The most important issue you probably won’t hear about during the run up to this year’s election is public sector pension liabilities. Even though it accounts for billions of dollars in spending and affects millions of state and municipal employees, the sad state of many pension funds barely makes a blip on the radar.
At its core, adequately funding pensions is about keeping a promise. Public sector employees were told while they were working what they would receive when they retired. Governments have a responsibility to ensure that they put enough money away to meet those obligations.
For “Leaders and Laggards” (release event next week!)
, we used the Pew Charitable Trust’s reporting from its “Widening Gap” series
. The gap between the leaders (those that are up to date with their contributions and are continuing to make their required contributions each year) and laggards (those that are behind and are failing to make the necessary catch up payments) is vast.
In Wisconsin, for example, the pension fund is 100% funded, and in the 2012 fiscal year (the most recent Pew has data for) the government contributed 100% of its required contribution. In fact, in the two previous years, the government contributed 108 and 104% respectively to catch the state up. On Wisconsin!
In Illinois, by contrast, the pension fund is currently sitting 45% funded, and last fiscal year the government only contributed 76% of its required contribution. The total unfunded liability? $94.5 billion. Yes, you read that right, billion with a “b.” By comparison, Gov. Pat Quinn’s total 2015 budget proposal
is only $65.9 billion.
But more than simply monkeying around with the retirement security of thousands of government employees, diverting funds to cover pension shortfalls requires sacrifices in other parts of the budget. Education and healthcare are any state’s two biggest line items, so increasing funding to pensions almost assuredly means taking money from someone who really needs it.
Gov. Quinn’s budget document says as much (from pg. 23):
Pensions were the fastest rising cost the governor inherited, crowding out the general funds needed for education, public safety and human services. Annual payments required to meet the statutory pension funding formula increased from six percent of general funds in fiscal year 2008 to 19 percent in fiscal year 2014.
It is easy for politicians of all political stripes to offer more generous pensions to public sector employees knowing that they will be long out of office when the bill comes due. It also hides the costs. Upping salaries is seen in the budget immediately, upping pensions is not. The political deck is stacked against doing the responsible thing and making sure the books are balanced.
According to Pew, here is the list of the 15 states that made 100% of their required contributions in fiscal year 2012:
- New Hampshire
- New York
- North Carolina
- Rhode Island
- South Carolina
- West Virginia
These are red states and blue states. These are states that have historically kept up with contributions and these are states that are catching up as fast as they can.
Their leaders, who have made the tough but fiscally responsible decision, should be lauded.
ABOUT THE AUTHOR
Michael McShane is Research Fellow for Education Policy Studies at the American Enterprise Institute.