NCSL state pension crisis reform report missing taxpayer bottom line

March 15, 2012

Since 2010 many states and municipalities have tried to control future pension costs, and a new report outlines their efforts. But it does not answer the $4 trillion question: Who is going to pay for benefits already earned when the money is gone?

The report, released Wednesday by the National Conference of State Legislatures, is a comprehensive summary of reforms 43 states enacted from 2009 through 2011 in efforts to control exploding defined benefit pension costs.

Those costs threaten to destroy citizens and businesses forced to pay taxes for which they receive no services. That can obliterate careers of politicians who raise taxes and cut services to fund retirement. Ultimately it puts at risk the very benefits retired public workers earned.

Report author Ron Snell said Thursday in a telephone interview that overall pension investments falling short of paying promised benefits is "a fact of life." Paying off the debt "will be a slog."

He acknowledged recent reforms "will have a big impact on future unfunded liabilities; help control growth of future liabilities," but the only reduction in existing debt would be eliminating cost of living increases.

"COLAs; that has a big impact. That cut about 40 percent in Rhode Island, and Oklahoma took 10 to 15 percent off."

However, only 21 states have done anything about COLAs, mainly for new hires. For current employees and retirees, Snell wrote in the report, "the legislation faced legal challenges."

But Snell said Thursday, "If you're talking about basic UAAL (Unfunded Accrued Actuarial Liability,) the changes will reduce growth, but not reduce it."

So, somebody has to pay off this huge hidden debt over at least the next 30 years.

Certainly his six-page roundup is an excellent point for state, county, city and town officials staring into the pension abyss to start. Otherwise they put taxpayers on the hook forever. That ultimately is what must happen without major reforms.

Snell writes, "By the end of the first decade of this century, state retirement plans had suffered an enormous reversal from their financial status in 1999 ... Since then, two recessions have battered their assets. The slow recovery from the last recession has made it impossible for states to rebuild pension system assets. Some systems have also suffered from inadequate state contributions over a long period and from unfunded increases in benefits."

In theory, defined benefit pensions are the best way to prevent poverty in old age. In practice they are "moral hazards" allowing greedy politicians and corporate executives -- who make false promises then take the money and run -- to loot the present at the expense of future generations.

For private business pensioners, it's tough luck. For government pensioners, the tough luck falls entirely on taxpayers. Under current law, government pensioners get paid in full first. Everybody else, including bondholders and current employees, is down on the money list. The only list taxpayers are on is for asset seizure and ultimately imprisonment.

Nothing in the reforms states enacted significantly reduces the existing debt to pensioners.

Snell confirms that even closing a defined benefit plan and  "Adopting a new plan which may in itself be less expensive for employers does not directly address any existing unfunded liability .... Legacy costs could mean an increased burden of employer contributions for closed plans as their membership falls over time."

Two years ago in a report on pension reform, he called proposed changes "Radical and Conservative."

He wrote then, "Reversing this trend is a radical change in direction ... But the changes are also conservative."

Since then, more states and an unknown number of municipalities have tried to slow pension fund descent beyond a fiscal event horizon of perpetual debt. Others are waking up.

"No question, I think there has been an explosion in information and awareness," Snell said Thursday.

But the big question still on the table - whether a $1 trillion or $4 trillion question or more - is the bottom line: Who will pay for what we already owe?

Politicians need to answer that one fast and show us the payment plan they must inflict on taxpayers, workers, bondholders and retirees.

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