Public Pension Crisis Bodes Ill for Coastal Democrats
The upset election of Donald Trump and the ascendency of the Republican Party at all levels of government has led to an intense debate among Democrats about how to heal their split with middle- and working-class voters, especially in Michigan, Wisconsin, and other rust-belt states. But the Left’s complicity in the ever-growing debt for underfunded public pensions, which the Stanford Institute for Policy Research puts at $5.599 trillion, or $46,884 per household, only further enhances the GOP’s prospects, even in New England and on the West Coast.
Both parties have some responsibility for the unproductive work rules and overly generous benefits that have led to the funding crisis. But politicians in blue-state legislatures and cities dominated by Democratic Party machines have clearly been more willing to placate public workers in return for their unions’ support.
According to a 2016 analysis by The American Interest of Cook Political Report voting data, the 19 states ranking “strongly Republican” over the last two decades have per household pension debt of $33,800, while the figure for the nine states leaning “strongly Democratic” is almost twice that amount ($65,080). And of the 10 cities with the largest ratio of unfunded liabilities to revenue in the context of stricter rules from the Government Accounting Standards Board (GASB), only Billings, Montana, has a Republican mayor.
The problem now for liberals is that, after years of papering over inadequate pension funding with wildly optimistic assumptions about investment returns on existing assets, the inevitable wave of tax increases and service cuts required to keep plans solvent is beginning to hit, especially in blue precincts.
Unsurprisingly, many of the hardest hit cities have been in California, where Democratic policies are almost indistinguishable from those of the teacher and other public employee unions. In Los Angeles, where between 2003 and 2012 pension costs grew 25 percent annually, the city has sought a series of supplemental levies for essential programs it can no longer afford. These include a $1.2 billion property tax increase to house the homeless and a half-cent sales tax to generate $860 million in transportation improvements.
And in San Diego, the percentage of teacher salaries that city schools must contribute to pensions is slated to go from 8.8 percent in the 2014–2015 school year to 19.1 percent in 2020–2021. As a result, the Unified School District is looking at $117 million in offsetting annual budget cuts, including for maintenance and supplies.
One could argue that there is nothing new about the problem of underfunded public pensions, which watchdog groups, such as the website pensiontsunami.com, have been warning about for more than a decade. But it is one thing for voters to contemplate the vague future consequences of an ever-postponed financial crisis and quite another to experience higher taxes or service cuts today.
Once reliably blue Connecticut saw massive ticket splitting last November in the wake of Democratic Governor Daniel Malloy’s effort to bail out the country’s second-least solvent state pension system with back-to-back income tax increases. “Local Democrat (candidates) were astonished by the level of hostility they got toward Governor Malloy,” notes Kevin Rennie, a long-time political reporter in the state. While Hillary Clinton easily beat Donald Trump in Connecticut with 13 percent more of the vote, Republicans managed a tie in the State Senate and left Democrats in the House with their smallest majority in three decades.
Until recently, many blue-state politicians have been able to forestall voter anger by pretending that higher taxes and fees were needed for new services or improvements, rather than to compensate for underfunded pensions. California Democrats, for instance, would have voters think “we are fixing roads,” says Republican State Sen. John Moorlach of a recent $10 car-registration increase. But, in reality, “that money is going to be diverted into pension plans.”
Yet the large sums required to bolster sagging funds will ultimately limit this tactic. When the Bay Area Rapid Transit (BART) subway sought voter approval last fall for $3.5 billion to improve service in San Francisco and its suburbs, East Bay Times editorials noted that the system was really seeking a disguised pension bailout. Although the referendum passed in November, a related transportation measure to increase sales taxes in BART’s Contra Costa region was defeated.
Conservative think tanks have also begun to highlight the various ways that government agencies quietly divert funds from their apparent purposes to prop up pensions. In October, for example, the Manhattan Institute ‘s Josh McGee published a national study of public education budgets. It showed that taxpayer contributions for government-worker retirement plans have nearly tripled since 2001, while per pupil spending on equipment, facilities, and property fell 26 percent.
The economic consequences of immigration and globalization seem be to what animated voters last November, especially in the Midwest. But the cost of bailing out the country’s pension mess, created by a decades’ old alliance between Democratic politicians and public-union bosses, may soon impact every voter without a government job.
Dr. Andrews was executive director of the Yankee Institute for Public Policy from 1999 to 2009. He writes frequently on government reform.