage of the tax bill. well, if you look at it of the percentage of the tax bill the rich don't really benefit anymore than the middle class. but the one thing to keep in mind most of those in the middle class aren't actually claiming m.i.d. so it's somewhat changes that point. what happens to housing prices? well, it depends who you ask, i suppose. we took a simulation of taxpayers and went through the data we put together on the tax saving approach and found -- and used a little mortgage interest calculator and found well, if you have the tax savings listed in the first column how much more would you be able to afford to pay and that's over there on the far right column. the percentage increase and how much you can afford to pay less than 1%. the n.a.r. claims it would be a

15% reduction. that research by economists at the university pennsylvania and at m.i.t. it was about 3 to 6%. it's 12% to 3 to 6 less than 1. both of those latter estimates are, obviously, much lower than the 15% that's often claimed. ideal tax policy involve broad-based low rates. the problem with taxes is that they create what economists call deadweight loss and that's lost wealth and it's larger if the rate's higher. so from our perspective, and this is where we're going to differ from some of the fellow panelists, the idea of reform here would be to broaden the base by getting rid of the m.i.d. and then make a proportional reduction in the rates so that the revenue remains the same. the debate over how much revenue to raise is for a different forum. here we're looking at a different tax policy what we'll

minimize the income and broaden the base and our calculations show that it would be about 8% reductions in rates. .. s to most taxpayers who earn under 100,000. by the way the url for the study there is the correct one. the one in your chair is not.

thank you. >> thanks for a very quick and lucid run-through of criticism here. so, seth, would you like to pick up. >> sure. my name is seth hanlon, director of fiscal reform at the center for american progress. and it is certainly a pleasure to be here. dean mentioned these are tax policy questions. there should be, you know, distinct from questions of rates. i think i would disagree with that i think when we're talking about the mortgage interest deduction we really can't separate it at all from the fiscal challenges that our country faces. obviously we're hearing where there is immediate crisis about extending, raising the debt limit and a lot of, you know, obviously partisan, partisan ill will over that. but i think, you know, from all sides of the political spectrum there's an

understanding we're simply on an unsustainable fiscal course and, you know, we think that it is pretty clear that we have both a spending and a revenue problem. revenues as a share of gdp this year are estimated to be less than 15%. that is the lowest they have been since 1950 when harry truman was president. it is pretty clear, they have declined since the last time the budget was balanced during the clinton years. not only that but we have serious challenges with an aging population, rising health care costs that we need to bring under control further but it's clear that our current revenue base is not sustainable at all. and so, we need a balanced approach fiscally. and i think, the key to a balanced approach is looking at both sides of the government ledger, spending and taxes. and looking, at the cost effectiveness of both our spending programs and the embedded programs, social

programs, business incentives, that are embedded in the tax code. tax expenditures. the total of course of the so-called tax expenditure budget as estimated by treasury is about one trillion dollars per year. that is the single largest. if you compare social security payments or medicare it's larger than that that. it is more than twice as large as the domestic discretionary budget. so to leave this area of spending off the table is really a myopic approach. we have the project at the center for american progress called, doing what works. we look at both sides of the government ledger, spending revenues and focus identifying programs that work at achieving their purpose in a cost effective way and looking at ones that don't and seeing if we can reform them so that they do. so the mortgage interest deduction i think is, can fall under this analysis. it is equivalent to a

government spending program. the government could, essentially, matches homeowners mortgage interest payments, a percentage of that, based on their marginal tax rates. it could just as easily provide a check or refund or subsidy to the lender and the economic effect would be the same. so it is pretty clear the mortgage interest deduction is a, should be looking through as through the prism of a spending program. and not only that but it's an enormous spending program. its revenue cost, so in other words the fiscal cost to the government, is projected to be by both treasury and the joint committee, to be just shy of $100 billion this year. and to put that in perspective, that is twice the size of the budget requests for the department of housing and urban development. in a sense, it is twice as big as all of our other housing programs combined. so, the key questions are, you know, of any program are what are the programs

purposes? are those purposes important and are, is the way we're doing it, the way we're advancing those purposes the most cost effective way? so i think we would, progressive, most progressives and certainly center for american progress would agree that homeownership is a worthy goal. it has intangible benefits and that, you know, people, throughout the income scale should be, better than not to give them the opportunity to own. so, but, if you look at closely at the mortgage interest deduction and ask ourselves a question, are we doing it in the most effective way, i think clearly the answer is no. if we wanted to increase homeownership, if that indeed was the goal, we target the incentives towards families who are on the margin of possibly not being able to afford to own a home. and eric mentioned some of the numbers but it's pretty clear that is not what the mortgage interest deduction does in the way it is currently designed.

wealthier families get a much bigger benefit because of what's known as the upside down effect. not only do they have clearly, tend to have bigger homes and bigger mortgages and thus more mortgage interest to write off, but they also can deduct interest against a higher marginal rate, providing a bigger tax benefit. and so, eric had mentioned some of the numbers. i think they square with a recent report in the national tax journal by if we look at the static effect of the mortgage interest deduction, homeowners in the 40,000 to $75,000 income band benefit on average $542 per year and those above $250,000 benefit by $5400 a year. so in other words, we have 10 times the subsidy for wealthy taxpayers as we do for middle income taxpayers.

of course there is the issue of, that is static estimate. and, well, if we were to eliminate the mortgage interest deduction, wealthy, there are some dynamic effect where wealthy taxpayers could pay down their mortgages and adjust their portfolios but research shows even with, even if you take the most, the most conservative some shuns about that -- assumptions about that, still wealthy taxpayers receive a far outsized benefit compared to middle class taxpayers. six to eight times the benefit. and so i think all of this creates fairness issues but it also, it also suggests the closer need for efficiency and cost effectiveness of the mortgage interest deduction. so, and i just want to be clear. a lot of the times you hear proposals for, or polling questions about eliminating the mortgage interest deduction but i would say that keeping the mortgage interest deduction in its current form and, or eliminating it tomorrow are

not the only two options. there is a urge range of options in between that we can and should be looking at. so i think, you know, there is different, there are different ways of reducing, better targetting the benefits of the mortgage interest deduction. there is lowering the amount of debt on which interest can be deducted which is currently effectively $1.1 million. even lowering that to $250,000, the national tax journal study found which is more than most proposals would suggest actually affects only 7% of homeowners. and also there's reducing the outsized benefits that goes to people in higher tax brackets, either by reducing the value of the deduction from its current maximum of 35 or 33% to 28% which is what president obama has proposed in his budget for all itemized deductions. or one step further, moving to a credit which shall be

flat for all taxpayers. and if done at the lowest, or about the lowest marginal rate of 15%, what would be the lowest marginal rate of 15% if the bush tax cuts expire, you would have a flatter and what would be a much fairer subsidy for homeownership. so, and finally i think there's two aspects of the home mortgage interest deduction, it is hard to see how they advance the primary purpose of homeownership. and that is that the deduction is allowed on second homes, including vacation homes and not just vacation houses but, but, boats that could be used as houses. and it's also up to $100,000 in home equity debt, the interest on that is deductible too. so that is actually a subsidy for taking, reducing the equity in one's home. its hard to see how that advances the primary purpose of homeownership. so, just to wrap up, the

center for american progress recently released a long-term balanced budget report, called budgeting for growth and prosperity and i think, a key point is that it is not necessary and it would be undesirable to make too many radical changes to the mortgage interest deduction too quickly. i think that is true of all deficit reduction measures because of the fragility of the economic recovery. we don't want to cut either raise taxes or cut spending or cut tax expenditures too much too fast. i think that is true. the mortgage interest deduction too with the fragility of housing markets. so we can look at making these changes over a long period of time. and that is what we do in our plan. essentially we have step down the value of the deduction and until it is transformed into a 15% credit, flat for all households. limited to $25,000 in

interest on a primary residence. but we do that over basically 20-year time frame to, you know, so not to upset economic expectations unduly and to minimize the impact on house prices. the one international example is would be britain which reduced its mortgage interest deduction over a 25-year time frame with little effects on homeownership or shocks to house prices. so i think there's a balanced approach that's more fiscally responsible and targets the subsidy for homeownership in a more cost effective way. >> great. thanks very much. lawrence, you're on the receiving end. you've had all these pitches thrown straight at your head. so take it away and tell us why they're all wrong. >> well, now, first i want to take the policy center

for inviting me to give an opposing viewpoint. in washington people say nothing is done because there is too much debating or bickering over major issues. we have urban institute, center for american progress which would be considered left of center, reason foundation would be considered way on the right agreeing. then one reads "the washington post", "new york times" editorial, "wall street journal" editorial and they're also in agreement in regards to what needs to be done regarding mortgage interest deduction. so where do i stand and where do the association stand? well, let's look at the situation first. it's the worst possible time to discuss because the fragility of the housing market and ben bernanke clearly laid out that without the housing market recovery, that economic recovery will be very lackluster. so the fact that we are discussing this is just not a good timing issue. now assuming we're not in a worse housing crisis and

that it is the appropriate time. i laid down some of the reasons on the recovery process. well what about during the bubble years? well during the bubble years, certainly one would try to identify the causes of the bubble. things like the growth in gse portfolio. the higher hud mandate on housing goals as to how much mortgage that needs to be purchased in the very underserved markets. the credit rating agencies, these perverse incentives they have to provide a aaa credit rating agency. but if one goes back, and i would also mention on the very last point where there were some key people making pronouncements this is not a bubble, so encouraging people to buy, buy and buy which in hindsight clearly was misplaced. now mortgage interest deduction was in place for 100 years. so we should be looking for the bubble situation, something that is peculiar to recent times and not something that has been in place for 100 years. so one can do a study on it.

so perhaps mortgage interest deduction in light with credit bubble perhaps caused some aspect of the bubble but mortgage interest deduction by itself it is hard to figure that out considering its 100 year existence. people pointing to community reinvestment act. it has not been around for 40 years. also arguing something that isn't in place for a long time as causing the source of the bubble. some of the facts pretty much in line with what was said earlier, i think that this figure on the mortgage interest deduction, $120 billion tax expenditure, revenue-raising potential is maybe $100 billion but the figure is measureable in light of the current debt ceiling debate. removing mid, some people tax expenditure. government spending. so one can find equivalent of it. i would say that mortgage

americans would be view removing mortgage interest deduction not as tax expenditure but a tax increase. you can ask people, how do you feel about it? further more, sovereignty with the law and democratic process and tax code clearly say that this mortgage interest deduction you pay less tax. so despite the strong economist argument, strong washington arguments, removing the mortgage interest deduction is a tax increase. it is not a reduction in government spending. regarding what happens if we remove mortgage interest deduction, well, given that $100 billion annual tax, that the tax revenue potential, this is how much the homeowners are giving up. you put your money in the bank. somebody gives $100 billion a year, how much is that asset worth? do present value analysis and capitalization. you say, well at the current 5% interest rate, it should

be worth about $2 trillion. depending how one plays the interest rate discount rate one can get a 10% price decline, 20% price decline, depending how one would discount t would impact not only people taking mortgage interest, mortgage interest deduction but every homeowners. so if dean and i own exactly identical home, we have neighbors, i have a huge mortgage interest deduction he paid off the debt. if the home value of mine goes downs, his home value goes down also. impact on all homeowners and not only people who are getting the mortgage interest deduction. some facts certainly. the rich are getting more benefit because higher tax bracket but that is looking only at the one side of the ledger. on the other side of the ledger they're paying more in taxes. higher tax rate. so in terms of percentage in relation to the income we find it is younger families who are mostly beneficiary of the mortgage interest

deduction. in fact among the people who take out the mortgage interest deduction, people who take out mortgage interest deduction, 91% earn less than 200,000. 65% learn less than 100,000. homeowners currently pay billion 80 to 90% of all federal income tax. if we remove it, homeowners may be paying up to about 95% of all federal income tax. other people can argue, well it doesn't include, fica, social security taxes and others but depend on how you define whether federal income tax is that exactly as defined or fica or social insurance fund is not really social insurance fund should be part of the overall revenue one could get a different figure. in absolute dollar terms, no doubt wealthy families to get benefit but in terms of the percentage is the younger families that is clearly benefiting. one of the strong economic arguments for having some type of economic incentive would be to say, well, if

there's a market failure with a negative like pollution then you tax. if there is positive externality you provide some inincentive to. we find sustainable homeownership, not the bubble homeownership is associated with higher student test scores among home owning families. lower juvenile dell link question. higher participation time for charity and many, many more. there are societal benefit true to being homeowners being in the community. the research on sustainable homeownership, not the bubble homeowner isship. we don't want a repeat of the bubble. and they are, we have some influence in washington. when we knock on congressional office they open the door. now the question is, are we a special interest group or a is it the case where mr. olsen was my professor

and he asked me to go to the former soviet republic, it is in my boi, he is the one who forced me to go there. his book was on the rent seeking special interest group. if the special interest group creating so much debt to the society. many policy advocates position we provide certainly benefits our members. the true beneficiaries are existing homeowners. they don't see the sudden reduction in their home values. homeowners make up 75 million families. they are the comfortable majority. and homeowner,s according to mr. olsen, logic of collective action can not organize. they don't have the incentive to organize in the sense nra is representing their point of view. rather than a special interest, they are promoting a public interest. i'm raising the question. we are a group of many economists and thinkers here. the, assume, now, this is just a big assumption.

assume that there is a rent seeking and debt loss to getting rid of mid. we need to assure the debt code we don't have the rate loss. if we change the rules in middle of the game it impacts current people who may have had the decision based on the current rules. somehow if we, global warming and everybody move to the north pole and we can start all over, perhaps mortgage interest deduction is not there. we're not starting from all over. we're a history made the decision knowing that was in place and is it fair? and, if there is a dead weight loss cord, there is always a way to negotiate and provide the necessary way to remove that dead weight loss. i'm not sure what that is. i'm trying to raise the question for people who think there is a debt rate loss. productivity growth, "wall street journal" editorial would say housing is a bad investment. you invest in factory, you produce widgets. houses do not produce

widgets. it is a dead investment i would say, well what does a house produce not widgets but produce work ethics? or whether provide certain intangible quality for people that want to work hard? we don't know? according to the growth model not only capital deepening produces economic growth but it is a measure of our -- we don't know what the productivity growth is. many homeowners when they're buying a home they're making their long-term decision and some of the psychological and psychology journals say people who are thinking long term make more prudent decisions overtime rather than people if are thinking week to week or month to month. so buying a home changes that outlook. debate about and i ask a lot of questions to say the answer is clearly not resolved. and the fact that the u.s. has the fastest world economy, fastest and largest world economy since 1913, since the introduction of mortgage interest deduction, so is it because of or in spite of?

and it is one of those questions i guess that can never be answered. knowing that dean was here i also wanted to bring up his professor, james buchanan's idea of levithon. the government getting larger and larger and there is no way to stop it. is mid one way to prevent the levithon getting larger? we have one million members. we have people of all political stripes. 20% of our members are probably from the tea party. they come up to me and say i want a lower tax rate, give up mid. enthis i say, let's look at reality just as information item when if you give up the mid and lower tax rate today, who knows five years from now, 10 years from now there is different congressional makeup, tax rate goes up and you lost mid. you have higher tax rate. after thinking it over it changes some people mind about it. certainly lower tax rate is good but what happens in the

real world. for renters, candidates use international comparison i'm always a little cautious is it apple to apple or apple to oranges but if, if mid is removed, let's remember more steel gets mid and depreciation and other benefits. could be the case where i buy a home for my brother and my brother buys home for me and they get mid and depreciation, so what happens? and also we also know that in a rental society, heavily populated rental areas there more incidents of rent control. most economists to say to help affordable housing rent control would be most ineffective way to go about it. if you have rental society and voting lead to more, introduce introduces more distortion and inefficiency into the system. long-term deficit pressures to the system is certainly there. aging population and i only mention, perhaps there could be some peace dividend where more countries become

democratic or, or could be replay of the bloodiest century in human history. i'm going way, way off tangent now. the only reason why i'm mentioning that is, some people were clearly, just evil, you know one can look at hitler and in germany but one can also look at many places where there is a massive debt, whether in china, whether in russia and others and it was due to land reform. people say 90% of us are not owners. 10% are owners kill the owners and land is ours. so we had the bloodiest century due to the land reform situation. but if you have a solid society majority are owners one has to think about whether that leads to more stable social outcomes. my final slide, i just put, this is my personal. not nar statement. just to state i'm not mr. no, no, no on everything. but, by final slide is, two

most transformative president after which most people would agree on the last century, fdr, mentioned a nation of homeowners are unconquerable. as economist we compute the numbers but perhaps there is something more than numbers regarding the homeownership society. ronald reagan came to the nar convention and he said at our convention that he will not touch the mortgage interest deduction because it symbolized american dream. the president not only thinking of one segment but the broader society, that they are considering many aspects. so, there is large agreement in washington, left and right and i again, thank the tax center for inviting me to this to be on opposing side. i had to come up with many, many possible counter arguments to this discussion. thank you. >> thank you. i've heard all my life about how homeownership is the key to the american dream and

that the mortgage interest deduction is key to the american dream. i hadn't thought it was key to the future of the world. [laughter] but that was a great and rousing defense. i would like to, i'd like to, i'd like to start just by trying to, sort of bring these discussions together a little bit. lawrence, on your side, seth made a number of points but where his argument seemed to be going, toward the end was not to abolishing the tax preferences for homeownership but to change them really. and it seems to me, you know, his, he was outlining an approach based on tax credits, other things, that would have made the distribution of the benefits fairer and presumably would have reduced the benefits for those who don't arguably

need them so much, the wealthy. so, i think it's probably, i'd like you to sort of address those questions. is it reasonable to talk about a fixing of this system if you feel there needs to be some support? and seth, on your end, i think that lawrence, you know, raises some really important questions which i think are, you know, very hard to unravel about, you know, what i think economists sometimes call the transition costs. and i know that you are, sort of a speaking to this when you said you, if you make these changes you have to do them over time because, you know, you've got all of the property values in this country just about embed the sum shun of these tax deductions. if they are gone, you suddenly pull value out of,

you know, huge, slice of american assets. so you have to do this very carefully. but if you, sort of go in the direction you're talking about, you know, kind of reforming it and so forth, do we really end up in a terribly different place? in other words, we're still, we're still trying to, we're still trying to talk up homeownership through the tax system and make in a way that is almost as expensive. let me talk with you, lawrence because you were on the receiving end so much. >> i appreciate seth thinking through the transition process. that any changes need to be gradual because, you know, sudden changes as i mentioned could be quite disruptive, particularly at this point in the economy and the housing market. regarding the distributional impact, i think the question really comes down to exactly that.

the distribution impact which is not really a question about the mortgage interest deduction even though the data, data was clearly laid out but the more question why shouldn't, if warren buffett does not need mid, people ask, does warren buffett need the extra income? if the question is about the distribution part, it should be on the broader, just tax reform or tax structure to say well, wealthy people, some people would view as wealthy people are not paying their fair share. they should be paying higher share of their income. that is just broader issue on the, and not, specifically directly related to mortgage interest deduction. one other thing about the distribution at impact is, there is, i believe, some consensus among economists that current economic recovery will be quite slow. and this is due to deleveraging impact. and everyone look at that situation. i think one aspect of the deleveraging that is not

being looked at closely is that many small business owners, so these are not microsoft, amazon, who can't issue aaa bonds or go to bank, small business owners where do they get the money? often they tap housing equity, or they tap their family, their parents housing equity to get the start some business. . .

>> i think in the way the policy budget process here in d.c. works, all of these discussions about reducing the debt, our focus on a ten-year budget window. and i think that's unfortunate that we're not looking further out. it's very hard to look at those projections 20 years out. but i think naturally what we need to be doing is preparing for the decade after this one. just to get some numbers, on the current law baseline which is unrealistic in some ways, but if we don't, covers nothing, the debt as a share gdp which is 69% now will only go up to 76% by 2021. and then it will begin to arrive after that. the fiscal problem we have is

not immediate. we don't have to do too much of deficit reduction to quickly. and if we do, not just in the housing area but in all areas, we can really threaten this very fragile economic recovery and make herself worse off in the long run because of that. and so thinking 10 years ahead, 20 years ahead, i think a gradual step down in the value of the deduction for an ever the top rate is, scheduled to rise to 39.6 at the end of 2012, to something that is lower and flatter for all households really puts us on a much better fiscal footing. the estimates are if you do that, coupled with changes like producing the size of the mortgages that are eligible for the deduction, we can cut, cut the cost of the mortgage interest deduction in have. and so we can plan to do these

now. we can discuss this, plan to do it now, and put things in place that will slowly and got to take effect and put us on a much better fiscal footing 10 years from now when the real problem is. >> let me backup for just a second to again for people are watching us online. anybody who wants to send in questions, again e-mail address is public affairs at urban.org. i'm going to go out a couple more questions before we open it up to the audience. it seems to me that, it seems to me that a core question here, if we're talking about tax reform, both danced around, all of you kind of have been circling around it, if we are going to do something about the mortgage

interest deduction, a first question is do we start on the premise that it is flawed and needs to be fixed? or eliminated completely in the broader context of some tax reform? is it so big an issue that it cannot be avoided in the tax reform? or is it so interest in our economy, so important to so many people and so disruptive to change that we just want to have a tax reform that just leaves that part of the code unchanged? as eric alluded to, that was exactly what the reagan administration did in 1986. basically just too tough to handle. and the american dream and all that. but basically it was too big to mess with, so they left it alone. the question is, from a fiscal

and policy perspective can we afford to not tackle this huge tax expenditure, both for reasons of fiscal strength and good policy, or is this, is this break is so big and so entrenched that the political reality is, you know, we are going to miss the chance for reform and all other areas? and i just like to throw this, i'd like to thought, perhaps eric, you did had some experience in the real political world, would you like to take a stab at that? >> well, i think the only thing i can say, my colleague has said this also, given the size of the fiscal problems we faced, i

don't think it is possible to do anything to address these without doing something that is politically unrealistic. so i think -- [laughter] i think you're seeing is a politically unrealistic in today's context is not enough to push it off the table. then, i think the other thing i would say, if we're doing this as a form of backdoor spending, which is the way i look at it, many people do, maybe not lawrence, but there are many other to the tax code, and we've never taken a position with front door spending that we just say all spending has to go, or all spending has to stay. we look at things on a case-by-case basis. we ask is this worth keeping or is it not worth keeping, or -- or can we pare it down and basically improve it a bit, can we make it costs less and work better. and i think certainly something

along that last, cost less and work better, is the way we are to think about something like this. >> i have a feeling your instincts are more just get rid of it. >> i think michael off would probably have some different views. he used -- he works in washington, i used to work in washington. i think a repeal today would have some effects that maybe we wouldn't want them to phase it out on a grandfather in current mortgage holders. some positioned along those lines would probably be a wiser way to go about it. >> i'd like to ask lawrence a sort of a core question here. in all of their defense of the economics of the mortgage interest sector, i didn't hear you or anybody else actually question, really question the

assumption at the end of the day the deduction, the tax breaks make homes cheaper. and i just on a gut level have never believed that because it seems to me that when you're putting a piece of property on the market, the buyers and sellers both know what the tax advances are. and so the price adjusts so that for all of the particularities of the destruction that might be called by eliminating it, is it really defensible to say that deduction makes at the end of the day homes more affordable? they certainly skew the decision for a buyer in favor of ownership. there's no question about that. but do they really benefit the homeowner at the end of the day by making them actually more

affordable? >> so, the capitalization issue, so if there is a benefit, a benefit that goes out for many years, then home value gets capitalized, and, therefore, if one removes the benefit the home value declined. so because of the mortgage interest deduction and his boosted up homebuyers therefore from buyers perspective they are paying higher home price. they may get the deduction but they're not getting any net benefit situation. there's two academic studies. one from the national bureau of economic research, which looked at homeownership from mit. they found that the impact is about five percentage points. this study was done i think more than 10 years ago. it was before the bubble and crash. so five percentage points, that is saying current homeownership rate 66% without it. it would be 61%.

so that's quite sizable in terms of impacting number of families. i think there's one more recent paper that came out, forget the authors, one from kansas state university and i think school of economics. they look to say that mit has no impact on homeownership, and the restricted building area, coastal markets like san francisco, boston, new york, but it has some positive impact in the middle of the country where people can build homes more easily. such as basing on that it appears that mortgage interest deduction to provide a little edge in terms of the ownership but i think the principal reason for that changes to him ideas would on the existing current homeowners what already made their decision. based on what existed. and now they will be suddenly hit financially as a result of a change. >> i think what we have here is an information problem. those of you in the audience who are homeless, how many of you

know the following three things. neville, what was the size of your mortgage interest deduction last year? what does that translate to into lower tax bill? and what does that translate into in terms of a higher mortgage that you can afford? i would say probably zero of you, none of you know those three things. if you don't have the information as to the size of the benefit that mid provide how on earth can that make you able to spend more on housing? the information just isn't there. picking up in your skepticism on the pricing spent i think your argument, if that's the case, then that would argue for the idea that, in fact, it does have a meaningful impact on prices. in other words, if i the buyer don't know what the benefit is, maybe i'm getting ripped off. spent know, i'm saying the buyer, and as you go through and make the detailed calculations, you don't know how much you can afford because of the existing

m.i.d. you just don't know. if you don't know and how can it possibly cause you to spend more on housing? >> well, it's hard for me to understand at the end of the over the long-term markets are going to settle out. you know, all of these taxes vanishes factors into it. let's hone in a little bit more than the question of reform, speaking long-term, reform versus getting rid of the deduction entirely. if you don't like deduction, if you don't like it, is it smarter, is a smarter or wiser to try to repair the things that people are most frustrated about, such as it tends to

benefit, the benefits go mostly to higher income people, and may arguably raise prices for homeowners at the lower end? so the question is, repair or start from scratch with a clean sheet of paper? in a broad tax reform. >> well, i think, you know, a lot of the things that are said about homeownership, and seem to be widely believed may not be true. there are a lot of studies out there that associate homeownership with all kinds of good social and community characteristics, people voting more, lower crime rate and so forth. but nothing that my knowledge

establishes that homeownership is causing these good things. it may very well be the case. people have certain characteristics also own homes. so it's not, it's not a very, a very good to me definitive indicator. in fact, we've had an experience in the last decade where a lot of people were induced through policy to own homes or maybe should've not not been owning homes. it's very good thing to have homeownership but opportunities, but also for many people renting is a very good option, appropriate option. and i don't know that we should necessarily establish that the government should be deciding that we should have more homeowners than we otherwise would. again, as long as markets are working right and the opportunities are available. so having said that, on a sort of purely policy grounds, one can argue that maybe you should just not have any preference at

all. there are many countries in the world that don't. canada doesn't have a mortgage interest deduction. duties and doesn't. australia doesn't. their homeownership rates are comparable to ours. which kind of leads to a second point. how much is the mortgage deduction really doing for homeownership. if you really want to help homeownership, you wouldn't be giving deep subsidies to high income people who would most likely be owning in any case. you would be giving broader stuff to these and even refundable credits to people throughout the distribution, people who might be induced to own even if they don't. i'm contradicting myself because i said i'm not sure that's a good thing but if you assume that's what you want to do, that is where you ought to be directing the subsidies. so a different form of subsidy, which some people have proposed, and i think seth is advocating

something of that sort, would make a lot more sense than what we have now. >> i've got a question that was e-mailed in from people outside of the room. the first one is given the long-term solvency issues are due mostly to inadequate population growth, would it not be better to reach out the mortgage tax benefit, and expanding child tax credit? given the choice between lowering debt and subsidizing families, wouldn't it be better to subsidize families directly? >> there's a population growth, certainly it will raise the housing and hopefully it will pull -- [laughter] homes in the current market situation. but i don't think the country would look for any drastic change, you know, going from mortgage interest deduction to

child tax credit. and again, i think the issue is the millions of current homeowners who made their decision based on certain rules of the game, and if the rules of the game changes, then it impacts the financial value of the asset. other tax expenditures, things like the health insurance, the employer, providing health insurance, it doesn't have the capitalization impact. but in the case, this is where the tricky part comes, which is the reason why it's very difficult to say let's see what the most efficient way to design tax code and let's go with that. >> but clearly, clearly the basic that is happening in here is a long-term debate. in other words, a discussion about where you ultimately want to go, acknowledging that those instructions are things you want to avoid. you don't want to move, do something too abruptly here to want to think it through because

people do have value locked up in the properties. but what about starting over or at least thinking long-term about what make sense but another question that came in from the audience is about home equity loan deduction provisio provisions. this sort of speaks to a broader question in my mind, that there are, there are an awful lot of aspects of the mortgage interest deduction and of homeownership in tax incentives that just seems so far a field from the traditional idea, supporting the young family buying the house, vacation homes, home equity loans to pay for vacations, boats, or whatever. this seems to be, you know, so

we moved from even, from the court original rationale. >> i think this is a problem you get when you try to put social goals into the tax code. you get things like deducting vacations expenditures. it's an inevitable part of the process. >> one of the things that speaks to my mind is the fact that as eric described at the beginning, this is a whole tax system that involve almost by accident but now it's sort of interest on most every part of our society. it's extraordinary. and i just wonder, you know, it's a very barnacle encrusted system just as the whole tax system is. it's great microcosm.

but doesn't it, isn't it incumbent upon the realtors on the home, construction industry to also take some responsibility here for looking at ways to clean up? >> you make a very valid question. and also i wanted to say that i agree with one portion of what eric had said earlier. that the bubble homeownership is not something we want. so the question about his stable ownership, so clearly there were mistakes related to the bubble and crash. now going back to ed's question. i would say if there was a survey of economic professors across the country come and say question about m.i.d., i would not be surprised to see 90% of the responses saying yes, m.i.d. needs to be adjusted somewhat, or even gotten rid of. the remaining 10% may say something like, there's so much explosion in the economy anyway,

m.i.d. is another distortion. it's the second best given other distortions that exist. now, having said that i think against the tricky part is people will make immediate position as to whether m.i.d. is good or bad. i think they're overlooking the fact again that millions of homeowners who made that decision, and how do you tell the people who have already made their decision to say we have changed the rules of the game, and at the current median home values of say about 70,000, one takes away 15%, that is about $34,000, to say to homeowners, sorry, you will lose $34,000. that's assuming total elimination of m.i.d.'s attorney will be less of an impact, or gradual phasing in of less of an impact. >> i apologize to the audience or letting a lot of time slip away without asking for questions, but please raise your hands.

yes, sir. >> and maybe you can identify yourself. >> sure. is it on? david logan with the tax foundation. lawrence has kind of spoken to this but i would be interested in hearing all of your opinions. it kind of goes to the deficit debt reduction theme, and there's a literature that kind of says the most ambitious reforms or fiscal consolidations undertaken internationally have proven the most successful. off the top of my head i can think of european central bank, these people. my question to all of you is kind of, if you're for a quick repeal of some tax expenditures, what makes the m.i.d. so different? and that's pretty much it. >> yeah, i mean, i can answer that. i think it's a good point.

i don't think it's a different and a lot of different areas. not just the tax expenditures but it's been good if we talk about economic expectations, you know, and that people have, you know, that lawrence had mentioned. people take at a mortgage with the expectation of tax benefits. there's economic expectations throughout the economy that are based on both tax and spending policies. i mean, from government contractors to just peoples economic planning, retirement planning. so any measure of deficit reduction is going to upset those in some way. but i think housing, i think we do need to be particularly careful. i think there's a reason we need to be particularly careful because of what's happened in the housing market in the last three years, and the fact that we have so many people that are underwater, you know, and we don't want comes in the people who are on the brink of being underwater that we don't want to do something to the immediate that would possibly push more people underwater, trigger more

foreclosures and more economic pain that could threaten the whole recovery. >> yes, sir. >> the country and my name is dan. i was wondering, no mention was made of one other specific incentive for homeownership for benefit, the $250,000 per person exclusion on income when you sell your house. it seems to me that factors into at least another benefit that i understand the rationale was maybe more certification. and again, maybe it's such a small number in the economy it doesn't matter, but at least i would like to hear folks comment why that hasn't been raised in the discussion as another tax benefit related to homeownership. >> i could talk for half an hour on that. it certainly is a tax benefit in all the tax expenditure listings

and cables. i think there is a concern, again, and that's true for capital gains, but in generally but particularly with homeownership when people are moving, and you have to move and just pay this tax because you're forced to move. your neighbor has the same gain occurred on their house. they don't have to sell and they don't have to pay this greater tax. so i don't think there's a desire to burden people with this extra tax on that kind of occasion, locked into their homes or rented out instead of selling it and so forth. now, what is replaced, this extension, was a very complicated proposal where people were allowed this one time rollover of houses. and i really did have the effect of discouraging older people in many cases from downsizing. because you get a complete exemption if you rolled over into a house of equal value.

but if you lowered the value of your house, you would pay some capital gains tax. so this was actually a considerable this application relative to what existed before. >> my name is francis lee. i'm a retired federal employee. i would like to follow-up on a point that eric made about homeownership. is it necessarily always a good thing that we should be promoting? what about people whose homes in the rust belt, for example, have lost value? and they are unemployed, or they would like to move elsewhere in pursuit of employment opportunities. but if they have community

involvement when they go in their homes. but now they may be tied down by their homes in their communities where they can no longer find income. >> that's a really, i think that's a good point. i was thinking as you were talking earlier, lawrence, all of these potential benefits of homeownership, you know, stability, also the opportunities for people to extract money to invest in businesses and so forth. but all those are a little hypothetical, and your downside risk, too. so is it really useful to spend much time talking about these, you know, theoretical side effects? they may be valid. they undoubtedly are valid for many people, but it's always going to be a mixed bag. and maybe we should just focus the policy on the one specific thing we're trying to do. >> just on the labor immobility

issue. first, one is a jobs issue but i think your example, if so has a job in texas that they cannot sell a home in ohio which prevents them from moving, certainly it brings this lock in effect. we want to have higher labor mobility. that would be much more efficient with the economy. we want a mobile society. yet the underwater homeowners cannot sell their home because they cannot come over with additional cash to recover the additional balance. i think this is a question really about this housing market bubble which we should never ever encounter in the future. so now it's after fact and our people who are underwater. and what do we do? there's so much a short sale process going on which requires bankrupt approval and charge off. so there's some mechanism there, but i share your concern that without a doubt that richards

would have more, better flexibility moving compared to homeowners, say, in michigan who may need to sell but they just cannot sell because they are among the worst situation. >> the gentleman in the back of the room. >> greg squires, george washington university. so far there's been no discussion of race. in his book, jim dimon has suggested the mortgage deduction should be a limited a resident of highly segregated commuters, particularly all white communities. the argument he makes following the logic of incentives that economist like to talk about, change the incentive from one of creating barriers to restrict access to one of wanted to encourage more minority to move into all white communities so that you can get the mortgage deduction back. i'd like to know if you given any thought to this particular use of the deduction as part of a reform in case we don't eliminate it altogether in the near future? >> you to reformers, you would like to ask that you probably

would like to keep it simple. >> i think the race and ethnicity aspect to the distributional, the distribution of the mortgage interest deduction. we have spoken terms of income but income is distributed, there's going to be an unequaled this division of tax benefits by race, to. it just simply follows the distribution of income. i haven't thought about that specific proposal and i think i would be skeptical, a tax code solution to those problems. i think, you know, housing discrimination is certainly a big issue that we should be discussing, i mean, one problem that's true of tax provisions and tax expenditures in general is, and it's a real problem, is that the agency tasked with administering them is the irs. and the irs knows about

measuring income and it does about revenue collection. but it doesn't necessarily know about issues like housing discrimination and there are a ton more. so i would be skeptical of that type of approach. >> i don't want to sound like a broken record but i believe those are a bad idea. >> hi. sheila with the national income low housing coalition. i don't want to debate lords. we talked about this many times, but you want to raise this issue about the argument for reform, which is the loading of property values, which is pretty consistent message that comes from the home building in the real estate industry. and arguing against reform and the national coalition has a proposal for reform and

legislation that is being developed to do reform. but here's my question. first of all, it seems to me that if you say that the value of housing will go down by 10-15%, if there's a wholesale reform, first of all you are admitting that the mortgage interest deduction causes housing to be inflated by 10-15%, okay? so there is, you're acknowledging that it is a factor that has capitalized, has made it more expensive and, therefore, made it less accessible to low and moderate income people. so that's, can you help us in our gut by making it. but the big your argument is, so what if my house is down 10-15% in value, if everybody's -- is everybody else's houses down in value.

in 1999 my house was worth $175,000. today it's worth $400,000. two years ago it was worth $450,000. those are meaningless numbers. i haven't done anything to make the house worth more than $175,000. so if everybody loses at the same rate, all we've done is we've made it -- nobody else is worse off, and we've made housing, access to the housing market more accessible to lower and moderate income people, right? >> well first, i don't to be with you on account position in back. that's what i have been saying. the question about, well, maybe he don't care if everybody else, your home value goes down, everybody else's home value goes down. i think this is where one can say democracy has many, many

beneficial parts, and also many things that is frustrating. well, through the democratic process, maggiore of america's probably disagree with you. and that's how they are voting. this is the reason why, even though there may be issued a consensus among economists, consensus among think tanks on m.i.d., that the actual elected officials that go to talk to their constituents, and they don't want to attack m.i.d. because they don't want to hurt their constituents. so you may not care but many people in the country do care. >> we are coming up on 1:30. i'm going to open for one last question, and then let us -- so, yes, back of the room. >> hello, mr. lawrence.

m.i.d. come i think you convince me, and i going to convince a whole lot of homeowners either. the founding fathers, the congress, they make the rules and the law. calvin, potomac city center, washington, d.c.. when they made the rules they made the rules to protect themselves. they have businesses and corporations. they have rental space, they can write off their airline tickets. they can write off retreats in las vegas, and what have you. we, the working folks, the only thing we have is the m.i.d. so that means that the very good aspect of m.i.d. is during the first six years that you pay your mortgage, 100% of that is interest. not principle. it goes to the interest. so at least three years out of

that state you live in your house for free, or you get your mortgage payments back. >> it's a long way from being free, okay? >> i just say, i'm just saying. from a elementary street situatn here. your first six years, 100% of that monthly years interest, the interest is refunded back to m.i.d. >> it is deductible. that's not the same thing as getting, having the government pay your mortgage. >> it reduces your obligation. your tax obligation, okay? anand in a sense that someone in your pocket that you save. all right? and a lot of folks, homeowners are not reading the m.i.d. just because these folks are benefiting from it, they don't need. so their argument is, they are benefiting from something that they really don't need, doesn't jibe with people working. because we're not trying to hurt

the wealthy. it's us. that's the only game in town that we have right now. the right to lower our obligation. i think the young men made an example that $19,000 in 1936 was exemptions or bios, okay? when you do your senses. and he was saying 10 was right off, another nine was m.i.d. and if you were to get, $11,000, then would he be satisfied? i would rather have that 19,000 right off than just 1100 or $11,000 of riding on the short sale. so 19 is a lot better than 11. >> great. listen, i want to thank everybody for attending. i want to thank our panelists. it's been an inviting discussion. there are many things -- and

enlightened discussion. they are me thinks we could have touched on, but we will just have -- and now, and i just want to thank you all for coming and thank you for having me as moderator. i learned a lot. [applause] the [inaudible conversations] [inaudible conversations] [inaudible conversations] [inaudible conversations] [inaudible conversations]

[inaudible conversations] [inaudible conversations] ????

>> ♪ ♪ ♪ ♪ ♪ ♪ ♪ ♪ ♪

>> now, a discussion on retirement issues. and let's talk about the impact of state and local public sector retirement pensions and the rising cost of health care. the pew center on the states host this hour and 15 minute discussion. >> our first panel today is about the national significance of state and local pension retirement issues. yesterday we spent a lot of time looking inward, what was going on in state plans and in states. today we would like to broaden that discussion with a really important panel here. our moderator will be susan urahn who is the managing director of the pew center on the states, and you heard from her already yesterday. with those are some distinguished guests. i like to introduce dan crippen,

who is the executive director of the national governors association. we don't have name cards, so could you -- thank you. also, michael cooper is a national correspondent for "the new york times" who does a lot of work in state and local government issues. and in addition we have stephen fehr, who is a special is also in state and local issues fighting for stateline.org and also on reports for the pew center on the states. so with that, sue, i would like to turn over the microphone to you've spent we will try to have an interactive and if we could just kind of turn to a slight use or you can see each other. one hoping to do is get a little bit of the conversation going among the panel. try to move this along for an hour, maybe more. we have an hour and a half? spend about 15 minutes taking questions from the audience, 15 or 20. if you have questions or if questions come up, do write them

down, make no. we will try to make sure to get as many of them as we can. so gentlemen, i'm going to not repeat a lot of what was yesterday. there was a lot of conversation yesterday about how bad the problem is, is it fixed, you know, where do you see the real tension there? so let's start with a very straightforward question. stephen, maybe i will start with you. how big is the problem and is it fixed? >> you know, there's a lot of debate on whether there's a crisis in public pension funding. i was on a panel last week where we had to talk about this. and i think it's important to say that no one has suggested, certainly, we're not suggesting from our reports that our retirees checks are in any kind of immediate jeopardy, or that

pension funds are running out of money, you know, right away. the problem is that many state governments have not been be the required annual payments. and that raises a lot of concerns about future funding levels. but the point i made last week is that public pensions are part of a bigger picture. states are very slowly recovering from the worst recession we've had over 50 years. the revenues from taxes are down. the tax base is eroding, especially from sales taxes. to stem this, the title stimulus money is in it and they are required by law as you know to balance budgets. and as result of that they've had to cut spending, raise taxes, our old, raid rainy day fund. and at the same time they have these incredible costs that are

arising such as, especially medicaid and health care. so on top of this you have the public pension challenge. every dollar you have to spend to catch up on pension payments is money that you would like to spend, you may want to spend on other things. and ultimately taxpayers could face higher taxes, cuts in services. the final thing is that a poorly funded pension system and affects, has another impact on taxpayers which is, and this didn't come up yesterday when we had rhode island here, but moody's get their bond rating a few weeks ago. and he specifically cited as a reason the long-term pension problem there. which is going to increase their borrowing costs. so, while there's not an immediate crisis, no one's checks are going to stop coming.

there is a long-term problem that can't be ignored. >> dan? >> i'd say as i'm learning every day, we've been there a couple of months now, it's hard to generalize. and there are obviously 50 states and five territories and they are all a little different shape. some of the more breathless accounts, talk about a handful of states, nor the most troubled, and even within those states of course a number of the pledge doing quite well. so it's tough to say fix, not fix. i would say probably not fixed but fixable. and some the state you might expect because of the fiscal distress. they have no problems in new york shows up in, being nearly fully fund. so it's tough to say, with any general sense, however, i can say in general terms that the state fiscal picture is a little better than it was when some of the studies were done,

especially looking 2009 and 10. revenues have turned a corner and witnessing some increases again, although not back to the level they were before 2008. and stephen just that, it's unfortunate but most of the new revenue is going to increases in health care spending and medicaid. in fact, we saw at least in the proposed budget earlier this year the rest of the budget generally went down, whether it was k-12 or higher and/or transportation or infrastructure, however you want to measure it. most of those on average were flat or slightly reduced. so medicaid and health care is clearly the biggest challenge. and i say and the longer run, and that means beyond the horizon of current pension plans, most of them will make it through the next decade, and many of the much loved even if there was not more money paid in, but in that next decade and just got health care costs for retirees, let alone medicaid will be the single biggest

charges states face and the single biggest challenge of the pending system. >> dan is right that all states are different. i'm a newspaper reporter and you never read 99% of flights landed safely yesterday. you read a 747 crashed killing every on ports we will look at the most distressed when. i think in the states there is a crisis. if you look at illinois which is less than have them it needs for its, which is several times gone into what i think are somewhat risky pension bond, you know, i think no by at this table would ever feel like i've been behind giving to my 401(k) some going to take a second mortgage and vested hope i can pay to both back. that's not a good bet. and as we were hearing yesterday, these things can go in 10. the stock market tanks, the economy is back on just a moment you need most than for social needs. suddenly you also need to replenish these pension funds.

even though it is rebounding they're not back to where they should be. >> with a newspaper, with the newspaper articles, if any have not had chance read some of the michael compressed on pensions, i would highly recommend that you do so. and let's talk about one, the end of 2010. prichard, alabama. everybody here know about prichard, alabama? no, you? all right. tells the story of prichard, alabama,. >> prichard, alabama, is a port city on the outskirts of mobile. it was a booming post-world war ii city after mobile had been a big place to build ships for the war effort and the population of the area doubled and tripled. a big boom place. right outside the city, prichard grew up. and at its height i think at about 50,000 people. it had to department stores, it had as do. it was a real little city with a downtown, and it suffered since then. everything that could happen,

there was like flight, suburbanization, yeah, the population shrank to about 27,000. and a year and a half ago, or almost two years ago now the city's pension funds ran out of money. this was not a surprise. there have been actuaries who had said five to 10 years earlier if you go at this current rate you will run out of money in 2009. they went at the current rate in 2009 they ran out of money. and even though this was a state offset of the pension fund, the state law says you must pay this fundamental what, the city stopped sending the checks. and so you had about 150 retirees who suddenly had no pension checks coming to them. and i went down to them, some of them were younger than social security retirement age because you could retire in your 50s. so that no source of income. there was a retired fire marshal he was found dead in his home, you know, the utilities were turned off, no electricity. and he was apparently destitute

and couldn't health care. is a retired police captain i met who was fortunate and he had gotten a job as a cop at the regional airport but then one saturday morning he was washing his car at the carwash when somebody tried to rob him and he resisted and your shots we can go to work. they put a tip jar in his local diner and people would put money to contribute to them. that's what kept him afloat for three or four months before he could get back to work. so prichard to me was an example of the fact that we talked a lot yesterday about the difference between accounting and funding, and we talk a little bit about the debates over what should the discount rate become is a present realistic? should it be risk free? but i think all of those are useful debates but the fact is at some point if you look at those trend lines, sometimes the future does come and i think richard is an example of that. so these retirees went 19 months with no pension checks. just this month for the first

time they reach a summit with a getting pension checks about a third of what your own. this is not a rich pension plan, not a rigid city by the average pension was $12,000 a year. i think the highest pension in the entire plan was $39,000 for a retired fire chief at been there for many, many decades. so this is not one of those plans you hear about with lifeguard her time with huge pinches. but it really ruined peoples lies. i spend about a week down there and talking to people, and he was a couple with a both been in a police force and they've moved to a slightly larger house for retirement so they could garden. now they would probably lose the house. the man was like 68. he got back to work as a security guard at the mall. walking the beat again. so prichard was an example just to show sometimes you should listen to those actuaries. if you don't do something, the and eventually does,. >> so what are the implications for states, and what is the potential that there will be sort of more of this, if not by

the state level, because a lot of variations, there's some states a lot more trouble than others. not at the city level, we haven't talked about that a whole lot. dan, implications for states? >> again, the variation is why but most are many states have pension systems and funds from a local employees. teachers are public the most obvious but there are other local employees covered by state pension funds. if those funds are in better shape, the local distress will translate necessarily into either the prichard were into state distress. so again, it varies a lot but certainly there may be some obligation if not legal, moral for the states to look at some of the dependencies of their local governments. so it's not so much a legal obligation as perhaps a moral one, of looking after going.

>> that was when the striking things about prichard, even though there was a state law, the attorney general took a path on not doing anything. at a very hands-off attitude. i think that's true of alabama, particularly. there've been other bankruptcies in alabama where the state has sort of said we wash our hands. other states are much more likely to put in control boards or to bailouts or oversight. but it's a real question. some of these places the problems, the cities could trickle up to this. >> each city pension plans, cities are in much the same condition. sitting to write on a panel last week was the mayor of atlanta, and he very eloquent become he was elected in november, and the very eloquently for an audience of security professionals laid out what happened in atlanta.

and sitting there, it was much, you could substitute a state. is the same thing. three benefit increases during the 2000s when they were surplus money in the budget. and they are paying the price for that now. their annual pension payment is simply over $100 million. it's squeezing everything in the city. it's its biggest problem. he said, i set him up a little bit by saying, a little bit more about whether it's a crisis. when you look at the fact that you have two newly elected democratic governors in california and new york, two large states, they enjoyed union backing, they enjoyed union workers to get elected. and they both come out very strongly for pension reform proposals, cuomo and brown.

and i said that's the clearest evidence that you have a crisis because it would be very easy for a democratic governor in one of these to strongly union states to stand up and say we don't have a pension problem, or cannot say anything about it at all and leave it for somebody else. but in their very first few months in office they recognized how this was affecting everything else in the state finances. and they both came out with proposals. no sooner did i finish making that statement then transcends if you think i want to be doing this? he said it's the same star and olympic i was elected in november with union money. they helped me run my campaign. they are now, you got against me. they are showing up at meetings. he said it's no fun being a mayor and having to tackle this problem. i just make this point because it's happening in city after city. and if you liked our report on state pensions, we are preparing one right now on city pensions,

the condition of the largest city pensions in the united states. and hopefully we'll get that out pretty soon. >> i was speaking to mayor reed lastly also, and if you haven't heard, atlanta would like him to a vote this week or before the end of june. is proposal to cut pensions. and it's fairly radical compared to what we've seen before. as we heard yesterday people tend to cut their benefits for future hires. as some of the other speakers but it's -- it takes many years for that to take old. right now they get 3% for each year of service, and they will reduce it to 1%. so that's a really big change. for many years and many states people sort of thought that was illegal to do. but we've been looking at different places, in some places those protections are not as strong as people assume. we did this were a month or two ago, my colleague and i can about detroit where their police

sergeant, lieutenant went to arbitration. i think the city was seeking to do away with a defined benefit plan altogether. that union wants to keep the clinic an independent arbitrator ruled they would keep the plan that reduced the multiplier. it wasn't as extreme as atlanta but it showed that could be done. if you look at the cause is likely in michigan it sounds very much like the benefit of crude up to now are protected, but maybe it could accrue at a lower rate going for but this is a patent is happening. i know in california there was a little hoover commission that had recommend people look at this. there's a lot of case law in california this is pensions rights are protected but i think it's open to a test. in chicago, illinois there's a big debate going on, some business backed groups are saying we don't think the constitutional protection. but the states and i believe said no, it's pretty ironclad. you can't change these. ..

when they set up the benefit in the first place they allow themselves and now to take it away in the future so they feel like they are on solid footing for that, but it is probably still going to be important. >> well and depending on how the court decision goes to could to some degree changed the terrain moving forward. he made a really interesting point that the changes, even though they had consider perhaps moving away from a defined benefit program, they didn't. they made somewhat more draconian changes but still incremental, sort of moving around the pieces of the existing system. state pension systems tend to be

a little bit of an outlier if you look what has happened across the country since the early '80s. by and large what we have seen as a vast movement away from defined benefit into defined contribution, but not so much of the state level. there has been certainly a conversation and we have michigan and alaska that it may made that shift in a couple of other states, george is one of the hybrid system so they have kind of mixed and matched but by and large, not a lot of conversation and certainly no concerted movement toward or walking away from a defined benefit system. why not, and you think that might be happening? we will start with you on that one. >> i don't quite know why not. there certainly discussion and i think it is growing all the time but i don't think there is yet the kind of scale or movement that there was in the private sector or corporate side so my guess is we are going to see more of the hybrid system developed and the benefit determined by earnings on whatever funds they have. it just hasn't been the

tradition are the history so that i don't see a draconian or quick movement away from defined benefit yet. >> there were eight states this year where governors were elected to have said they would favor a switch to a defined contribution plan. seven other states republican governors at another was an independent, lincoln chaffee in rhode island. but when they got in office they found it was a little more difficult than they thought, and none of them opposed it. no legislature enacted a defined contribution plan this year. only one state, indiana, did adopt one that they made it optional for employees. and as we discussed yesterday, it is difficult -- this difficulty when you are socked with his high cost of making the transition from a defined, when you close a defined benefit plan and you don't have new employees

coming in to contribute to it. so, they backed off because of -- they got scared a little bit why the high costs and a lot of states have not given up on the idea. kansas really wants to do it. they have put it off for a year and they are going to study it some more, but as ron snell who is in our audience often says, and he is tracked this since 1999, many states often proposed this but very few in the end can rally around it. >> the high upfront costs are a big problem because once you do that you won't have the current workers paying into the planned so somebody has to meet those unfunded liabilities, so the idea is down the road it may save money but upfront when you most need it because you are in a fiscal crisis to begin with which is why you are thinking about it, it is the hardest to do. >> we talked a little bit about the city role in pensions. let's flip it over and look at

the federal level. representative from nuñez from california introduced a bill this year that among other things calls for more transparency. it is hard to argue against transparency. it is a good thing, but what should be the role a federal government might play when it comes to state pensions? the private sector has the pension guarantee board, the federal insurance almost in making sure that there is a protection for the workers if private companies go out of business, so how do you think about you know any kind of a comparable role? is it good, is it that? is it to be avoided? we will start with you dan. >> the approach has been discussed on several occasions about applying states and there's as much an opposition among potential and future retirees as there is anywhere, because the pbgc up implies that the federal government or some person were to take over would be that many pensions would have a limitation, a haircut or whatever you want to call it so there is an upper limit.

so in the states often have the worst problems in part because of higher cost of living, higher wages things that go into if those would be the states that would be most likely to have cuts made to the pensions if they were guaranteed somehow by the federal government. so again the whole politic of current employee versus future and how, and which states would qualify and how their benefits would be cut if they needed the insurance has stopped the real serious discussions so far. >> and on the transparency question do you think there is sufficient transparency now? >> i don't know. as you say, seems to be always more transparency is better but i'm not sure there is much now between the work you are doing and lots of wall street analysts and others. there is a plethora of information which you write fairly frequently and a plethora of information out there. i think is not a lack of information. it is a lack of will, money, folks. many of the comments we have made here and you have made in

your articles about the states of course that are true in states for social security. we have have predicted for years this would going to happen and i would some day in the meantime we have talked at length about it. so it is not that we don't know and your case in alabama the predicted well before 2009 there would have been money so i don't notice so much a lack of data and transparency. certainly we would always call stress testing are variants testing and discount rates used and see what the differences are so you have some sense of the range of your exposure, but we are making predictions here about people and events 30 years hence so we cannot know with any certainty exactly how it is going to come out. i think transparency as you say is always good but i'm not sure the work required to produce what additional data applied is necessarily worth it because we have lots of it right now. >> i think labor see some of this greater transparency as a threat because something similar

happen in the private sector. i think once allows for change people had to state what the liabilities were more clearly, we saw private sector companies heading for the exits and starting defined contributions, so i think at least among some labor folks i have talked to the see transparency as an effort to undermine the process. >> addled think anyone would argue with transparency. i think the newness bill, part of the attempt there is to force states to re-examine their discount rate assumptions, and the problem with that is, states aren't on illicit. what is an appropriate discount rate for one state may not be appropriate for another so it is hard to applied a common standard for that, even within states. california teachers pension funds recently lowered their discount rate, but the main

retirement system did not, so it is hard to, there is no one-size-fits-all. >> let's go back to dance to something you said and we will step one step back from pensions and we talked a little bit about health care, the cost of health care and what states have or have not set aside and there's a lot of conversation about that yesterday. you pointed quite accurately to the rising cost of health care health care which is driving a lot of the opec rob lum which leads back to the health care problem. are there things that states can do, and are there things states are doing to bob began to curb the rising cost of health care? it is one thing to deal with the health care retirement problem, but if you don't get the retirement costs or the health care costs under control, it is sort of a losing battle, so are they moving down that road in any effective way? >> i don't want to imply they they're moving toward funding health care or refunding the

pension systems but, indeed at first medicaid which is the most drain on the current budgets, there are a relative handful of people without making this too long they spend much of the health care dollars every year because they have more needs. in medicaid about 5% of the population spends 50% of the money every year. in medicare the distribution is even more to the right so relatively smaller number of people spend most of the money. in the states so far, medicaid, those folks have not been managed, and i don't mean managed-care but having had health care management at all so they show up and gets certain services. states are beginning to move -- a big example of having all medicaid recipients manage. so this expensive 5% or 10% within systems will not come under care management. those folks frankly look a lot

like folks like the public retiree employees because folks are attracted to public service for lots of reasons but one of them is, at least in the past, sip your help in the fifth of either day or a dependent more like he was in need of or likely to be needing health care during the working life are retired lives of the concentration is there sometimes. 2% of the population may provide 50% of the cost. along with setting up we can figure out how to manage medicaid complex patience as we call these expensive patients we will go a long way to knowing how to manage the same kinds of patients and public retiree systems, medicare and everywhere but the real trick is to get the management systems around their care and that means again, not managed-care but having information systems that can be coordinated having the national research with the right pharmacy and those kinds of things. there are a lot of things the states will be experimenting within the next half a dozen years being pushed by medicaid but that should be applicable to

a lot of other health care system so it will help reduce the costs of population but it won't again guarantee either more nominal increases or guaranteed future benefits. that is going to be the challenge and it is a pay-as-you-go system. as they think you said steven with tax bases tending to be a roadie now in states, sales tax base is eroding in part because of internet transactions, escaping sales taxes, property attacks taxes of course are down because of property dolly is going down so as those tax bases diminish even if you start getting health care health care and are more manageable path the challenge is going to be to have enough funding to do everything. unfortunately i think so far we have seen that everything does not include education and does not include transportation and does not include a lot of things we normally think of as investment so we are tending to spend more money on health care and other things and less on investment. that is the challenge for the future. >> to change your little bit,

michael you did some reporting in the times did some polling a little bit ago to take a look at what the public attitudes were on public employees on pension. what did you find? >> was very interesting. i served at the height of the craziness in wisconsin, the state capitol being taken over and state capitols around the country are in uproar over this so we did a poll with the cds news "the new york times" to try to gauge public attitudes towards unions and towards benefits. and the results were frankly a little bit surprising to everybody. overwhelmingly, people disapproved of any effort to weaken collective bargaining. it was 60% to 33% on that. all so they oppose cutting benefits to reduce deficits by a clear majority, like 57% to 37%. this is a hard issue to pull because people know might have all the information that we try to ask about some of the more controversial pension type things and so we asked police officers or firefighters to be

able to retire in their 40s and draw pensions and you know what a majority 49-44% yes. we asked a similar question should teachers be able to retire years for war for 65 and get pension and again. he said yes, so it was interesting because you were hearing at that point so much about pension envy and were hearing, there was idea that public workers are being ganged up on and the poll didn't really bear that out at all. when whenever you write about these issues it is extremely political. if i write about prichard, i get lots of e-mails from virginia and saying we are not all prichard and we are not going to run out of money. when i wrote this pull, i got all kinds of e-mails from the rising what is going on? people were looking at the cross tabs and saying maybe you oversampled union households. then the following day "the wall

street journal" and their poll which i think that argument one way. but it shows that public attitudes were not as against public workers are benefits as i think some of these governors had anticipated and in fact you saw that scott walker's approval ratings within the state went down in wisconsin. a lot of governors who took the hardest dances were struggling and that is interesting politically to see how that goes forward now. we are going to enter a presidential campaign year and there will be lots of independent expenditure groups that by law have to advertise partly about issues and partly about candidates and i wouldn't be surprised if we didn't see a lot of these groups on both sides frankly trying to stir up public opinion. where public opinion lands after half a million dollars worth of ads, we will see. >> it struck me about when it came out, there've been so many stories about abuses by state

employees, particularly in states with strong newspapers that have been covering it, boston, chicago, california and despite a couple of years of constant negatives stories about abuses, people still remain -- largely support unions. >> is interesting though, i think not in this pull but others as you said they're a fair number of potential future retirees whether union or not, who don't like the transparency, who don't want to know more and don't want the public to no more. there must be a fear at least of some backlash about transparency. so i don't know how to reconcile, i mean obviously one poll can disagree with another and you have got california and the problems with polls taken in california round the time of the blatant abuses by employees and

mayors on their pensions. if you take a poll around that time of course you get a little different results, so i don't know quite what to make of it is a little surprising with what has been going on. i don't know if they took this pull versus past polls. i do think that when juxtaposition and given the number of choices the public will be very sympathetic with past promises made but not a sympathetic may be about continuing to allow state employees to retire at say 55 where for one else is moving to 67 so i think those disparities for future employees may become more critical than the promises made in the past. >> unions in and of themselves were not viewed terribly favorably in the third of the people have a favorable view and a quarter had an unfavorable review and the rest of them no it is no it is not like a prounion poll but just the individual questions of collective bargaining, benefit cuts in pension cuts. that is where we seem to be sort of clear. >> they will talk about what was

happening in wisconsin, governor walker and what we have seen in new jersey with governor christie. i think they have a tentative proposal on the table for some of their pension challenges. states take very different approaches to resolving these problems. i think what we have seen in wisconsin and new jersey is a lot of conflict on a lot of public rhetoric and a lot of, a lot of emotion around it. their other states and steve if you want to talk a little bit about that word is then done in a much more i don't want to say congenial but perhaps less conflict ridden arena, does it matter? does everybody get to the same place at the end of the day? are the reforms the same or are we seeing a convergence there? >> it is hard -- two states i mentioned that a been fairly successful in the last year at getting union and states to sit down and agree would be vermont and delaware.

now, both have democratic governors. but, vermont started their reforms a year ago when they had a republican governor. and, you know maybe it is because the states are relatively small and a cumbre stations are a lot more intimate. somebody in vermont told me, actually it was the former governor, said that it is very likely your next-door neighbor is a teacher or a firefighter, so you can personalize the debate a little bit more and you can visualize that we are talking about your neighbor here whereas in larger states it is harder to do that. at any rate, in those days they were determined, to governors, shaman in vermont and markel and delaware, to sort of be the counter to wisconsin. they wanted to show that it could be done without that kind of stridency. so, in their very first days in

office, or the very first days of the year and shamblin is the new governor, they sat down with union members and their office and they said you know what is it going to take? what can we do? and what they found is there is more of a willingness on the other side to listen because the other side, the unions realize while we sort of are in this together. how can we keep what we want and help the state at the same time and there was more of a spirit of doing that and the state a little bit more than in others. so they helped their states reduce their budget deficits and in return they gave up a lot. in vermont they are going to have to work longer. but the trade-off is they are going to get a bigger pension check for doing that. so, they were willing to do that knowing that there was going to be something sweeter for them at the end.

but what i am kind of fumbling with here is it is hard for me to say whether those two small states, with what happened there could be exported to some of the other states, but the dynamic at work there was the governor willing to sit down and negotiate. i guess it helped that he was from the democratic party because he had -- it was a relatively friendly audience he was dealing with. but, there are examples and they didn't have protests or argue that much, and maybe some people told me that it signaled a change in how unions you know -- for every new jersey union leader that is comparing their governor to hitler as one did

last week, there are also many leaders who are willing to sit down because they realize times have changed. >> again, i sound like a broken record, but the disparities between the states and the size of the problem in the age of the workforce, solvency or lack of -- and different plans, and plans within a state as we know some will be in tough shape and others will be fine. the perceived size of the problem of the state level and political cultural kind of dictate where we suggest to governors which traction they are going to take whether it is a big problem and confrontation seems to be the right answer and i'm not saying it is but suggesting that is how they choose this, in new jersey or delaware and rhode island and vermont and others in the northeast. is not just size of government. incremental changes will help a lot and they are not about to run out of money in the next 15 years and changing smaller

things or retirees who are not close to retirement may makeayak more sense.e se part of it is the size of. the problem. >> certainly the problem cuts across partisan lines and looking at new jersey and new york where youresd have got big states and big problems are not big problems but depending on how you define it. both of them are kind of moving in the same direction. you mention new york briefly. one of the reasons new york does not have a challenge when it comes to the pension fund is that it has paid its annual required payment into its year.n fund every one of the reasons they have done that is because they arethi required tos by statute. arizona which is a state that has some severear fiscal stress and is really struggled in the g last two yearsle has a well-fund pension plan. they are required by the statep. constitution to make those annual plans of there seems to be something to removing a little bit of discretion fromthe the s hands of the policy community when itet comes to a making those annual payments.kia that discipline is a little

easier to exercise when you have to. >> i think the discretion thend flexibility can be verye be dangerous things for pension plans because they kind of lucid offense. in the stock market is booming, they say look at our investment returns. we do need to put in much this year and when the stock markete is tanking, we can put in enough this year. expensive debts you have. because if you're assuming -- it's like borrowing 8% if you're awe assuming that's what your investments are going to earn. so when governor christie became governor of new jersey and had a $10 billion deficit, you know, what was the biggest thing he did to solve it? not paying the $3.1 billion required contribution to the pension, which is going to be owed at 8% interest at some point in the future. i think that's a really dangerous thing. >> you know, it's interesting, the discretion, of course, part of the diversity. but my home state of maryland came out relatively low in your studies, like 60% funded.

no one thinks, at least that i talk to, maryland's going to go bankrupt or needs to or any of the localities are, but they haven't kept up with the funding. but no one's really clambering for full funding in maryland because the assumption is it will be paid whether it turns into more funding in the future or whether it becomes pay as you go. so, again, you know, to look at these numbers and say, you know, the stock market's doing better and therefore -- or not doing better. as we know, most of these states are using four and five-year moving averages. by definition, i can almost guarantee you that next year numbers will look better because the numbers are still baked into the average. we're going to have another good year -- assuming we do and the market will move, the average is up, that doesn't mean anything's gotten better or changed. so we need to be a little careful about how we -- >> maryland did have a big reform effort this year led by a democratic governor who has a lot of union support and -- they

want to boost that percentage up. >> but no one's predicting the end of the world. >> right. >> but the other flip side of that is, you know, in boom times there's sort of a protect us from ourselves mentality. they feel every time it looks healthy, they feel pressured to give out richer benefits or more pension sweeteners. that seems like an unhealthy situation if you can't have everything you need because you're afraid you're going to dig yourself in deeper. and, you know, the past has shown it as sort of true if you look at the pension sweeteners having a big effect now. they all happened at the end of the stock market boom at the end of the '90s and 2000. that's when california went to a 3% multiplier so you could retire at 30 years for 50% of your salary. that's when they re-evaluated.

>> i remember a conversation i had with a north dakota legislator a couple of years ago. and north dakota at the time was the only state in the country that had a really healthy surplus. and he was saying but it's no fun having a surplus because all these groups are pressuring him to -- in that case the big pressure was from taxpayers to give the money back. and they did. they've done it two years in a row. and so surpluses create their own problems. >> we've been talking a lot about the fiscal cost to states about this. but the reason -- part of the reason you have pensions in place anyway is to make sure the states get the workforce to provide what the constituents want. given the increasing stress and the public concern about this, are states going to have increasing difficulty recruiting and retaining workers going

forward? and particularly in some of t the -- some of the more specialized areas of government where they do need expertise like i.t., pension fund management. you need folks to reimburse in a thoughtful way if they're going to do a good job. so you going to get people who want to continue working for the state going forward? >> so far, most of the states, many of the states are laying people off and trying to reorganize the functions they have. and whether that's the old outsourcing kind of techniques or consolidation, more i.t., fewer bodies. in fact, we're hoping to next year to have a summit about how they have dealt with the challenges in restructuring their governments. in some ways the jobs disappearing now won't reappear. there's areas with continued demands and it'll be a test of public salary systems as much as retirement system. whether or not there are certain

occupations for which you pay market rates as opposed to more contained zifrl service kind of rates. so the differentials will probably grow within government because of the problem you cite in order to attract the right people. but at the moment, of course, we're not looking at hiring, we're looking at laying off. the federal government probably has a bigger challenge in the sort run for employees because of the number of employees who will retire now. and the continuing cuts to the federal budget. long way to say no, at the moment, yes, in the future, but i think it'll have more pressure on the salary side than it will on pension or health care. >> you're predicting the workforce that has shrunk is likely going to stay small? >> yes. >> and as the private sector begins to pick up following the recession, that's likely to add additional pressure on in terms of other opportunities for employees. so you get smaller state government and to your point salaries are going to be a big part of that conversation. >> in some ways it's not going

to be unique to government. while we have a relatively high birthrate compared to a lot of industrialized nations, we're still at replacement rate, which means we're not going to grow the workforce much unless we change participation within. so given our current apparent attitude of immigration as a country, we're not going to be able to add to the workforce. so we're going to be all competing for a fixed number of workers in the short run. >> one of the things i heard yesterday and maybe some of the rest of you heard this too on the panel in workforce retention was that there's sort of a new profile of a state worker that's emerging. whereas in the past, pension benefits, salary were used as recruiting tools. the profiles changing somewhat because the younger workers are interested in a defined benefit pension as much as they are portable 401(k) because they don't expect to spend years and years in their careers for their

state government or working anywhere else. they're much more willing to move around. so is maybe as -- maybe as states are, you know, reinventing services what they want to be in the future -- maybe the profile of a state worker's changing, as well. i heard that loud and clear yesterday. >> i think it depends on what kind of jobs you're talking about. and depends what kind of jobs you're talking about, not at the .. he bronx, it's because you can retire with a second pension and go on to retirement. i think others may be secondary or tertiary. >> do you think there is an openingrecalibration of the pension system to where you may need it for recruit mts and less for others? it seems like in the past it's gone the other direction, when one particular segment of the working population get the added

benefit, they get to retire earlier. there is a lot of pressure to add other groups to that, expand it out. it seems like what you're suggesting is it's got to go the other direction. >> that certainly has been true in the past, that unless one group gets something, everybody else gets it. that's one of the reasons things are so expensive. >> let's step way back. i think we've got about ten minutes here before i want to open it up for questions. ten minutes? all right. we'll wax just a little bit philosophical because this is all couched in the larger question of tight security. one of the debates we had internally as we were looking to talk about -- how do you talk about pension? states need to balance cost and what it takes to recruit a work force, and then we had a long conversation about is it a two-legged stool or a three-legged stool, and do we have to worry about retirement security for our employees? we weren't sure. at the end of the day we left it off. we called it a dual balance, work force and cost.

i think there was also some conversation yesterday about what is the state role in sort of retirement security for your employees? is it a responsibility that states own? is it going to bury? is it going to be one thing in massachusetts and another thing in michigan? and our state's thinking about this in a way that sort of helps them shape the decisions they make about their plans, because the different plan structures will get you different outcomes in terms of retirement security. but i don't have a strong sense that there are a lot of states that are talking about this. should they be? >> i think you're right that they're no there's not a lot of states talking about it as a philosophical question. they're more worried about the next six months and cash flow and the next budget than what our needs are going to be 15 years from now. i'm sure you know that we have 25 new ones, so they're talking

about taking on unions in several states and more likely other issues. most of the stress, again, is between health care and the administration, so there is a philosophical debate about how do we attract the right work force, what does the benefit package look like in the future, so there needs to be, but so far it's not at the top of their list. there is an obligation if you accept a pension system, there is an obligation to make good on those promises. there may be circumstances where they can't be. i can't speak for all of the alabama cities, certainly, and how in individual places things might change, economic circumstances, and how government officials were irresponsible in ignoring those warnings for so long without doing anything about it. so there is a responsibility. it's not unlike that. we hold our corporations to others that have this benefit. states don't necessarily have to

have the same benefit or even a retirement system if that allows them to attract an employee. so they don't have to offer it, but it certainly should be an obligation to keep the promises you've made. we have a larger -- you invited the philosophical speculation. we have a larger issue, i think, developing for us, too, which is as we spend more on retirees, and what do you think about that as a 55 or 70-year-old person? we live longer, we'll spend more for health care and other things, we'll likely spend more on the other end of the population, for our children, for their pension, for health care and other things. we seem to be ignoring that part of the question and not asking what are we doing for investment for our kids, for our grandkids, for the infrastructure, and we'll focus on making good promises for the retirees. i'm not suggesting one is wrong or one is right, but we do need

to be thinking about a solution, whether it's cutting your taxes or cutting your spending, it doesn't matter. we're spending more on our retirees, multiples, than we do on the same kind of cohottrt. we tend to support retirees for about 20 years in the current system, too. so we have equal amount of years we're taking care of people on both ends of the age spectrum but spending a lot more on retirees. but we do need to raise the philosophical question in the states and at the national level. what are we sacrificing in order to continue to support retirees at the levels we are? >> one of the distinguishing features of the recession was governors and legislatures in the last four years having to -- because they have to balance their budget, they've had to

make budget cuts in a hurry to balance their budget. and sometimes across the board. and they're now, after four years, starting to say, okay, we had to do that, we had to do it sort of in a rush, in a hurry. now let's step back. now let's say, what do we want state government to be in the future? should it be leaner? what services do we want to buy as a state? in the same manner, we're dealing with the pension system. a lot of the easy decisions have been made centering on new employees, new hires, raising retirement ages, raising contributions, all those kinds of things. now that those have been done, states -- it now is the time to have a similar kind of discussion about retirement security, and one of the reasons that i was hoping we could get treasurer amondo here yesterday

is because i had been reading about her and following her, and she's one of the few people -- one of the only people i observed that is sort of making that case. she gets it. she realizes this is a part of a larger conversation, and you heard her yesterday talk about should a retiree be making 70% of their final pay when they retire? you know, maybe so. but that's the kind of conversation that needs to be initiated. the "new york times" today has a great piece about the city of costa mesa, california in suburban los angeles. and one of the things that will leap out at you when you read the article is there are lifeguards that retire making $84,000 a year, suggesting that there needs to be a -- there could be a conversation about whether that's too high. and those kinds of conversations are not occurring now, but i think with people like treasurer amondo, they're starting to, and

that's really what's at the core of all this. what do we want for retirement security in our country? >> and the retirement security of public workers is just a small sliver of the pie. i mean, they were talking security for private sector workers, studies that show how little savings people have, how few people have defined benefit plans. almost nobody has it now and how underfunded their own defined contribution plans are. once all these people retire, it will be very interesting to see what happens. >> time for a few questions. anybody? yes. i'm going to walk a mike around and make sure you get well heard. >> hi, i'm meredith williams from colorado para. alabama is an interesting case study. it would be interesting to know that 150 grand a month that they quit paying to the retirees, what percentage of their total

expenditures that was. pritchard didn't have a pension issue. they instead had serial, fiscal mismanagement over an extended period of time. inability of public officials to set financial priorities going back many, many years. and one day the mayor and the council woke up and said, we're out of money. we're not going to pay retirement benefits this month. they could have just as well said, we're going to lay off firefighters, or we're going to turn off the streetlights. it's all a matter of setting priorities, living within your means in some fashion or another. to blame the pension plan which you acknowledge was not lucrative, a $39,000 benefit for a maximum, apparently. it seems like the media has decided public pensions are a

really easy whipping boy. it was kind of the bell, california deal. you had fiscal mismanagement there, you had corruption. and yet it's a pension problem. no, you had some dishonest, corrupt, elected officials in bell, california that had their way with the city treasury. not a pension issue. it manifested itself in unbelievably high pensions, but i just am -- i guess as one who holds himself accountable, i just issued 188-page capher that i think is the best one in the country for a pension plan, disclosures from one end to the other. i'm kind of tired of being painted with the pritchard, with the bell. you know, lifeguards making 84 grand in retirement. is that a pension issue, or is

that a problem with the city? you know, the city decided to pay some unbelievable wages for its lifeguards. maybe they're a tourist attraction. i don't know what it is. but that's not a pension issue, that goes back to the people running the city, the elected officials, the decisionmakers there. they set a salary schedule for lifeguards that results in them, manifests itself in them getting a very nice pension. but the base cause goes way back in time. >> so how do you begin to sort of desegregate this, it's a pension issue. we had the same problem in new york, new york doesn't have a pension problem because it's making its annual payments, self-discipline. how do you anchor those two segments? >> i don't think i was suggesting that their pension was particularly rich or there was any problem, but the reason

i thought it was an instructive story to look at is because tons of places we know aren't making their required contributions, and at some point that's the root of the problem in pritchard. clearly they were wildly, you know, irresponsible in pritchard. they went into bankruptcy ten years ago, there were different mayors that had gone to jail for various shenanigans. but at the end of the day, they had people saying, you need to make this much money, put away this much money a year, and they didn't do it and they ran out of money. in many other places, policyholders are being told you need to put this much money away every year, and they're not doing it as woefully as pritchard did, but this is the extreme case of what would happen if you did that. >> i think this is part of a larger national debate we hope will take place, which is, again, as i was suggesting before, the juxtaposition of what we pay for in the public and when we support children

versus elderly and others. and we whittle that longer than we used to. we incur more out-care costs than we used to, we pay more pension than we used to. i'm about to retire. we're going to double the amount of retirees from 30 million to 80 million. we currently have one recipient. you think about we're going to have two in the same retirement. can i demand the same amount from them as our parents did of us? i don't mean that to be a rhetorical question, but it comes back to, what are the obligations of a society? what does this package look like where the children support their own kids and their parents, and that's the system we've built up, and now we're starting to fray those edges as we live longer, support kids less, we work less and there are only two of us supporting each retiree. we have to have that kind of adjustment in the system both

driven by demographics and economics. we're not getting to that point. it's not a question of the pension system. it's failure, it's promises. there's a larger question here of what we're going to support in retirement, how long, at what level versus the other end of the age spectrum. >> we might see a lot more 80-year-old baseball managers. >> if we had enough baseball teams, that would work out well. >> other questions. yeah. >> good morning. i'm with the national public pension coalition. i have a question to follow up on what mr. crippen said, and i think there is a danger on what we spend on kids and other sectors of the society and what we spend on retirees, and in particular, retirees in these retirement systems, because the money is not coming from taxpayers. a small portion is coming from taxpayers and the majority is coming out from the market. so i see them as well as

investments because that's what's really driving those payments out. so i think we have to critically really look at who is paying for what, and i think one of the other problems that i see some danger in is this idea of intergenerational transfer. for the most part, when we look at retirement systems and we look at that question, we look forward. we look at this generation and we look at the next generation. we don't look at the point that you're actually talking about making changes for people who are 20 years into their plan or 15 years into their plan, and perhaps in the first 15 years, everyone who was supposed to make a contribution didn't. so i think we need to spend more time looking at what the past generation paid for that system, what the current generation is paying and what the future generation is paying, because unfortunately, we should be paying over the full 30-year career of the employee, and, unfortunately, in many cases, that hasn't happened. so there is some intergenerational inequity, but it's not always forward-looking.

sometimes it was, again, past mistakes and somebody has to take responsibility, and i do agree we all have to keep our promises. >> but instead of a 30-year work life, we may have to look at a 40-year. when it was set at 65, people didn't intend to live that long, and again, it's not a question of promises unkept as much as what are the promise we're making and what is detriment to that. saving for it is a good thing. we have social security, which is not really saved for, either, but when it comes to the time you're withdrawing your checks, whether it's from a state pension fund, social security or 401(k), you're actually relying on the current economy and its work force to provide the wherewithall to cash that check. and whether it's the value of a stock -- because you have to sell that stock to somebody, and you probably have to sell it to somebody who is working. if they're not making enough money, they're not going to value that. so the real asset question is a tricky one in economics, but it comes back to, how big is the

economy? if we don't grow the economy, we're not going to have as much to share with workers and retirees. we're back to this very fundamental question. >> other questions. yeah. >> thank you. concerning the state, local balancing act, what do you foresee the federal government doing whenever the states come to you with the problems that we are saying that cities and counties have? >> i don't know if i understand -- we're not coming to the federal government at the moment, hopefully not. try again, i'm sorry. i didn't quite understand. >> the next group we'll be having is the state local balancing act, and what should states expect from cities or counties or what should the government expect when the cities and counties have shortfalls? >> at the moment, we're not. of course, in the foreseeable future, a lot could happen.

federal and state things are going away. just as an example, there was a homeland security bill that had a 3% reduction, which sounds pretty reasonable given the current climate. to get there, they cut grants to state and local governments by 60%. that's just going to happen. states are going to anticipate this and absorbing it, so they're not coming to washington to stay. they allow the bailout pension systems or bail us out. they're having to balance their budgets on reduced tax basis and reduced federal contribution. so i don't foresee any time soon, at least, the governments telling me, don't go fight for more funds, that's not a solution. so coming to washington is not something everybody is talking about. >> i think you do get at least part of the conversation around the nunez bill that was sort of floating around washington was, we have to be worried, we in washington have to be worried that the states will come, that there is this pension concern and we may need to bail them out. i think what the states are saying is we're not seeing that

as a likely possibility. so i don't know that anybody has a definitive answer to that at this point, but it's kind of hard to know what the federal government will do because it isn't clear that the states will do that any time soon. >> thanks. john abraham with the aft. the question that's been on my mind, and i hope people are thinking about this as well is, over the next 20 years, the number -- the percent of 65-year-olds is going to grow by 80% from about 40 million to 70 million. and at the same time, the number of citizens under 65 is going to grow by 12%. so it seems to me like one of the issues that states and governments and private employers need to address is, how do we accept those able and

willing to work later in life to stay on the job? and we've been through this round now of disincentives, i will say, to retire. higher contributions, longer eligibility periods, higher ages, and it just seems to me we need to now start to consider ways to in cite those same workers to stay on the job longer, and i'm just curious to see if the panel has any comment about that. >> i think you're right for two reasons. the demographics are not only flipping on number of workers versus retirees, which is essentially what you're saying, it's going from three workers to two for each retiree, but we're going to need both the experience and the work force that an older work force can provide. so it may happen naturally, it

may be from raising ret tirthe retirement age, it may be from raising the retirement age for social security, but i think we'll need more workers at the other end of the spectrum. we're not growing our own work force, our fertility rates are about even, so we're not going to grow as a country a lot more population in the work force, so we're going to need those workers. and i think you're right, we should look at incentives, but part of what the washington debate currently is about, of course, is changing the disincentives, raising the retirement age. raising the early retirement age, raising the quality of education for medical care, so it would keep in you the work force. it would be better if it was not forcing, but voluntary, and the market itself will provide some of that. but i agree with you, it is necessary. >> i think some of the conversation which is often the problem is posed as you work and

then you retire, and then it's very black and white. but it seems to me there may be an opportunity for a little bit of a transition. i mean, what are the structures that allow people to perhaps work part-time for an extended period after they don't quite retire? there is a working sentence within the structure that will partly answer that. if you cut down part-time, your benefits may shrink so when you retire you get a whole lot less. so the incentive structures around retirement are one thing, but are there incentive structures that would require a slightly more flexible work force and allow more structure between working full-time and retiring full-time. that's not a conversation we've had much of. one more question. >> les kerney from the state of arkansas. has there been much conversation regarding potentially

significant inflation three, four years down the line? we made a lot of efforts to -- around the edges, cobras being cut, all of those things, and now you have a significant senior work force, or past your retirees, who their monthly benefits have either been held or, actually, because of inflation have significantly been reduced, and all of a sudden you say, well, we've not funded these things. so the pressures are going absolutely the other way. the pendulum has gone from, one, this area, to what do you do when you've had a schoolteacher that's been widowed, retired for 20 years, and you have all these inflationary pressures. where are the states going to be? what kind of conversation is talking about futuristically five years when there's going to be a lot of pressures to

increase pensions for those who have been retired? >> well, i mean, certainly you're seeing people do away with colas and things, but this is -- in a sense, the public sector is lucky to have this conversation because the private sectors don't have any colas. i'm sure if inflation picks up again, which it really hasn't been as high as people were fearing for a long time, then that will be a new policy problem for people to wrangle. >> yeah, i think those conversations aren't happening. there's not much anticipation in these actuarial tables or that it's going to be back any time soon. so if those levels exist as you think they could, then we'll be having this conversation.

although social security does have a cola, it's going to be paired or calculated differently, the result which will be deduction. social security will have a cola, and it doesn't look like that will disappear. nobody is talking about, that i know of, what happens if inflation comes back in a raging way. >> speaking of retirees, on a somewhat lighter note that we might conclude on, most of you in this audience, or many of you, is certainly aware of the work that ron snow from the agricultures, he's our pension tracker. i do a lot of this work myself and i rely on a lot of his work for that. ron is retiring in august, and ncl will still continue to do that, but i think any of you who have worked with him know the great job he does. he's in our audience and i just want to acknowledge him for that. [ applause ]

>> and on that note, l l l l l l [applause]

[background sounds] [background sounds] noticed the color of the bourbon. that pretty and the color that you see is all coming from the char on the inside of the barrel.d this char is where bourbon gets all of its color. and a lot of its flavor. currently they have discovered over 200 chemical flavors justf in the oak and the char from th barrel. >> this weekend we highlight

frankfort, kentucky, on booktv and american history tv. about the we can look for the history and literary lives of kentucky state capital. on book tv on c-span2. the first tuesday burned to the ground. stop by the third, the old state capitol. booktv and american history tv and frankfort, kentucky, this weekend on c-span2 and 3. >> we are back at the pew center. representatives from state and local governments discuss how to manage state pensions and retiree health benefits. according to a report on the pew center on the states, just over

half the states had fully funded pension systems in the year 2000. to 16. this is about an hour.nk ths just will be hearing from lori grange who is the deputy -- glory, give a short title.grge, who i >> pew center on the states. and we'll go right into this, but let me reassure you that we are -- that is loud.ure you we're in the home stretch you. i know you guys are excited even though this room makes it feelys like sunlight 24/7, i think it's nice outside. 24/7. i think it's nice outside. if it's pouring rain, i have no idea. i think it's a nice day, you're in the home stretch, we're going to get you out of here. i assure you our staff is also excited. we love having you here, but the minute we get you out, we're

going to party. a couple things. one is, i am not, as many folks you have heard from in the last 24 hours, i am not a pensions rock star, i am a pensions groupie. so what i can tell you is this is about as groupie as it gets. you're not seeing a lot of bling, no stillettos, but you brought me to nirvana, and i worship you. in all seriousness, you guys have been terrific. you have been as much a part of the success of this conversation as anybody on this podium. so on that note, we have heard from an extraordinary number and range of experts and as our final conversation here, i want to turn to perhaps our most distinguished panel of experts, which is you. the question that i'd like to get into with you in our last remaining moments is to have a conversation about what's going to be next for you in

particular. that's you as elected state lawmakers, you as pension funded state administrators, you as shareholders. i'd like you to talk about your next steps and what's on your mind as you leave this room. you know as well as i do that the range of topics we've discussed over the last 24 hours is enormous, it's been exhausting, it's everything that you deal with on a day-to-day basis. so i want to hear from you a little bit about how, when you go back, how you're going to walk back into that midst of challenging issues, and what's next on your plate. so a couple quick things about this discussion. first and foremost, this can be as long or short as you like. if you draw your last breath of conversation, we'll call it a day, and everybody can go home happy. whether that's ten minutes or we take the full hour, totally up to you. so no pressure to end at 12:30, but if we're having a robust conversation, terrific. i get paid my full salary either

way, so no personal feelings hurt on my end. the second thing is elected officials will appreciate this. this conversation is so flexible that you can answer the question that you would like me to have asked as opposed to the question i asked. so total flexibility, especially if there's something we haven't talked about or you haven't talked about, had a chance to talk about, this is it. so don't feel constrained by either my questions or someone else's. and finally, bear with me, but what i'd like you to do is turn inward -- not spiritually or emotionally, i literally mean turn inward. folks around the perimeter, if you could turn your chairs so you're kind of facing toward each other, i'm not going to stay up here. what i'd like you to do is direct your comments toward yourselves, and especially if folks are blocked by the pillars, feel free to move your chairs out so you can see each other and see who is talking.

when we pass the mike around, if you could just reintroduce yourself and the state you're from, because that's going to be pivotal to the conversation. so i think that's it, and i'm going to move around a little bit in oprah style around here, and we have our couple mikes. speaking of oprah, half of the future of the trusts, right now i'd like you to look under your chairs. that was so lame, i'm sorry. it's actually only the ethics laws that prohibited us from leaving a set of car keys under that chair. i want you to know we had -- that's right, we had every desire. okay, so i'm going to pose this question and would really love anybody to kick us off. so the question is, what's next in your state for you? and what i mean by that is you heard from state treasurer armondo in rhode island, williams in colorado, a number of your peers about some big issues in their states and some

next big steps they're going to take, whether it's to try to navigate the litigation in colorado to treasurer armondo's public education tour, especially if you are an elected lawmaker or pension plan administrator. what are you going to do next? what's your big issue? what are you going to do next and why and what challenges stand in your way? so someone kick us off. great. >> this is going to be a landmark statement, is that i don't know, okay? i can simply say that. but what this conversation has done, it's opened my eyes, and like many of your legislators -- i'm mick sheke shelton, i'm sor from oklahoma. we have several people from oklahoma here, and we get caught

up in our lives rather than sitting down at the table and figuring out how we get out of this. so i'm looking forward to the conversation about some of the things wea've talked about here today, and it is my hope that some of the things that i've learned here i can articulate to my side on good, helpful solutions to a problem. thank you. >> actually, could i ask you to follow up on that? and -- that's right. talk a little bit about when you head home to the legislature, what's the issue facing oklahoma's legislature? what's the biggest issue in this arena, and what's live on your radar screen in terms of the legislative debate or not? what's the biggest challenge that you, as an individual lawmaker, are facing? >> we pay several reforms this year on our pensions and our

offer of those reforms is sitting in this room. and i don't think that a lot of that conversation might have streemd ov streamed over to the other side of the aisle understanding what we actually passed, and i think it wasn't until i actual the got in this room to hear some of those reforms, and our name even popped up on one of the screens as one of those profound reforms of states, but just trying to gain an understanding of where we are and what we're doing. we did not know for a fact if the reforms were some political push or tangible things that we needed to do, so that's why i was encouraged to come and be a part of this. and i know i didn't have -- that was one of those times i answered what i wanted to answer. >> that's all right. >> but thank you.

>> well, that makes the whole meeting worthwhile. i'm from oklahoma city. as we all know, we can have ideas, and if you can't implement them, they're really meaningless, they're just rhetoric. we have some tough challenges. we felt like we were one of the worst states in the union, and we had the numbers and we had the governor's office, and i will make this commitment. i'll do a better job. a couple months out, we did get into the position of a political issue that the democrats knew we had the numbers, so they were just going to be against everything. so i felt like the more information i gave to the other side would just arm them in arguments. and so i did make the command decision just to run and run hard, and we did pass them all. but i think this has opened everyone's eyes. i didn't do a good enough job informing the other side exactly

of the great need. i think it became apparent after 20 or 30 hours on the house floor that all the issues did eventually get out there. anyway, i will do a better job. i think our top priority this year, we increase retirement age this year, greatly reform the cola probably more than any other state. next year i'm going to come back with with increasing contribution rates, at least by vet minimum, by employees, and i was hoping to gain a little bit more of an understanding on the public safety side. it seems like we have a lot of stuff that's like nebraska where people are spy king and exorbitant plans that do not face reality, so i have a little bit of learning to do in how we can reform the public safety. they're tough to reform. they definitely like their benefits and they're going to be a challenge. >> could i ask you a question and follow up on that? >> yes. >> it's interesting to hear some folks, including treasurer armondo of rhode island, talk

about some of the tactics they're going to take to try to navigate those political waters you've referenced. the public safety realm of workers is certainly -- may be a challenging one to navigate in terms of benefit reform. can you talk a little bit about -- there's been a reference to kind of a listening tour. i know mr. williams of colorado referenced a listening tour of workers, treasurer armondo rempsed a kind of campaign, talking to the public. what are your expected tactics or steps that you think you'll take as you enter this next frontier, as you've described? >> well, begging never hurts. and pleading. and shining a few shoes. i think the best thing is explaining the problem. i felt like if we can't do it as

one of the worst-funded states at the bottom of the recession when we have all the bad numbers, how can we ever expect that we're ever going to really solve this problem? but at the end of the day, it's relationships and begging and being able to articulate your viewpoint when it really counts, and we did have the great fortune that in the end the government wanted to do it. the senator pro tem took on one of the biggest bills, and my counterpart in the senate was fantastic. in the end the media was all behind it saying, please do something. so there is a little bit of luck involved of everyone kind of seeing the problem, and it sure doesn't hurt if you have the speaker of the house and the governor and the pro tem all come together and say, you know, we're on an unsustainable pass in action. we'll be in dire straits to the

financial condition of our state and we have to do something. >> thank you. others? >> thank you. i'm jeff king serving in the kansas senate, and while kansans tried to generally lead and not follow oklahomans, i think it's the same situation as many here, but procedurally has taken what i think is fair to say a unique approach. we faced this year with a new governor a very new house and a very similar senate, all of whom recognized the dire state that our capers, our public retirement system funding and unfunded liabilities were in. we ended up taking a two-year approach to that where, in the first year, we addressed folks that are in the system now. we addressed -- our state is a very strict contract state. our supreme court has been very

adamant and very clear that our pensions plan creates a contract ripe with existing workers and there are very limited things we can do with that. and we tried to get as creative as we could within the limits that the supreme court allowed us to modify the plan for existing beneficiaries. we essentially gave the existing beneficiaries an option for future years of accrued service. we didn't touch any of past year's recruit service, but for future years, they have an option of either electing to reduce their multiplier earned by about 25%, reduce it back to 1993 levels and pay the same amount of money in, or they can get about a 6% increase in their multiplier up to 1.85 instead of 1.75 multiplier but pay 2% of their salary more into the system for future years of service. it has almost the exact same effect on decreasing unfunded liabilities but different legal impacts for both. and our hope was that if the

supreme court liked one idea but didn't like the other idea that they would deem the whole system legal because employees had had an option to choose between one legally blessed idea and one that might not be. to get over some resistance to doing reforms to existing beneficiaries without looking at future employees at the same time, we have made everything that i just described contingent on the consideration of a new plan for future employees with next year's legislative session. we mandated a 13-member study commission. the majority of those members are non-legislative. that commission by law must propose legislation to look at changes either to define benefit hybrid or define contribution for employees starting after july 1, 2013, and the legislature must vote on it in order for all of the reforms that we passed last year to go into effect.

so the discussion that the treasurer of rhode island talked about, that we've talked about here, not only do we think it's a good idea, we're actually legally mandated to have it, and we'll start having that discussion next month. so while our discussion may end in 30 minutes, this is the start of about a 15 days of discussion across the state of kansas for me and 12 others. >> terrific. thank you. yeah. >> i am from nebraska, retirement systems again. i just thought i would share with you what we're going to be doing this summer. we're currently in the process of doing a 30-year modelling study, similar to what meredith did in colorado, but we're going to make this an interactive study, a moldel that we can inpt different data about the retirement systems for our dv plans, our school and state patrol where we can change the factor, change the years of salary, the retirement age and

all of these different factors. we're going to take a look at it, study it this summer. our legal counsel for the retirement systems is here, kate allen, from nebraska. we're working with the retirement committee, and i would encourage you, those of you who are legislators, to work with your agencies, your retirement agencies, because they have a wealth of knowledge. we're all in this together. we all want to come up at the end of the day to be able to fund our pension plans and do it in a smart way, and so i would just say that that's something we're doing. we're looking at do we want to make any changes to our defined benefit plans in the next year change a tier, change to a different toier, to add another cash balance plan or whatever it may be. that's what we're doing. >> let me pose a question for

whoever might take it up, but whoever is next, go forward with what you'd like to talk about. this is particularly for state lawmakers. as you have deliberated these reforms and even past reforms, have you felt like you had the critical information you need or have needed to make those decisions, whether that's intensive data about past practice, whether that's intensive data about, you know, based on modelling or future forecasting? whatever you think has been the most critical, especially data, empirical data or evidence, what have you. have you felt like you've had that in place when you've been delivering these reforms or not? we'd be interested in hearing about that. but let's turn to someone over here, please. >> bill sample, arkansas senate. one of the projects that i have

taken on is that many years ago, the legislature granted some of the municipal governments that had fire plans that were under water to go into a state-defined contribution plan. and so every year on this closed plans, these cities, they're pay as you go. and they had no way to finance that to actually get away from it where they could pay off their debt and go on about their business. i thought that it would be good if i could pass legislation to allow them to bond that debt so that they could get away from pay as you go and get that debt taken away so that they could move on. but i found out that it would take a constitution minimum to

do that. and we've got 25 cities that range from just a few million dollars to many million. my city has a $35 million debt that unless i can get this passed, they'll never get that paid off. they'll be paying on it for 100 years. and so there are unique situations out there, i know, that -- where each state has different problems, but we were talking about a while ago some of the systems going bankrupt, well, i actually have at least probably 25 that we have rolled into a state program. and that's just one of the things we have to deal with. >> please.

oh, sure. whatever question you would like. that's the beauty of this session. >> we've had several different things over the years that have affected our pension system. we were one of the two states, south carolina being the other, that couldn't use he cequities l about the year 2000 that were constitutional amendments. so you bring equities into the system to now fund your retirement system, and the issue is not that the information isn't there, the issue is do they understand what they're looking at? that becomes probably a big issue, because some things are done on the blind, particularly since we had an investment policy in our wall that said you couldn't put any more than 60% in equity. they put that hard number in the wall. of course, i argued that we ought to use the pruden the man. but the municipalities and the county lobbyist came in, and all the local officials were afraid

we were going to lose all the money. that we were, quote, gambling with it. so what i'm saying is it's not often the information that you have, it's how people emotionally and intellectually jump at the information ahead of them. so to sit there, we have this decade of mike's. which lead me to my final comment, that means there's enough information in this meeting that i've garnered, but it means you need to have a long-term stable view, and you can use all the examples of some of the things i've heard in this room in the last few hours as proof of that. so the thing i take back is --

these medals on here that's been coming on and off. >> i do believe our relationship is pretty competent to look at all the legislation. but erin will just say things. i almost said, if you want the legislative. or to be a governor, you might want to understand a lgt bit about the financial market. that might help, you need to know whaet going on and sometime that's what the problem is. we just don't understand the information. it's not there, i just can't speak to the reactions, so i'm seen that.

. >> i've often wondered, is one element of that possibly some of the turnover in some of the state ledges where you actually have. but maybe you're overwhelmed by the number of issues. >> it true. we do have different backgrounds, that's for certain. we don't have term limits in our state except for a she ever ari governor. i'm a party member, and that's only supposed to be within term limits, but i've changed my mind on that. there is significant turnover in the legislature, anyway. what you said is true. >> did we have someone over here before we go to this gentleman, and again, if you'll state your name and the state you're practice, we'll turn to mr.

williams. >> jon rad ford, at the state level. so in oregon, just to get back to your first question, in oregon we're probably in a monitoring mowed. we started about ten years ago making a metal adjustment to our pension plans. we created a second tier about five years ago, more litigation and a third tooish. right now we're at a moderate twoen. almost none of those have that driving in oregon is the. if they published more entity, the owners are. i think the political side and the people, particularly, and

especially a political richt. i mean this isn't a target of opportunity to reduce our cost in the public sector. decisions have to be coming around that type of party, but ruin stayed and there was a dramatic and gentleman cone yann images to the social security. i think we're just in -- in the future, we're just going to be wandering home to spee. we all achieve some of the savings that we anticipated, and so forth that's probably a positive answer. we've discussed contributions in the pension plans in the last year or so, so that is going to

be looked at as we move into the future. >> thank you. >> we talked about administrative executive branch section passion. half of the work is the executive branch and the other half is in the legislature. as part of the lejs laifsh. there are changes performed by my commission and he represented it in open hearing. before the jury can have a second consideration. you also do section punishment tifts. so we get to do a lot more than just try to track down what the local governments are doing. the thing i want to see in pennsylvania more than anything else is the end of the single

finger pointing. it really doesn't make any difference how we got into this mess. what matters is how we're going to get out of it. i could sit here and demonize that particular employee, or that one ran up 36 hours in a matter of weeks. that doesn't matter now. what matters is what are we going to do when it spikes. you can look at your second hour on the overtime. we have a problem with the superintendent of schools given a 205 dollar bonus. it's not just the union issue. it seems like everyone who --

thaet not going to help us if we just spend our next ten years trying to legislators, the past pension and maybe them fix it, and the way-back machine is broken and i'm not going to be able back and change that stuff. i'd like here in this room, what are we going to do as a dear. >> actually a great segue. we're going to pass to mr. williams now because i know he is also a voice with similar opinions, saying, leet move on to the, because in a second i'm going to ask what you think is

the most favorable job on that. go out to tall the reporters and change things. so hang onto that thought. >> ms. williams, i've had a great time. i llz learn a lot in other jurisdictions from oregon really got my and got my juices flowing. he talked about this of where we just dialed down benefits in the corporate sector. if i'll. ive co compete with target. i have to keep my cost structure as long as possibly and there are no consequences. when my work anylong.

people in this room worked for a state department. you have responsibility. as you do it wrong, it's come back to haunt you. 10, 15, 30 lengths from now, civil 43-year-old schoolteacher and she -- they can't work anywhe anywhere, are you going to let her starve? are you going to led it freeze. no, you're probably not. when you race to the bottom with walmart. but what i wanted to see perhaps on a plaintiffs strukt active. that after school.

timing is rent them out in towns. pension obligation fund except for the selling people the other ting i would say is this is all about numbers, there is no free lunch. hire the best actuary you can find. shake all the hands that answer they know what a pension fund is, and fire the same molgd. or i want to try this or i want to go back. boy, ready for that. we hit one of the top legislators in colorado. we also stack out with the

kvrg -- let's raise retireme retirement -- oh, that doesn't do squat. let's try something else. let the decision makers play on now to 30 years. incyst on that. you've got to make huat our disposal. but i learned a great other state officials to comment on their next steps. i want to come back to the media question briefly. >> one of the things we always have planned is in august, our committee will be setting down to talk about, prioritizing our

next steps. >> ur from arkansas, flooded. by the way, this is hallmark's facility, it's, and when we look at the huge -- that same claim could be made by three are within the area. but saying all that on the milgd that they taking some time to sit down and say, what are our next timz. >> we are in have challenges.

we are attempting to work around the edges and improvements and factors. i am thinking long-term. what do we need to be doing now? we have a real disadvantage in my opinion and that is we have a very strict term limit. house members are restricted to six years period. that's three terms. some do go on to the senate, which gives them another eight years but our institutional knowledge is really limited. that is, in fact, i think impacting us in terms of how we are able to obviously meet our obligation as legislators.

i think the big thing this has brought to me is that the long-term look and the communication piece that we probably ought to be about, we do have four regional meetings planned over the next eight months. so we'll have a way of starting that dialogue of what we need to be doing futuristically and ensure the sustainability of our plans. >> are those principally meetings with local officials? >> actually, they are going to be open meetings. there will be invitations sent to obviously the stake holders, whether it will be a city or employee. there will be, obviously, a planned agenda. all the directors of the various retirement programs will be present. we will probably have a

shortened version of 30 minutes or so of a planned presentation and going to questions and answers. we'll probably always solve the oud yens by vlg prequestions for people so that we can have a good discussion and it won't lag. then, the committee will meet the following morning to discuss the agenda that we are trying to establish in august where we want to go and what are the issues that are high pryority for us. >> throw me a softball to set up my next question. will this be open to the media? >> not only to the media but hopefully to everybody. i hope all the meetings are well-attended. i think the more people understand about the pension process and the fact that the vast majority of money really comes from the employees and the investment of that money.

th then it is not such a drag. 10% of the people in arkansas are dependent in one way, shape, form or another on public pensions. in fact, there are communities that would be real dramatic if pensions were not available simply because of the shift in population in our state. so it is a very important piece of our economic, you might say, vitality. i think another aspect of that is that many -- it is not as much as it used to be by arkansas is one of those states that has a significant retired population. we have large xhuptcommunities retirees. that probably has waned a little

bit in the past few years but it is still a significant factor. so it is a very interesting topic of discussion when it becomes a public one. >> great. thank you. particularly illuminating the point that it is not discussed in as much detail in conversations like this and others, which is that the imfact on local and state economies when retirees don't have as much money to spend within those economies as they might as a result of this, obviously, unintended? >> one of the thunings i was trying to emphasize earlier, it is a real quality of life issue. it has a social implications beyond what many of us may understand. i include myself in that. if we can not create an environment, particularly for our elderly -- since i have

become just even in the senior stage, i think it is more important that we think about the kinds of environments that we want for our seniors. we have not even started to really grapple with the health care issue. we are only discussing what's the base amount that they are going to have available to, in fact, have a lifestyle that has some dignity with it. i think that's an important discussion for all of us to have. it is certainly not limited just to state legislators to have or the executive branch. we need to think of thats as a societal issue. it is not all about unions and all of these other issues. >> thank you. let me ask this question and we will get a couple of comments and then we will start to wind down.

if you do have a comment that you would like to work in, please gear up to offer it. all kidding aside for michael cooper, he made the observations in his presentation that it is not journalisms job to report that 99% of airplanes land safely. it is not what they do. that's not necessarily their job. i would ask maybe a couple of you to comment on how do you think media coverage in your state has been on this issue, for better or worse, in terms of its impact on both the legislative debate an the public debate? recognizing that just like states, journalists and media outlets are not mono litic, make a comment about the media coverage on your issue. it is interesting to hear

treasurer romando say there were six reporters trying to cover this issue and she is trying to engage more. it may be the limited resources and staffing that local and state-level media have in general on their staffs, let alone resources to cover this one particular issue. any comments about that? please and we will come over. i'm john cybek from massachusetts. i understand the media's role. it also then colors and affects what our priorities are going to be, what ultimately happens. in massachusetts, some pension reform passed a couple of years ago because of some outrageous examples. a firefighter out on a disability pension who was a professional body builder.

legislators who were able to get a year's credit for one day of service. the initial focus was on dealing with the issues raised by the media. while i don't want to dismiss them, in reality, we are talking about a small number of people out of the entire workforce. so it really delayed and derailed meaningful, true pen quhun reform that will save us money over the 30-year period. now, we are getting into that. where we are heading that have is the governor has a piece of legislation. we have had hearings, suggestions on doing everything from scrapping the plan to just completely blowing it up and going to something different. the benefit for me of coming here was listening to the various per mutations, what states have tried what has been successful. i like the kansas approach, to look at future years, things

that may not have been considered that may have my staff skewerrying in terms of finding out how it might be in the other states and what you can do moving forward. that really is the challenge going forward for all of us in terms of how do we do this? your second question about the data, we get it. i think part of the problem is sometimes we are bombarded with data. it is having the expertise and it goes back to getting the actuaries, really looking to distill through and find out are those data correct? are they consistent? where are the inconsistencies? one of the panels talked about how one of the mistakes or one of the underperforming plan never showed the full data. they would show 10 or 20 years and ignore the rest. that's the other difficult thing is because of what we are dealing with and the fact that once we've made these changes,

we can't really make additional changes for existing employees, we have to make darn sure when we do it, with he do it right and not do it overly aggressively in terms of responding to the public saying do something and do it today, because i don't want to be that legislator who 20 or 30 years saying, who the heck was that that made that terrible mistake? there has to be some conservatism, as we need to be conservative when we look at how we are investing these dollars. we need to make sure we are using the right data in terms of going forward. >> thank you. >> i would just add to that, i'm katherine clark from the massachusetts senate. we did have a series in the boston globe that really propelled pension reform too that as a colleague from arkansas said, got rid of a lot of nonsense provisions that had developed over the years but i think part of our challenge now

is now we are looking at the harder decisions with the longer term ramifications. we are suffering a little bit from pension reform fatigue. the we are in the middle of a very contentious debate and will be resolved within days around giving some flexibility to municipalities and collectively bargaining their municipal health insurance. that has been a very, very tough topic. we are a very, very heavily un o yunized state. we are prounion in massachusetts. this has been tough. to come back and say to both the public and the legislators, hang with us. now, we have another topic we really need to talk about in a meaningful way when we do have some editorials on the specifics

of pension that have not been particularly helpful saying, you know, we just need -- this is easy. you move everyone to a 401(k) plan. we are not even a social security state. i think moving everyone to a 401(k) plan as we have heard over and over here today is not exactly an easy solution that we could do. so i think that we need to work with our editorial boards as well to sort of say, let's really partner around this issue and help educate them. i think the treasurer in rhode island was really on the right track about the importance of public education and the importance of bringing not only our colleagues with us but the public with us on what's going to be very important but this has just been an incredible conference to hear what other states are doing and sort of what the potential pitfalls and

challenges are going to be. so it has really been very, very helpful. >> thank you. >> two more comments before we wrap up? let me plant one, get a couple of comments in return if you could, because it would be very helpful to us. we have -- we have heard from a number of prominent researchers. there is beth keller's group, others, the pew center on the state. there are a number of very high quality organizations that work pretty well across the 50 states to try to collect good data and do good analysis and try to be helpful to lawmakers. i'm almost certain i am speaking for those colleagues and my colleagues in asking if on the top of your head, and this doesn't have to be the only time you can think of this, are there particular issues or type of research that you think, if you could get some of our organizations to focus on, that would be particularly helpful for you? this will be the last couple

minutes before we wrap up. any immediate thoughts or if i could plant that seed and get feedback, we would welcome that on on ongoing basis. any comments about that? great. our work is done. fantastic. go ahead. >> one thing that i think would be useful because of the conversation we had this morning. i'm john rad ford, state controller. one thing i think would be useful from the conversation this morning is some level of research or analysis on this issue of cities and counties and school districts that end up in fiscal distress. what are the underlying causing factors that have permitted that to happen? you know, we have cities and counties and school districts and special districts that are well financially managed with

strong fiscal discipline and strong fiscal leadership that regardless of the ups and downs of the economy, regardless of the infrastructure costs or pension costs or other kinds of long-term liabilities seem to manage quite well. what are they doing over a long period of time that has allowed them to avoid physical distress? conversely, what have those cities and counties been doing for the last 30 years that have led to this kind of fiscal distress, whether it is fiscal distress in the way they manage and finance their pension obligations or their infrastructure or any of their programs? maybe that would be instructive. >> terrific, thank you. one last comment? the gentlemen from arkansas, do you want to wrap us up? >> one of the things that intrigued me about this and i would like to know a whole lot

more about it, is the medical trusts that looked like to me a thought that might be able to self-fund some of that and stuff that might be useful in some situations. i don't know if it is universal but certainly that follow-up would be most helpful. >> terrific. i am going to put one of my colleagues on the spot here. you will see his name and contact information in the folders. should you have additional ideas going forward about what the pew center and the states or some of our colleagues in the field might do to be helpful, without any guarantee that we will be able to do it, with he woue wou absolutely welcome your ideas. i will give you my colleague's name. feel freed to forward it to them. david draine, draine@pewtrusts.org. you will see his contact

information in your packets. we are coming to a close. the first thing i want to do as we always thank our panelists, i would like to ask you to thank each other for this great conversation. [ applause ] >> finally, turning over to barbara shavitz, to bring us absolutely to a clothes, i just want to reiterate the praise i hope on behalf of all of you for both bashrb's leadership of thi event and the incredible work among many of our staff that are here today who have put a lot of work in this and treasured the opportunity to hear from you. i guarantee you, we have learned as much from you if not more. we certainly hope to bring that to our work going forward. thank you very much again. barb? >> i would just like to echo that it has been really

gratifying for us at the pew center who think about the pensions too much to have the kind of group of people come together, including the panels that we have that were stellar and the audience and the special guests, all of the state officials. all of you are in policy-making positions. we had 25 states represented here. it feels as if we really had a good meeting of the minds about what is going on in this issue. i think we are thankful for all of you to come because it makes our work worthwhile. in closing, i wanted to note, we had several really good power points during this presentation. what we would like to do is after you go home, please go to the pew center on the state's website and you will be able to find a presence on the website about this conference. we will have some video clips and you will be able to link to the power points. you will be able to see the agenda again and find bios of

everyone. so there would be a way for you to get back in touch with some of the information that you saw here. if anybody has any kind of logistical questions, i will point out rosa linda ortega and give her a big shoutout for doing all of the administrative work for all of us on this. [ applause ] >> with at, [inaudible conversations] [inaudible conversations] >> this afternoon we'll show the third in this series of hearings on the radicalization of islam in the u.s. today's hearing looks into terrorist groups' recruitment in canada and how that impacts minnesota. you can see the hearing at 5:40 eastern. and tonight here on c-span2 booktv prime time continues

its focus on book fairs and festivals. from the virginia festival of the book, an author panel on the founding fathers and religion. that's at 8 eastern. at 9:10, laura caldwell at the printers row lit fest in chicago. she's the author of "long way home: a young man lost in the system and the two women who found him." and at 9:55 eastern an author panel from the tucson festival of book on the history of the american west. >> paul jennings, obscure people with little known stories. american university professor clarence lusane reveals who they were as well as many other plaque men and -- black men and women who left their impression on the white house. >> i began to discover just fascinating individuals whose mark on the presidencies and whose marks on the white house were virtually unknown. except for a few scattered

stories here and there, and everyone kind of knew that george washington and thomas jefferson had slaves, but most people probably didn't know that eight out of the first 12 presidents had slaves. >> sunday night on c-span's q&a. >> two of the newly reopened slave corridors at george washington's mount vernon this weekend on american history tv on c-span3 with preservationist dennis koch and curator susan shuller as they provide a depiction of slave life in 18th century virginia. former deputy assistant to the president alexander butterfield talks about the secret taping system in the nixon white house. the civil war resulted in a tremendous loss of life but also great advances in medicine. george wonderling, director of the national museum on civil war medicine on the four years of the bloody conflict, and we'll visit frankfurt, kentucky, for its rich history. get the complete weekend schedule at c-span.org/history.

>> the u.s. military has a program where active duty personnel with a drug problem who have committed a crime go to what's called a drug court. the court helps them get treatment. the program is up for renewal in congress. national drug control policy state and local affairs deputy director benjamin tucker testified before a senate judiciary subcommittee on the cost effectiveness of drug courts and how they reduce recidivism rates. this portion of the hearing is about 45 minutes. >> the hearing will come to order. this morning's hearing will consider an important and growing component of our nation's criminal justice system. there are over 2500 drug courts in our country operating in every state and territory. many jurisdictions including my home state of rhode island also are developing veterans treatment courts. today's hearing will closely

examine these intervention and treatment courts and the role they can play as cost effective solutions for protecting public safety and reducing recidivism. as many in the audience know, a drug court is a specially designed calendar or docket that addresses the case of nonviolent drug offenders. these courts require participants to commit to intensive substance abuse programs. drug courts hold patients accountable through random drug testing for drug use. individuals going through drug courts are rewarded for doing well but sanctioned if they do not satisfy their obligations. they have worked in my home state of rhode island. as the rhode island attorney general, i worked to establish our state's first drug court. we now have ten drug courts operate anything our state. operating in our state. drug courts take many forms, but a consistent element in their success is the close cooperation of many players in the criminal justice system including judges, prosecutors, law enforcement, defense attorneys, probation or corrections officers and the

community at large including mentors, treatment organizations and counseling services. this cooperation and support is bipartisan, and it even reaches as far as capitol hill. i was pleased, for example, to join with senator thad cochran this morning and representative shelley berkeley at an event in the warmer outside weather today. drug courts have been in operation in the united states for over 20 years. veterans courts are a most recent phenomenon first launched in 2008 in buffalo, new york. like drug courts, veterans treatment courts are court dockets that provide directed services to a particular set of fenders. they respond to the fact that many veterans who have sacrificed so much for our country return from combat suffering from post traumatic stress disorder or other trauma that can adversely effect their behavior. veterans courts work to identify

and address the underlying causes of this behavior by referring veterans to treatment programs or providing other alternatives that can keep them out of jail while protecting public safety. whether functioning within a drug court system or based on a drug court model, these courts team with volunteer mentors and veterans' support or organizations to assist veterans in resuming successful roles in our community. there are now at least 50 veterans' courts in operation around the country with dozens more being planned. last month i had the great pleasure and privilege of welcoming attorney general eric holder to rhode island for a round table discussion focused on the pilot program serving veterans in our state. i came away from that discussion deeply impressed by the hard work, thoughtful planning and extensive community participation that has gone into that project. i'm glad that we'll later be judging chief judge lafazia of rhode island's district court who is leading the veterans

pilot program and will tell the senate about our state's important work in this area. as my colleagues know, the budget constraints confronting our federal, state and local governments command we martial the resources we spend as effectively as possible. today's hearing will allow congress to consider the role of drug and veterans courts in such smart and cost effective criminal justice solutions. i thank the witnesses for joining us today, and i look forward to working with senators on both sides of the aisle as we continue to support these cost effective solutions that protect our communities. i'm now delighted to welcome the distinguished junior senator from minnesota who is a honorary member of this committee, subcommittee to make a few opening remarks and to join the hearing. >> thank you, mr. chairman, for calling this very important hearing, and you're right, i'm not actually a member of the subcommittee, but in the judiciary committee every member of the committee is invited to

attend each subcommittee's hearings, and i wanted to be here because this is the effectiveness of drug courts and the veterans courts is such a great new development. and i'm a strong supporter of these problem-solving courts, and i believe we should be doing everything we can to promote these, these programs which are extremely fiscally responsible. and as we have the debate over our budget, i think it's very important that we understand how cost effective these courts are. first, i wanted to take a moment to recognize and welcome judge robert rancourt who's attending -- he's not testifying in this hearing today, but he's attending, and he's from minnesota, and i just learned that he is the incoming chairman of the board of directors of the

national association of drug court professionals, and i want to congratulate judge rancourt, and i'm very pleased you're here and joining us for today's hearing. in 2007 minnesota adopted statewide drug court standards with the goal of enhancing public safety, insuring participant accountability and reducing costs to society. and i'm pleased to say that the adult treatment courts, family dependency courts, juvenile courts, dwi courts and our first veterans court are all doing exactly that. helping to prevent future crime, getting participants in the treatment that they need and saving money. saving money in the long run. judge john hallihan who presides over the hennepin county adult drug court submitted a statement

on his program that i would like to submit for the record with your approval, mr. chairman. he writes that participants in if his court are subject -- in his court are subject to intensive probation, breath and urine testing and counseling. they are also required to appear in his court every other week to update him on their progress. judge hallihan quotes a letter that he received from the parents of a graduate from his drug court who wrote, and i quote: thanks to you and the hennepin county court system, we have our daughter back. and she is conquering her addiction to alcohol and drugs. she has attended every court session and sees what happens if you screw up. without a program like yours, a lot of young adults would not get a second chance and would waste a lot of time in jail. unquote. i think this statement perfectly sums up how effective drug

courts can be, and i look forward to hearing more from our witnesses about how we can continue to improve and expand the success of these great programs. so thank you again, mr. chairman. >> you are welcome, senator franken. delighted to welcome senator kohl to the hearing, and i'll take this opportunity to introduce our first witness, benjamin tucker is deputy director of the office of national drug control policy. overseeing ondcp's high intensity drug trafficking areas, drug-free communities and national youth anti-drug media campaign programs. he's previously served in numerous positions in federal and local government including as deputy director for operations at the u.s. department of justice office of community-oriented policing services and with the new york city police department. he received his master's from

the fordham university school of law, and we are delighted to have mr. tucker with us today. mr. tucker, please, proceed. your entire statement, which if read would take considerably more than five minutes, will be made a part of the record so that you can make a shorter statement orally here today. >> thank you very much, senator. chairman whitehouse, ranking member kyl and distinguished members of the subcommittee, thank you for this opportunity to testify here today on the importance of drug courts. as ondcp's director for state, local and tribal affairs, it is my job to work closely in supportive prevention and law enforcement initiatives through development of policy and programs. i understand how important it is to identify and support alternatives to incarceration. having walked the beat as a new york city police officer and worked in criminal justice for the past 35 years, it is clear we cannot arrest our way out of the nation's drug problems.

the obama administration recognizes that addiction is a disease and that prevention, treatment, recovery, innovative criminal justice strategies and law enforcement are all essential elements of a comprehensive strategy to reduce drug use. just last week the administration released its 2011 national drug control strategy. it articulates a balanced approach to drug control while identifying and addressing issues of concern to specific populations confronting unique challenges relating to substance abuse issues including active military service members, veterans and military families, college students, women and children and those involved in the criminal justice system. i'm here today to discuss one of the administration's fundamental policy objectives; stopping the revolving door of arrest, incarceration, release, rearrest through effective interventions and alternatives to incarceration. according to a 2007 justice

department report reflecting on the success of drug courts, we know that of the state prisoners who were dependent or abusing drugs, 53% had at least three prior sentences. these numbers have basically gone unchanged since 1997. drug courts have existed for more than 20 years, as you indicated earlier, senator, and their effectiveness in reducing recidivism and lowering criminal justice costs is welcome well documented. while over 2500 drug -- with over 2500 drug courts in operation today, approximately 120,000 americans annually receive the help they need to break the cycle of addiction and crime. and the drug court movement continues to grow. they help participants recover from addiction and prevent future criminal activity while also reducing the burden and cost of repeatedly processing drug-involved defenders through the nation's courts, jails and prisons. drug court participants receive

intensive treatment and other services for a minimum of one year. they are subjected to frequent court appearances and random drug testing with sanctions and incentives to encourage compliance and completion. but most important, graduating participants gain the necessary tools to rebuild their lives and reenter society as productive, law-abiding, tax-paying citizens. drug courts rely upon the daily communication and cooperation of judges, court personnel, probation, treatment providers and other social service providers from throughout the community. this successful collaboration promotes the overarching goal of improving public health and public safety. in recent department -- in a recent department of justice study, drug court participants reported 25% less criminal activity and had 16% fewer arrests than comparable offenders not enrolled in the drug courts. in times of serious budget cuts, the drug court model also offers state and local governments a cost effective approach when developed and operated within

longstanding, proven standards. the success of drug courts has led to the development of other specialty courts like veterans treatment courts as was mentioned, family treatment courts, juvenile drug courts and tribal wellness courts. veterans treatment courts are a priority for this administration, and as americans we must keep in mind the enduring debt we owe our country's active-duty military and veterans. the serious challenges they face when returning home, particularly substance use and psychological health problems, often go untreated. sadly, these challenges can sometimes lead to criminal and other disrupt i have behaviors -- disruptive behaviors. according to a recent justice department survey of prison inmates, an estimated 60% of the 140,000 veterans in federal and state prisons were struggling with a substance use disorder while approximately 25% reported being under the influence of drugs at the time of their offense. there are now over 75 operational veterans treatments

courts nationwide, and they are showing significant promise in successfully promoting sobriety, recovery and stability for our nation's veterans. consistent with drug courts, veterans treatment courts combine rigorous treatment and personal accountability with the goal of breaking the cycle of drug use and criminal behavior. however, in addition to the traditional partners in the drug court, they incorporate the unique capabilities of federal and state veterans services. in doing so, they connect veterans court participants to the treatment and support services they need such as treatment, medical benefits, home loans and other services intended to help facilitate their reentry to the community. in conclusion, i'd like to take a moment to acknowledge and commend our drug court professionals, our judges, our law enforcement officers, our treatment providers and others who have dedicated their time and talent to helping others break the cycle of drug use and crime to become productive members of society. again, thank you, mr. chairman, for allowing me to testify here

today. i look forward to working with you and this committee to address these challenges, these challenging and important issues, and i'm happy to answer any questions you may have. >> thank you, mr. tucker. first, let me welcome senator blumenthal of connecticut to the hearing, i appreciate that he's taken the trouble to attend. everybody's very busy now, so people being here is a sign of very keen interest. um, let me ask you about the federal interest in drug courts. in a later panel, we will hear from a witness who says that the federal government shouldn't bother with this, and that it should be left to the states to manage drug courts and not -- without support from the federal government. you've been involved in this for a long time. make the case for a federal role in supporting drug courts around the country. >> certainly, senator.

first, though, i just -- in the terms of my experience, as you indicated, i've been involved in this work for a long time, and it seems in any number of programs that have been successful such as drug court programs over the last 20 years, it seems that in very often the beginnings of those programs, the testings, the demonstration projects that give rise to these programs are usually funded in some cases by private dollarss, but very often true the interest of -- through the interest of the federal government and providing funding, seed money, if you will, so that these programs can get traction. that is what has happened with, um, drug courts, and while drug courts are primarily funded through state and local, um, resources, it is definitely in the best interest of the federal government to continue to support through funding for technical assistance and operational support so that our drug courts can continue to thrive. we have in the country based on

what we know about the success of drug courts the opportunity to change the paradigm, that is to say that continuing to arrest, um, offenders who have drug problems is not going to be very cost effective. the notion that we can divert these folks and get them out of the system, focus on public health and improve public safety at the same time as we save funds for every, um, dollar spent on drug courts we yield $2 for, in savings for the criminal justice, you know, for the criminal justice system. and so it just, it makes sense financially, it makes sense in terms of the comments made earlier about the fact that we have the opportunity to give people their lives back, and so for all those reasons, um, the federal investment and the assistance to sustain drug courts and to grow a model that we know has merit, um, is the way to go. >> thank you, mr. tucker.

um, let me just add that there is also in addition to your testimony from ondcp, there's also a statement coming in from the united states department of justice which will be put into the record, but it was not ready in time for this hearing, so the hearing record will remain open for seven days not only for them, but for anybody who would like to submit an additional statement. and i'll now turn to my distinguished colleague, senator kohl. >> thank you very much, senator whitehouse, for holding this hearing today. before getting to my question, i'd like to say a few words about the excellent work wisconsin is doing in this field. wisconsin has been a model for creating and using treatment courts to strike the right balance between holding nonviolent offenders accountable for their crime, but also helping them to break the cycle in and out of the justice system. our adult and juvenile drug courts, dui courts and veterans courts enjoy broad support back home from democrats and

republicans, law enforcement and judges and local communities. wisconsin's 41 treatment courts draw such broad support because they have proven successful at reducing recidivism while saving state and local governments millions of dollars every year. for example, the drug court in rural wood county has saved county taxpayers $400,000 since it began in 2007. wisconsin has also been a leader in the creation of treatment courts that focus on drunk drivers. one of our county's dui court works with people who have been convicted of their third dui. under this program in addition to serving their sentence, the judge and mental health counselors work with repeat offenders to stay sober and to get their lives back on track. this program's success has been a model for similar court throughout the country, and most recently in dane county, wisconsin, where republicans and democrats are working together to implement the dui court.

finally, i'm proud of our state's veterans courts. in 2008, in 2008 the state public defender's office and the wisconsin department of veterans affairs led an initiative to bring veterans courts to wisconsin. now wisconsin has six veterans courts, and most recently brown county is establishing its own veterans courts to serve the green bay area. these efforts insure that our vets are treated for the unique challenges they face after honorably serving our nation, and applaud -- i applaud them. mr. tucker, we know that treatment courts are highly effective at saving taxpayer dollars by helping low-level offenders stay out of jail and overcome addictions. state and local officials want to expand the treatment court programs and get new programs off the ground. in light of severe budget constraints at the federal, state and local levels, how can we work together to maintain the courts we have and also start new ones?

>> it's really critical, senator, for, um, the collaborations that are really the foundation of the drug courts to continue to function and operation. and you're correct that the tight budget times, i think, will test, i think, the mettle of our drug court professionals in every respect. i think that the advantage, though, is because drug courts and the model bring together law enforcement, um, social services, veterans administrators if it's veteran courts, bring a number of people -- probation officers -- all together to work on these issues. and i think having all these folks work together in a way where they can focus and keep, sort of remain, keep their own identity in terms of the work that they do, but the fact that they can come together and collaborate for the purpose of

expressly, um, improving the public safety and the public health by keeping the drug courts vibrant, alive and focused on keeping people out of the system as opposed to putting people in our criminal justice process will be, will be very effective. it will, no question, be challenging. i think my experience has been there law enforcement when money and dollars get tight, um, i think people figure out how to come together when they know they have a program and a process that works, and they have to struggle to produce results. and so i think that's the challenge we face, no question that that exists, um, but -- and we know that our treatment, um, providers are going to be strained. nevertheless, the need remains, and i think we need to be focused on how we allow that to, to continue. >> mr. tucker, as you well know,

dui courts are a relatively new effort. what is the ondcp doing to use the successes that we are seeing in dui courts like in wisconsin more broadly throughout the country? >> as you may be aware, senator, the office of national drug control policy and the national drug control strategy one of its focus particularly in the inaugural strategy, the 2010 strategy, has been on drunk driving. and so drunk driving has been, um, recognized as a serious problem across the country. it fits, i think, neatly into the connection, the nexus with driving under the influence. and so we are doing a number of things to sort of move the bar on drug, in the area of drunk driving in terms of educating drivers, in terms of working with organizations to get the word out, to be the bully

pulpit. and sort of, um, work with law enforcement agencies, drug recognition enforcement agency officers to insure that we put the resources, um, where they should be, on the roads and focused on individuals, identifying individuals who may be driving while under the influence. so we're providing resources to improve better ways to do roadside testing, we're providing resources to educate more police officers both state law enforcement officers as well as local officers to be aware of and to be able to identify those who might be driving while under the influence if not of alcohol, then be able to identify those who might be under the influence of some other controlled substance. >> thank you very much, mr. tucker and senator whitehouse. >> thank you, senator kohl. i'm delighted the distinguished senior senator from minnesota,

senator klobuchar, has joined us, senator from delaware, senator coons has joined us. the order on our side is senators franken, blumenthal, klobuchar and coons. senator frank franken. >> thank you, mr. chairman. i notice that our former congressman, jim ramstad is here, and i'd like to recognize him, too, for his leadership in mental health parity and in parity for treatment of addiction. minnesota's been a leader in, actually, in addiction treatment, and we're very proud of that. and minnesota we have seen drug courts do pretty good things, do very good things. you talk to, talked about really return on investment both in your opening statement and your response to senator kohl.

and part of this is recidivism. we've found in minnesota that participants in drug courts are less likely -- less than half as likely to be arrested for another crime as offenders who are prosecuted in traditional courts and, i mean, this, of course, we give lent kind of arrests, etc. . -- with equivalent kinds of arrests. so i want to see if you're seeing that nationwide, that trend nationwide in drug courts in terms of she -- recidivism. >> senator, with respect to recidivism, yes, we are seeing that nationwide. in fact, drug courts, one of the primary things that make them effective is their impact on the participants. and so 84% of graduates who have gone through the program remain drug-free, for example, after being graduated after the first year of graduation.

and with respect to the two-year mark, two years out of having graduated, 73% of those participants have not been rearrested or charged with any serious crime. so, and this is true consistently with respect to the research and the data that we see. so that's just another indicator of why this becomes so critical. the notion of sort of not just taking someone who's committed a crime, but then getting them into treatment, trying to keep them in recovery, giving them the opportunity to get the support they need to be, um, stay in recovery and to be more productive citizens, um, is, is, you know, what we're after. and so we, the data suggests that we have, we are in a position to have and repeat that success, um, going forward. >> well, let's talk about the return on investment and where

it comes from. because to me, if as we're in this budget crisis, in this deficit crisis and we all recognize that there is one, we have to find ways in which to bring down costs to society and costs to the government. so if you're reducing recidivism, you're reducing the number of people who are in prison. you're also reducing the crime, the cost to society. you're changing lives. people now who might be in prison are, have jobs, are paying taxes. i want to ask about one other thing which is families. because, to me, one of the huge maybe overlooked aspect of addiction is the toll on families. and we have found a satisfying

result from drug courts in minnesota is that more families are staying together or being reunited. in fact, in dakota county they found that children of drug court recipients are being placed in foster homes far less often than children of other fenders -- offenders. so to me that's a wonderful result. what impact do you think this has on families both immediately and in the long term? >> well, immediately i can speak at it from, you know, personal experience with respect to the role that i played when i was a police officer, and it's no different today. i spent a lot of time going into people's homes who there was domestic violence and a variety of other, um, behavior that was detrimental to the core of the family. um, one of the things that i think the drug courts do, um, and we focus on through the national drug control strategy

is to as we treat this as a public health issue as well as a public safety issue is to focus on ways in which we can give, provide the services and treatment that folks need. the challenges of someone who has a drug problem and who's an offender to the rest of the family we know is significant. i go to a lot of drug court graduations. i travel around, and i went to a drug court graduation several months back in charlotte, virginia, and sat next to, coincidentally, sat next to the mother of one of the sole graduate of that, of that graduation. and we had struck up a conversation. and she was clearly supportive of her son, she was clearly enamored about the fact that he was successful in meeting the conditions of being in the drug court and participating and to getting himself on the right track to being clean. but at the same time you could

see that she was apprehensive. she clearly had been through a lot. but it really makes a huge difference, um, and if you haven't attended a graduation, a drug court graduation, i recommend that you do because you walk out feeling, um, hopeful and renewed about the fact that the work that we do with drug courts really matters, for sure. with respect to the cost, in terms of cost at the state and local level, um, when we compare traditional case processing in drug courts, um, we are along with in the regular courts processing with the drug court processing, we are saving serious amount of money per individual. and because of some of the issues that you raise. so, for example, some of the research tells us that for every drug court participant, we have savings somewhere in the area of $1400. we have an additional savings that may range or approach $6700. so we're roughly in the area of

just over $8,000 in savings for folks, participants who go through the program, who we remove from the criminal justice system, um, and in the associated outcomes for the yield from the associated outcomes in all the other respects in terms of getting them back to work and making them productive really does have some financial benefit overall. >> mr. tucker, let me stop you there so we can go on to senator blumenthal. >> just let me say one last thing, and i have to leave and go to energy, so i won't be here for the second round. you talked about the whole, these families feel hope is, what is it, fear that said its prayers. and these are inspiring things. this is not treatment, doesn't always work, doesn't always work. but i want to say that as we get past this current budget crisis

right now, this debt crisis, this budget crisis and we move on after that to start addressing our problems and start addressing long-term debt problems in our -- this is a bipartisan thing. we've, i wrote -- i read a letter to make sure that we keep funding for this, and i got bipartisan support. this is, what's great about this is that this is something where we can address, there really is a return on investment on this, and it saves money, but it also saves lives, so i want to thank everybody who's involved in this, and i have to go. >> senator blumenthal is recognized. >> thank you, mr. chairman. i want to thank senator whitehouse for having this hearing, and i'm going to be somewhat abbreviated in my questions because we do have another panel, and there are other senators waiting to ask questions. but not to indicate any brevity or shortness in my interest in this area, and i'd like to

follow up with you afterward on the very good work you're doing not only on drug courts, but most particularly on veterans courts. and as you know, many of the brave young men and women coming back from service and sacrifice abroad in combat return with wounds that are invisible, post traumatic stress, traumatic brain injury which in turn lead -- in the some ways predictably -- to alcohol and substance abuse, domestic violence, all kinds of very serious and sometimes physically harmful activities. and for me one of the most telling statistics as a member of the armed services committee that i've heard is that about 30% of those incidences of

posttraumatic stress or traumatic brain injury are undiagnosed. and so many of these young men and women go back into society and are candidates for the kind of violence that very recently was documented. you may have seen it in "the new york times"' article over the weekend by erica good about staff sergeant brad eiffert and his struggle with exactly these problems and the way that he was, in a sense, rescued from suicide by cop through a veterans court or at least treatment as a veteran. ..

actually i was going to reference in my remarks. it is a classic sample that repeats itself over and over again. with respect to your question we have to look at all the courts. when we have drug courts and how they function each one has something different to offer in terms of its success. you may hear more of this about this from mr. marlow when he testifies. my sense is we have to continuously evaluate, examine those programs that are working, take from them the best

practices, and replicate those where we think it makes sense. it is also helpful as we look get these we learn a lot about what doesn't work so well. but i think with respect to the example that i have seen with respect to the veterans court in particular coming together of court personnel, military service personnel, law enforcement personnel, judges and the veterans' organizations at the state and federal level is the way to go. to the extent that we can keep that model, keep everyone informed i think we can continue to be effective in terms of the service provided. >> i appreciate your answer. what i would like to do for you is if you would, provide me with five of the best practices, what you regard as the five best

examples of how veterans courts are working in the country perhaps on a confidential basis and some of the best practices as well so that we can perhaps use them as models in connecticut and elsewhere in the country. >> question for the record. >> thank you. >> senator klobuchar. >> senator whitehouse, thank you for holding this hearing. we had a great event this morning to celebrate the work of drug courts. there are a number of republican senators there and that just shows the bipartisan support for moving forward with a drug court. i see my former congressman out there, former congressman for the state of minnesota, a republican and when patrick kennedy was flashed on the front page of the paper with his addiction problem, he went to stand by his side and i think it shows us all with his mentor and

friend throughout his experience in getting sober and going on to get married this last month it shows again this isn't the democratic republican problem. it is all of our problem. the numbers which my colleagues have mentioned are astounding. 70% of graduates will not be arrested again. compare that to 30% of people who go through the traditional system. i have seen it firsthand in my state for eight years in our biggest county. the first drug court in our state. we have 30 drug courts in our state and i think we all know the dollars and cents and the money that can be saved. the reason so many people are here to support the concept of drug courts is not necessarily those numbers. it is the teenagers that can get their life back again. the family that can send their kids to the street corner without worrying about drug

crimes. it is the addict who has a chance for another life. i want to thank you for the good work you are doing. i have a question about the dollar and cents because between the time we have this celebration and this hearing and i went to a budget meeting. i know that a lot of my colleagues and i are very focused on that right now and this actually can be a big part of it as we look at how we can save money and do good at the same time. could you explain why drug courts save money and what do you think is the most accurate estimate of the potential savings? >> good to see you again. >> took a lot of words to get to that point. thank you. >> some of the answer to your question relates to my earlier comment in response to senator blumenthal's question. that has to do with what we see

based on research in terms of the general savings. obviously when we take someone out of the system just the fact that more people than anywhere else in the world, we have of seven million people in the system, five million are on probation, supervision. carrying those folks out rather than having them in the system saves money. to the extent we can shut down their return to the system also saves us money. so the figures that i gave, $6,700 in outcomes, associated outcomes as a result of an individual not remaining in our jails and prisons is where we see the savings on a regular basis. >> one no. i heard cost participation of $7,000 cost of

incarceration over 22,000. would that be. year? >> i would have to get back to you. i think it is a range. hi am not sure if it is annually but it could be in terms of how to measure it. i can get a response to be more specific. >> i have one question, one last question about synthetic drugs and what you are seeing with those. we had a young man died in arizona. ordered off the internet. we have been working on a number of bills to include these types of substances on the list of illegal drugs. what you seeing? we have seen a number of kids you have never heard of these things before and they are at the emergency room doubling and tripling what we have seen. the new york times reported this weekend they had 34, 3,070 calls about bath salts in the first six months of 2011 that poison

control centers compared to 300 calls in 2010. >> we are seeing a dramatic rise in bath salts and intense products sold that way. the drug enforcement administration is focused on that and has begun to regulate some of the ingredients in some of those products but the challenge in some cases is just knowing what is fair. we are, as you know from the drug policy perspective, with our strategy continuously trying to focus on the prevention side of this as much as we possibly can. >> the education, the center needs to end my part of it. the education piece of it will be very important and these bills are coming up next week so that will be good. thank you very much. >> thank you for convening this important hearing and i will briefly say i am from a state that had a successful drug court

since 1994. like senator blumenthal i am interested in the progress of our veterans court which our attorney general has just launched in the past year. i will ask if i could for a brief answer to the question about what constructive role in your view nationally has police participation in drug courts played veterans participation as mentors and how is this providing training and best practice that help engage state and local government? happy to take a brief response. >> simply put, collaboration is the name of the game. we have wide support from national police groups when it comes to drug court participation, probation departments as well. people have finally come to the realization that this model works. any way in which we can support it is what people are choosing to do. it has been one of the reasons

it has been so successful. law enforcement across the board if you work with the international association of chiefs of police and others so we should continue to do that. >> thank you for your recognition that addiction affect every family, every community across this country and we need a balanced approach balancing law enforcement with treatment and community engagement. the drug courts have been critical to achieving that balance. thank you. >> thank you for your service and your testimony. we will excuse you now and take a minute or so recess while they change the table for the next panel. thank you for your testimony and participation in this hearing. >> thank you, mr. chairman. >> we will have more from the hearing on military drug courts in a moment. actor martin sheen tell the subcommittee that congress needs to keep the program going.

this afternoon we will show the third in the series of hearings on the radicalization of islam in the u.s.. today's hearing look at terrorist groups recruitment in canada and how that impact minnesota. you can see the hearing at 5:40 eastern. tonight on c-span2 booktv primetime continues its focus on book fares and festivals. the virginia festival of the book and author panel on the founding fathers and religion. that is at 8:00 eastern. at 9:10, laura caldwell in chicago. she is the author of a long way home:a young man lost in the system and the two women who found him. at 9:55 eastern and author panel from the tucson festival of books on the history of the american west. >> for politics and public affairs at american history it is the c-span network. it is all available on

television, radio and on line and on social media sites. surge, watch and share our programs anytime with c-span's video library and we are on the road with our c-span digital bus and local content vehicles bringing our resources to local communities and showing events from around the country. it is washington your way. the c-span network created by cable, provided as a public service. >> actor martin sheen testified at the senate judiciary committee on military drug courts. they're set up to help active duty military who committed low-level crimes get treatment. he called on congress to continue funding the nearly $89 million program. this portion of the hearing is about an hour.

>> come back to order. i am delighted to welcome our second panel of witnesses. we will go across the table left to right from my side of the aisle. our first witness is martin sheen who has appeared in more than 60 feature films including apocalypse now and martin scorsese's the departed and started numerous television shows. his performance on the west wing as president bartlett and earned him six any nominations. he has been a vocal supporter of drug courts for several years around the country and here in congress and we're delighted he has taken the time to offer testimony today. >> thank you, chairman whitehouse and distinguished members of the subcommittee. it is a rare privilege to be here today to advocate on behalf of drug courts. i would like to emphasize

however that i am not a drug court professional, nor am i an addiction specialist. i make the distinction because we all know celebrities who agree here or lesser degree so often confused for credibility. for instance i am not a former president of the united states though i played one on tv. my first exposure to drug court began 20 years ago and opened my eyes to the incredible capacity of human beings to change. i have seen individuals mired in the depths of addiction transformed by drug courts. i have seen families reunited after years of estrangement due to a loved one's substance abuse. i preface my opening remarks concerning my amateur status regarding this critical issue i was directly responsible for helping create a drug court system in berkeley, california in 1996 with father bill o'donnell and dr. cody, an

addiction specialist. recalled that options and our focus was the homeless and addicted street population of berkeley. with the help of drug court judge carol run hand and berkeley police chief bobby miller we began a treatment center at one sober living house. today there are six sober living houses. they are all run by a drug court graduates and nearly 6,000 people have gone through them and returned to health by like-minded spirit. these miracles happen every day in drug courts and i believe this country's greatest untapped resource is our addicted population. every year drug court helps save over 120,000 seriously addicted people bringing them from darkness to light and sending them on a course toward fulfillment, freedom, enviable boy. imagine for a moment the impact we could have if drug courts were available to all

1.2 million addictive individuals best served by drug courts if one were available. imagine the impact of 1.2 million people making up for lost time in their community and serving their families and their country. this is the purpose of drug courts and why is congress at a cost of $88.7 million for fiscal year 2012. it is no secret that our current prison system provides little return on our investment. we spend over $70 billion on corrections and it has done little to stem the tide of drugs and crime. instead addicted people cycle through the system at great expense to the public. drug court stops that cycle. in drug court we have a proven budget solution we can count on to cut drug abuse and crime. every citizen benefits when one addicted person gets clean and

sober. i would like to take a moment to talk about drug court serving veterans and the emergence of veterans treatment courts. i spent some valuable time yesterday with judge robert russell of buffalo, new york. this distinguished and renowned jurist is among drug court's hall of fame. two years ago judge russel created the first nation's veteran treatment center to restore the honor of these heroes. we ask so much of our men and women in uniform and they ask so little in return. they are often the last to ask for treatment. it is our duty to care for our veterans when they suffer as a direct result of their service to our country. today there are 80 veteran treatment courts with over 100 being planned. drug courts and veteran treatment courts are on the front lines of ensuring that when our veterans offers substance abuse or mental health disorders and get in trouble with the law they have the

opportunity for treatment and restoration. by helping restore their health we give honor to their service. our criminal justice system has been transformed over the last two decades by dedicated drug court professionals who believe a blend of accountability and compassion should be the foundation to handle our addicted population. these same professionals change the way we treat veterans when they have been visible wounds of war that led astray. frankly there's no better investment this congress can make and drug courts and veterans courts. the time has come to reap the staggering benefits of expanding this proven budget solution. thank you for the honor of appearing before you today. i appreciate your time and your service to our country. >> thank you.

our next witness comes as a personal favorite. the honorable jean lefazia. prior to her appointment to the bench she was an act of civil litigator in private practice and a leader in the rhode island communities serving on the road island state wallboard, commission on judicial tenure and discipline and serving as rhode island share for the international association of defense council. as chief judge of the district court she has introduced a pilot program for the state's first veteran's court and convened an extraordinary round table for attorney general holder on his recent visit to rhode island. she graduated from boston university and we welcome her here today. welcome, your honor. >> good morning, distinguished members of the subcommittee. thank you for affording me this opportunity to discuss something which i feel so passionately

about, expansion of veterans courts throughout this country. immediately prior to becoming chief of the rhode island district court i spent three years on the rain and calendar. active members of the military were appearing in increasing numbers. sometimes these individuals were recognizable by their stance and occasionally by uniform. other times they would hide their status and attempt to quickly resolve the charge without further attention. i was also hearing from victims in domestic matters who would tell me this defendant's behavior would not have occurred prior to his or her deployment for multiple tours of duty. which is a phenomenon we are seeing more of in this war than ever before. it became apparent some of these men and women were returning from combat with injuries that were very real but not visible to the naked eye. i realized a sentence imposed on a member of the military could have a harsher resolved and the identical sentence on a private

citizen. road island judges offer a filing on a first offense. the intent is to give the defendants a chance to start over with a clean slate. on domestic charges the court imposes a no contract twitter which prohibits that defendant from carrying a firearm. there's an exception for law enforcement but not for military. the military must be required to carry a firearm so the military defendant stands to lose his or her job, future and benefits. hardly what we intended when we sentenced the defendant to a filing. statistics indicate 1.7 million americans have served in iraq and afghanistan. this is a most significant number, nationwide this is less than 1/2% of the population. road island has given more than its fair share to the statistics. the call back of rhode island and national guard is the

second-highest in the united states. as of sept. 30, 2010 the number of veterans living in rhode island to serve in the gulf war's is three times the national per-capita average. most of these veterans returned home and reintegrate into the fabric of society but what about the small but increasing percentage who are unable to do so? studies indicate that one in five returning military will exhibit some symptoms of mental illness. not all of them will become involved in the criminal-justice system. no soldier left behind is a code americans are proud to live by. we do not deserve our soldiers on the battlefield. this is also true on the home front. do we lotto are returning soldiers a similar dewey when they come home injured or affected in a way that causes or altered to they are and what they do? especially if that injury causes behavior that puts them in the criminal justice system. these men and women were not drafted. they volunteered for this

service. they put on a uniform and follow the american flag into combat to fight and protect the fundamental rights and privileges that we as americans enjoy every day. most people agree we have a duty but how does that translate to the role of the judiciary in these cases? in response the rhode island district court is a partner in implementing the first jail diversion program in rhode island for veterans. this grant has allowed rhode island to begin the process but it is only a beginning. let me emphasize what this program does not mean. it does not mean any one will not be held accountable for their actions because of military status or medical diagnosis. is not a free pass. what it means is we need to increase our focus on this group of people and recognize them and implement programs that will address their unique challenges

and provide full and insight needed to become whole again, reintegrate successfully into society. veterans courts or problem-solving court. road island is a unique position because it is a small state. we have tremendous collaboration in rhode island with law-enforcement, mental health providers and other state department. road island national guard has been actively involved in supporting us. as we anticipate future drawdowns the number of returning personnel to require these services will grow substantially. the expansion of this program will allow us to fully address the various individuals and allow us to include all individuals who enter the judicial system because of service related injury. we are ready and positioned to take the responsibility of a statewide veterans calendar. we have the network and resources to make it successful and sustainable and that is an important word today. we will see this in a relatively near future. for this will look to you, our leaders in washington. i am proud to have rhode island

district court playing a leading role on this issue and i thank you for the opportunity to discuss this today. i will happily answer questions that you may have. >> our next witness is douglas marlow, director of the division on law and ethics research at the treatment research institute and adjunct associate prof. of site 53 at the university of pennsylvania school of medicine. he has published 80 professional articles and chapters on drug abuse and is on the editorial board of the drug court review and criminal justice and behavior. he is a member of the board of directors of the national association of drug court professionals where he served as chair of the research committee and drug policy reform committee and we are delighted to have him here for his testimony. >> thank you, it is really a great honor to be here. you have been waiting for martin sheen and the chief justice to finish speaking to hear from the

scientist in the room about the facts and data. that is my job as chief of science and policy for the national association of drug or professionals, to stay on top of scientific research which is no easy task because last time i did a search i found over a thousand published studies of drug courts. drug courts have been studied more intensely than any other criminal justice program. there are people in this room taking medication for diabetes and cancer and other conditions that have less evidence of success than drug courts. according to leading national university research organizations, on average drug courts will reduce crime anywhere from 10% to 26%. that is on average. the best drug courts will cut crime rates in half which is unheard of in the criminal justice system. as a matter of

cost-effectiveness on average all else being equal for everyone dollar invested in drug court you'll get $2.21 back from your investment. how many of you're getting a 220% return on your 401(k) at the moment? drug courts treating more serious offenders are returning $3.36 for every dollar invested. the best drug courts are returning $27 for every $1 invested. the u.s. government accountability office in 2005 concluded drug courts reduced crime but they wanted to know what else they do besides reducing crime. they launched the multi site adult drug court evaluation. those findings have been published in the last few days. national study of drug courts, every region in the country, 1200 participants, 23 drug courts included, they found not only do they reduce crime but

they reduce drug abuse, drug court reduce family conflict. they improve family functioning and those are associated with domestic violence and child abuse. they improve employment. they improve annual income. we have as good as you are going to get research on the effects of drug courts. if anybody tells you they looked at the research on drug courts and don't accept it they must reach the same conclusion about every other substance abuse treatment program in existence because there is no other program that has equivalent evidence of success than drug courts. some say drug courts' only have 5 to 7 randomized controlled studies. according to the fda you need two randomized controlled studies for a medication to be considered an evidence based proven practice. drug courts have many times that degree of efficacy. it is i highly proven

intervention. why a federal role? most crime is interstate. most is person on person, person on property occurring in a single place at a certain point in time. drug courts are interstate commerce. transportation, procurement, manufacturing. the effects are interstate if not international. that is why we launched the federal government launched the war on drugs roughly four decades ago. before that there was an increase in demand reduction efforts. it is a national event. it is a national impact and needs a national level response. as far as veterans, veterans have always been a national priority and they are the biggest movement in the drug court movement to treat