As the media relentlessly focus on the federal government's burgeoning debt, a new report says that states face their own ticking debt bomb: the exploding liabilities for lavish state and local public-employee pensions. Reform won't be easy, but there is no choice.
A new report by the
Pew Charitable Trusts shows that the problem is getting out of hand. In 2016, the most recent full year for which data are available,
states were more than $1.4 trillion in the red. Pension
debt has increased for 15 straight years, and shows no signs of abating.
Indeed, as
Reason blogger Eric Boehm notes, "The really scary part is that pension debt keeps increasing despite the fact that taxpayers' contributions to state-level pension plans have doubled as a
share of state revenue in the past decade."
Worse still, as performance lags expectations, desperate pension fund managers have gone in for
increasingly risky investments — meaning that workers' pensions might not be as safe as they think.
The Pew report is blunt: "Many state retirement systems are on an unsustainable course, coming up short on their investment targets and having failed to set aside enough money to fund the
pension promises made to public employees."
Take 2016, for instance. For that year, the median
public pension investment gained just 1%, way below the 7.5% expected gain. This alone added roughly $146 billion to states' pension debt. States now realize that their expectations are way too high, based on their poor performance. So that means they have to lower their expectations.
But that means an additional $138 billion in liabilities added to the balance sheet in 2016. All told, pension-fund debt surged $295 billion from 2015 to 2016, with states having just $2.6 trillion in assets to cover total promised pensions of more than $4 trillion. That's a huge gap, and for many states and localities it means virtual bankruptcy.
A
New York Times piece last week highlighted the growing problem. In Oregon, for instance, some public employees receive enormous pensions, thanks to negotiating precedents set by public-sector labor unions. One example: Joseph Robertson, the retired head of Oregon Health & Science University, takes home a pension of
$76,111. That's every month.
Then there's former University of Oregon head coach and athletic director Mike Bellotti, whose pension delivers $46,583.00 a month in benefits.
But it isn't just Oregon. The Times piece also highlights Scranton, Pa.
There, 58% of police and firefighters are on disability pensions, retiring before the normal minimum age. The average age of retired police officers in Scranton, the Times reported, was 44.9 years old.
It's an increasingly common problem.
California's Public Employees Retirement System is so far in the hole that it's doubtful it will be able to pay on its obligations without
massive tax hikes.
And
Illinois is on the verge of insolvency thanks to its pension disaster. There,
the city of Harvey last year was ordered to hike property taxes to fund the pension fund for firefighters, which is a whopping 78% underfunded. It wasn't enough, so now the state has garnished Harvey's tax revenues. In response, the city has laid off 40 workers, and more pain is on the way.
Promises Are Easy, Reform Is Hard
As it turns out, there are hundreds of potential Harveys out there.
"More than 400 police and fire pension funds, or 63% of
Illinois' 651 total downstate public safety funds, received less funding than what was required from their cities in 2016,"
according to website Wirepoints. A lot of Illinois towns and counties are in for a nasty surprise.
In state after state, city after city, county after county, such stories are becoming common.
The truth is,
pension promises have been made across the board that cannot be kept. Something will have to be done. But what?
The standard answer provided by progressive politicians and labor unions is "bite the bullet." "You made the deal with the workers," they say, "so now live with fewer services and much higher taxes as a result."
Another is to just have
the federal government bail out insolvent pensions. Will states that took care of their
pension problems really want to pony up for those that didn't?
But this isn't satisfactory.
The easiest reform would be to put all new employees into defined-contribution 401(k)-style accounts with some matching by their employer. That would mean that employees, not taxpayers, finance their own retirements — as is now the case in almost every private industry in this country.
Unfortunately, the state and local government worker unions aren't likely to agree to that.
That's because in state after state, public employee unions now call the tune, making it nearly impossible to adjust spending,
downsize workforces or renegotiate bad pension contracts.
So here's a modest proposal: Get rid of public-sector unions in
Oregon, California, Illinois and other troubled states.
Public-sector workers should not be unionized, ever. They should be beholden to the taxpayers, not to the politicians (who are richly rewarded by the unions for their support with campaign contributions) or to the unions themselves.
As we've now found out, when government "negotiators" sit down with union representatives, taxpayers have no seat at the table. Politicians give away the store to avoid "labor unrest," while unions, faced with little negotiating pushback, ask for the moon and frequently get it. Taxpayers, barely aware this shell game is going on, pick up the ever-growing tab for it all. And the pension red ink keeps growing.
But politicians deserve blame, too. They've let this fester, especially in high-tax, progressive "blue states," ignoring the problem until it became a crisis. Shame on them.
And while we're at it, some voters deserve a share of the blame, too, if only for thinking you can promise people anything but, somehow, someone else will pay for it. Nope. Taxpayers always pay. Now these voters are finding out that their neglect hasn't been so benign, and that many state and local pension funds are, in effect, bankrupt.
States and cities better start fixing the problem, fast, or else we'll see a
financial crisis that will have tidal-wave effects in
states and cities across the country. Think our nation is divided now? Just wait.
