A numbing barrage of reports has highlighted how states and cities are underfunding their legally mandated pension funds for retirees -- clerks to judges, firefighters to teachers.
Nationwide, the payment shortfall is reported at $278 billion for just the largest state and local pension funds. Illinois alone has $39 billion in unfunded obligations, Ohio $30 billion and Michigan and Massachusetts $15 billion each. Scores of cities have unfunded shortfalls -- $1.4 billion in San Diego, for example. Barclays Global Investors sets the national state-local total at close to $700 billion.
On the private side, corporations have been cutting back sharply on future pension obligations, switching to voluntary 401(k) investment choices, offering buyouts, in dire cases declaring bankruptcy and trusting the federally backed Pension Benefit Guaranty Corp. will pay off their obligations.
State and local governments can hardly disappear or declare bankruptcy. Plus, with few exceptions, they’ve been moving in precisely the opposite direction of private corporations, increasing promised pension benefits and allowing more early (age 55 or after 20 years of service) retirements. All the while, adding up more unfunded future obligations.
Why have states and localities acted so foolishly? Political expediency. Elected to four- or two-year terms, the immediate pressures on city council members and state legislators are to cut or not raise taxes, to fund popular programs, and to make concessions to government workers and their unions that don’t require immediate budget outlays. Postponing payments into pension funds, even sweetening future benefits, is a stealthy form of unannounced borrowing -- and a course of least resistance.
Eventually, the piper must be paid; to maintain their treasured bond ratings for borrowing, states and localities must balance their budgets. They lack the federal government’s power to blithely add hundreds of billions for programs such as the new Medicare drug benefit, which bequeaths its costs to future generations.
And the quandary is about to get worse. Looming almost as large as pensions, states and localities have incurred massive obligations to pay health insurance benefits for retirees, and sometimes retirees’ spouses or children. In almost all cases, the governments have been paying such benefits on a pay-as-you-go basis, providing for former employees out of current revenue.
But now, notes Frank Shafroth, former fiscal policy adviser for the National League of Cities and National Governors Association, there’s a foreboding “knock knock” at the door: “Who’s there? Gasp, it’s GASB, the Governmental Accounting Standards Board, the quasi-independent financial agency.” It has just issued new rules to force states and localities to show their 30-year financing plan for full funding of their retiree health plans.
The dollar obligations rival pensions: $20 billion in Maryland, $5 billion in New York City, even $3 billion in little Delaware -- a hefty $3,800 per resident. One expert says the nationwide state and local total could be $1 trillion.
The same prickly question is posed by pensions and funded health benefits alike: Why should taxpayers, many of whose pensions and health benefits have been eroded or destroyed by corporate promise-breaking, back up pension and health coverage guarantees made to government workers by politically motivated councils and legislatures?
There’s a partial answer: Workers who signed up for government jobs -- often at lower pay than private sector positions -- made their own (and families’) plans based on expectations of long-term job security and strong retirement benefits. And governments (that’s us) benefited from the long-term commitments made by teachers, judges and many other specialized workers.
But will all that hold fast in a world of globalization, contracting out and off-shoring, more “portfolio workers,” multijob careers, growing income disparities -- and severe fiscal pressures? Noting France’s current job security pickle, my colleague Robert Samuelson points out the dilemma of all advanced democracies: “They’ve made more promises than they can keep.”
States and cities have competing needs to retirees’ pensions and health. Among them: Overdue bills for failing or inadequate roads, buildings, public works. Costs preparing for terrorist-inspired and natural disasters. Pressing need to educate youth and build university-technical competence for decades of ferocious global economic competition. And -- as many of today’s talented baby boom workers retire in the coming years -- enough cash to offer salary scales and work opportunities to attract skilled new workers.
Some cutbacks are possible. States and municipalities can try more modest retirement plans -- for example, 401(k)s replacing lifelong defined benefits, as Alaska recently decided for new workers. They can cut back sharply on cost-of-living guarantees for pensioners (a dividend few private plans offer). They can curb early retirements.
Simultaneously, state and local governments need to tax enough to invest yearly, without fail, in their pension funds, and now their health care funds. Money invested in advance gains value.
Indeed, a little more revenue -- agreeing to more taxes and investing the yield now -- may mean a lot less pain for the generation that will be holding the check when the piper finally renders his bill.
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By John Mathys on Jan 12, 2008 10:08:12 AM
This state underfunding along with the long term underfunding of the federal age based entitlements, Medicare, Medicaid, and Social Security is the most important domestic issue facing the country and should be one of the few major issues discussed by both parties in the current presidential campaign. In stead of a realistic discussion about a very real large problem we get a meaningless debate about a contentless "change" and promises of even more future entitlement spending when past promises are impossible to keep. The current political discussions are deeply dishonest and misleading and the people will be very confused and angry when this fiscal time bomb blows up in a few years[2011] when the first baby boomers hit 65 and Medicare with their 78 million claims for health care with no funds allocated to pay the claims. See: "The Coming Generational Storm"[2004] by Lawrence Kotlikoff and Scott Burns and "Fiscal and Generational Imbalances"[2003] by Jagadeesh Gokhale and Kent Smetters
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