Good News About Pension Bad News

Good News About Pension Bad News

The estimated underfunding of America’s state public-pension plans is larger than ever, with the American Legislative Exchange Council (ALEC) putting the total at $5.6 trillion or almost one-quarter of the federal deficit. But as disturbing as this number is — and as hard as it will be for legislatures and municipalities to dig out of their financial holes — the pension problem has some redeeming features. 

Recent court decisions, for example, suggest that judges in California, Connecticut, and other states with low pension reserves are finally becoming skeptical of laws and practices that inflate post-retirement benefits or shield unproductive public employees. 

This past August, a California Appeals Court rebuked a Marin County union for resisting the state’s effort to rein in so-called “spiking,” whereby pension benefits are based on overtime racked up in just the last few years of work. “While a public employee does have a ‘vested right’ to a pension,” Judge James Richman ruled, it is not “to the most optimal formula for calculating that pension.” Because California has traditionally set the pace in pension law, the Los Angeles Times predicts this decision will reverberate nationally. 

A month later, Connecticut Superior Court Judge Thomas Moukawsher issued a surprise opinion in CCJEF v. Rell, an 11-year-old suit that sought increased subsidies for the worst performing schools in the state’s cities. Public employee unions, which had supported the case in the hope of salary increases, were shocked when the judge read his three-hour opinion. The real problem, he said, was not underspending but, rather, the lack of teacher accountability and the need for the Hartford legislature to demand better performance under the state’s existing $3 billion education budget. (Both decisions are now under appeal.) 

A second result of the pension crisis is that citizens are finally awakening to the problem of government debt in general. For too many years, voters have regarded public deficits as a monetary abstraction with little impact on their own lives. But studies have begun to show the extent to which tax increases and bond referenda — supposedly intended to fix potholes, build parks, expand libraries, or provide some other public good — have been diverted to pensions. 

According to an recent study by Josh McGee of the Manhattan Institute, average taxpayer contributions to cover teacher retirement benefits have risen from 12 percent in 2004 to 20 percent today, even while per pupil spending on equipment, facilities, and other instruction-related costs fell 26 percent. A similar report by Moody’s Investor Services has expressed concern that too much of the debt issued by public hospitals is really going to supplement underfunded staff pensions.

In Northern California, a series of editorials by East Bay Times warned San Francisco area voters that a $3.5 billion referendum to improve service on the Bay Area Rapid Transit (BART) subway system was designed to divert an already accumulated $1.2 billion capital fund to pensions. Although the referendum ultimately passed on November 8, a related transportation measure to increase sales taxes in BART’s Contra Costa region failed. 

And in Michigan, where the state constitution places a limit on how much any municipality can raise from property taxes, the collective $2.3 billion unfunded liability of seven localities — Ann Arbor, Grand Rapids, Grand Traverse County, Kalamazoo, Lincoln Park, Port Huron, and Saginaw — means that residents of those areas will soon have to choose between salvaging public pensions and essential community services.

The third and perhaps most important benefit of the public-pension crisis is that it has not developed uniformly across the country. As the Center for Retirement Research at Boston College reported in its recent comparison of underfunded plans, the extent of the problem varies widely. States such as Florida, Iowa, and Nebraska, for example, have relatively modest liabilities compared to their revenue base.

What this means is that solving the problem of underfunded public pensions, while difficult and painful, will not likely lead to a federal takeover of the debt.

We have already seen how both parties in Congress balked at bailing out Puerto Rico’s $70 billion debt, most of which is due to the $43.2 billion unfunded liability of the Commonwealth’s two largest pension funds. Instead, a federal oversight board was appointed last summer to apportion financial responsibility among retired beneficiaries, bondholders, and local taxpayers.

Going forward, it is doubtful that even a very blue state such as New York, where Standard and Poor’s puts the per capita liability for underfunded pensions at only $74, will want to bail out either neighboring Connecticut or New Jersey, where the liabilities are $7,660 and $10,648, respectively. Only by giving as much money to states with solvent plans as it gave to those in the red could the federal government attempt a bailout — a solution that neither President-elect Trump (with his own spending priorities) or the Republican Congress are likely to endorse.

Sadly, it has taken a serious pension crisis to expose the fiscal dangers of the decades-old alliance between public-union leaders and the politicians who inflated worker pension benefits, resisted productivity improvements, and then failed to fund adequately the resulting obligations. But at least the worst consequences will be borne by those factions that should have been more fiscally responsible.

Dr. Andrews was executive director of the Yankee Institute for Public Policy from 1999 to 2009. He is the author of To Thine Own Self Be True: the Relationship between Spiritual Values and Emotional Health (Doubleday).

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