States, municipalities must make pension reform top funding priority

January 4, 2013

State and local politicians may think they can relax as third quarter tax revenues showed 12 consecutive quarters of growth year over year. But that would be a mistake in light of pension investments that again failed to erase any of more than $5 trillion owed to government workers.

Both sets of data were released by Census within days of each other last month. The $15 billion, 5.3 percent year-over-year increase in quarterly state and local tax revenues is not even a rounding error in pension debt.

Add in relentlessly increasing costs for national health care, certain cuts in federal funding, deferred projects and programs, debt service and other cost pressures, and politicians are up against the edge of a fiscal abyss.

The National Conference of State Legislatures projects slow revenue growth for 2013. All of this despite crippling new state and local taxes and rate hikes inflicted over the last three years on citizens already crushed by a 5.1 percent Gross Domestic Product crash and 7.6 percent tax increase above the historic high of 2008.

Scott D. Pattison, executive director of the National Association of State Budget Officers was quoted in Governing Magazine this week, warning governors and legislators, "The problem is, they've short-changed and haven't put money into their pension systems. They slashed the hell out of a lot of stuff like higher education. It's not like there's all this new money to do new things."

 "We're better than we were, but it was such a lengthy, bad period for states," Pattison said. "They're filling a little bit of this hole, but not a lot."

 Only government could consider a 7.6 percent tax revenue increase over five years from an historic high "bad," but the fact remains state and local governments went into debt and deferred spending.

The biggest deferral was pension "contributions," which fell far short of what was required to make up for investment losses and fund future benefits.    

At the same time, those promised benefits continued to grow inexorably to $3.4 trillion officially by 2011, the latest full fiscal year available.

None of almost $500 billion "contributed" by taxpayers directly or through government workers from 2007 through 2011 was invested to pay the future pension benefits earned in those years.

In fact, the top government pension funds surveyed by Census paid out $313 billion more than investments earned, and those investments dropped $230 billion in value.

The latest calendar year 2012 numbers show the death spiral continuing.

Far from gaining any slack from the vicious tax increases they inflicted on struggling Americans and tepid economic recovery, politicians in 2013 are even deeper in debt than they were last year, but accounting gimmicks and deferred costs that must be paid hide harsh reality.

New Government Accountability Standards Board guidelines on pensions start phasing in next year. Upcoming legislative, municipal and school board budget sessions should include them.

But GASB guidelines do not require reform and full funding. The temptation to betray government workers and put taxpayers deeper into debt is too great a "moral hazard" for politicians to resist.

Recent pension "reforms" do not reduce the existing debt, and real impact on future debt is unknown.

Through the third quarter of last year, top government pensions surveyed by Census had negative earnings in seven out of 23 quarters and value of investment holdings dropped in eight out of 19 quarters.

Investment value ended up more than $1.5 trillion below where they promised five years ago it would be by now to pay full current benefits and grow to pay future benefits.

Somebody has to make up the difference.

The only way to stop politicians from squandering new revenue instead of funding pensions is to freeze the defined benefit plans and shift all workers to systems that lock in costs while protecting taxpayers from risk.

At least then when politicians short pension contributions earned by workers, they know it immediately instead of finding out the hard way 30 years later.

Once we have real reform, the debate can begin about who will share the $5 trillion sacrifice required for remaining pension obligations.


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