State and local governments already owe $4.4 trillion in pensions fund obligations. This is growing daily.
The one sector of America that is dominated by unions is government. Unions have disappeared in the rest of the economy.
There can be no doubt that state and local governments will not be able to pay all of these obligations. They will default. The only questions are these: Which states? Which cities? When?
On January 10, 2012, Senator Orrin Hatch (R-Utah) released a report on state and local government defined benefit pension plans in which he detailed the risks associated with the nation’s $4.4 trillion public pension debt, calling the defined benefit pensions structure “inherently flawed in the state and local government setting.” This massive liability is dangerous for taxpayers and could mean future cuts in services, reductions in benefits, higher taxes, or a combination of these less-than-desirable options.
This is now inevitable. It’s not a matter of if. It’s a matter of when.
One good indicator of a sound government pension plan is whether the funding ratio of pension assets to liabilities is at least 80 percent. According to the Government Accountability Office, 40 percent of state and local government pension plans had already dropped below the 80 percent funding level before the 2008 recession began. Post-recession data now shows that 62 percent have dropped below the 80 percent funding level threshold and that 11 states are projected to exhaust all of their pension assets by 2020. These unfunded state and local pension liabilities are also damaging to the federal government’s credit rating, as a federal bailout becomes increasingly inevitable.
The retirees get defined benefits. So, no matter how the pension funds perform, the governments must pay the benefits. But they will not be able to.
Georgia, Indiana, Oregon and Rhode Island (as of July 2012) have introduced mandatory “hybrid” plans for new employees, under which employees are required to participate in both a defined benefit and a defined contribution plan. In some cases, these pension requirements do not apply to public school teachers as their powerful union lobby has managed to receive special carve-outs. For example, even though Michigan state employees are placed in defined contribution plans, their teachers are placed into hybrid plans.
Despite the best efforts to increase the level of employee contributions paid toward pensions, raise the retirement age, or modify the annual cost of living adjustment, failure to make a complete switch from the traditional defined benefit plans to more stable defined contribution models guarantees that underfunded pensions will continue to be a growing problem for state and local governments.
States and cities are not telling this to the voters or retirees. It is being swept under the rug. The politicians prefer to kick the can, and this means that they prefer that voters be kept in the dark.
These faulty accounting practices are misleading and dangerous. While the rate of return on pension assets fluctuates, the fiscal promises made to state and local employees do not. Moreover, taxpayers, who foot the bill for pension funds, do not have a clear picture of how indebted they are to state and local governments. Increasing pension fund transparency will make lawmakers more accountable to taxpayers and compel elected officials to deal with the reality of their fiscal crisis.
This will not change. The public will learn that their elected representatives have made contracts with union members that guarantee far higher taxes and reductions in services that voters expect.
There will be a default at some point. Then the retirees who expected monthly checks will not get them. If they get any checks, they will be smaller than promised.
If they sue, the cities will declare bankruptcy and start over — without pension obligations.