As we wriggle out from the worst recession in about 70 years, unfunded state and local pensions, and federal egos, could trigger the next financial calamity. The Congressional Budget Office estimated in 2011 that states and local government owed $2-3 trillion in unfunded pension liabilities for government employees. One state and one city at a time, governments have been trying to repeal their grandiose pension promises, but harpy courts remind many that their state’s constitution prevents withdrawing promised benefits.
State and local governments over-promise on government worker pensions for obvious reasons. The beneficiaries are an important voting block effectively persuaded by the lure of peace of mind during retirement. No doubt some legislators are genuine altruists and believe the nobility of civil service should be matched with a decent pension. Regardless of why big pensions were offered initially, annual budget challenges tempted legislators to underfund pensions – passing the burden to unsuspecting younger generations.
Illinois most recently heard the bad news on its bid to restructure and shrink the $111 billion in unfunded retirement benefits for state employees. While sympathetic to the goal of reducing the state’s deficit, the Illinois Supreme court could not ignore the constitution which legislators had amended to prevent such legislative welching.
Other states have attempted to reduce budget deficits by shrinking commitments made in times of better finances. Rhode Island has reached a settlement after ugly litigation with the state employee unions. Detroit’s pension plan is victimized by the city’s bankruptcy, although it is shortchanged slightly less than other Detroit obligations. Arizona is writhing to free itself from over-generous promises of retirement benefits, but again its constitution is a roadblock. Stockton California’s bankruptcy did shrink its retiree benefit obligations.
The state and local underfunding of pensions is really a failure of integrity committed in hope of a painless solution. For jurisdictions behind in pension funding, federal help would seem the least painful solution. Of course, if everyone is forced to contribute to everyone’s problems, the misery will be “average,” even for those who made no outrageous promises and paid proper “dues” into the pension plan year after year. But, the federal government often lacks rationality and respect for the public’s money.
During 2008-2009 of the great recession, Congress cast itself as Superman by bailing out select firms that were near insolvency. With great fanfare it shoveled $245 billion at the banking sector, $187 billion at Fannie Mae and Freddie Mac, and $80 billion at General Motors (the main beneficiary being the UAW members), $67 billion to AIG and additional billions here and there. The banking, General Motors and AIG bailouts were largely repaid. The Fannie and Freddie bailouts have produced huge profits taken by the Treasury.
The federal government also went on a spending binge, hurling money at non-shovel ready projects (preposterously called job creators), extending unemployment benefits, boosting family assistance, invention a new healthcare entitlement and urging more Americans to become dependent on federal programs. Federal politicians played Rich Uncle and drove deficits above a trillion dollars in each of four years. The self-righteous temptation to rescue the financial industry was ultimately at a steep cost to future U.S. taxpayers.
The temptation for the federal government to get involved in unfunded retirement benefits will be strong, politically more popular than bailing out banks, and may yield plenty of votes. Unfortunately, the magnitude of underfunding is much larger than federal programs meant to cure the “great recession.”
Once again federal politicians could don a Superman cape then salvage some retirement income for millions of government workers. The talking point will be “Surely regular people deserve a bailout as much as banks and large corporations did.” Of course, that sidesteps an honest explanation of why taxpayers from other jurisdictions must suffer the stupidity and self-inflicted failure of politicians from deadbeat jurisdictions, and how much taxes will need to be increased.