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Fiscal Policy Richard Falknor on 20 Aug 2010 01:55 pm

What’s the Plan? Republicans and State Pension Burdens

UPDATE OCTOBER 13! Today’s Washington Post declares in an editorial “Martin O’Malley and Robert Ehrlich stay mum on massive pension bill” – – “That makes it all the more disturbing that Maryland’s most prominent candidates are saying so little about them. Of the candidates for statewide office, the only one talking about the coming fiscal tsunami is the Republican nominee for state comptroller, William H. Campbell, a political neophyte with little name recognition or campaign money. Mr. Ehrlich is perfectly aware of the problem, but he rarely discusses it publicly — possibly because he was just as guilty of overseeing the ballooning pension deficit, when he was governor, as Mr. O’Malley has been. Mr. O’Malley, too, understands the scale of the dilemma and is just as quiet, perhaps because addressing it head-on might alarm public employee unions, a pillar of the Democratic base.” 

* * * * * * * * * * 

Let’s take a quick citizen visit to the growing — if not soon crushing – – burden of state public pensions and related retiree health benefits to see what kinds of — if any– remedies our Maryland and Virginia GOP politicians are suggesting.

For the national context, readers may find Steven Malanga’sThe Beholden State: How public-sector unions broke California” illuminating. And National Review on Line’s Kevin Williamson points last Monday in his Bobby Bailout: Casey to Put Taxpayers on Hook for Teamsters’ Shenanigans to pending legislation that could lead to “a bailout of the public-sector unions, whose unfunded pension liabilities run into the trillions. (President Obama’s home state of Illinois is leading the way down the toilet when it comes to state-employee retirements. California’s pension shortfall, Vernuccio notes, is larger than the GDP of Saudi Arabia.) Casey-Pomeroy wouldn’t authorize public-sector bailouts, but it would establish an all too easily expandable template.

State Public-Employee Pensions — Breaking the Bank?

“BREAKING THE BANK in Maryland has been a bipartisan, multilateral pursuit for years, backed by both parties at the state and local levels alike. When state lawmakers enacted a big increase in teachers’ pensions four years ago — an increase that freighted Annapolis with huge obligations to cover benefits negotiated by local school systems — the move was pushed by Democrats, signed by a Republican governor, cheered by localities and hailed by then-Lt. Gov. Michael Steele, now the national GOP party chairman.”Washington Post editorial.

Yesterday’s Wall Street Journal (WSJ) commentary puts a mainstream spotlight on the problem: “Unfunded Public Pensions—the Next Quagmire: A federal bailout would cost trillions and prevent necessary reforms. But there are several ways states can rationalize their workers’ retirement benefits.” 

Author R. Eden Martin has a number of suggestions, the most salient of which is that – –

“Public pension funds are in dire need of change, but state and local hopes for a federal bailout now stand in the way of change. Quashing that hope —- which the Obama administration could do with an explicit statement that it will not bail out state and local pension funds -— would spur the reforms we need.(Underscoring Forum’s.)

The WSJ also reported yesterday that the “SEC Sues New Jersey as States’ Finances Stir Fears” –

States as a whole face a trillion-dollar gap between the pensions, health care and other retirement benefits they have promised to public employees, and the money set aside to pay the benefits, according to a report by the Pew Center on the States. The SEC said it is concerned about how these problems are disclosed to investors. ‘We want to make sure that states or municipalities who go out and raise money from the public are adequately disclosing all material information in connection with their pension liabilities,’ said Elaine Greenberg, head of the SEC’s municipal securities and public pension unit, which was created in January. In the New Jersey action, the SEC cited municipal bonds in 79 separate offerings totaling $26 billion from 2001 to 2007. Many of those sales occurred after the SEC said the state abandoned a plan to bring pension funding up to snuff.” (Underscoring Forum’s.)

Bringing it back home, Maryland has $51 billion in public-employee pension liabilities, as well as a related challenge ($15 billion) in paying for public-employee health and other benefits.  These pension and related liabilities dwarf many of the other fiscal concerns in Annapolis.

Last April 15, we wrote in our post Tea Partiers: Be Wary of “Delayed Action” Tax Bombs

“On this Tax Day, Tea Partiers might also want to begin examining state ‘delayed action tax bombs’ — reckless, already-enacted state legislation that may soon explode our pocketbooks.”

We pointed to a 2006 Maryland example of over-promising while underfunding public pensions –

“No member of either chamber of the Maryland General Assembly voted against the State Employees’ and Teachers’ Retirement Enhancement Benefit Act of 2006 which increased state pension liabilities by $1.9 billion.- – HB 1737.”

Was this addition to Maryland’s pension liabilities then-governor Bob Ehrlich’s way of making the Old Line State more “business-friendly”?

Moving to Fairfax County, Virginia, we cited the Fairfax County Taxpayers Alliance – –

“This year in one of Virginia’s mega-counties, premier Old Dominion budget watchdog Arthur Purves reported ‘School board urges higher taxes to pay for pensions’

‘FCTA [Fairfax County Taxpayers Alliance] board members attended today’s Fairfax County Public Schools budget forum, held at Marshall High School.

The FCTA asked why the school board is urging the supervisors to raise taxes by $81.9M although only $9M is needed to pay for next year’s expected increase in student enrollment.

The school superintendent acknowledged that the reason is the increased cost in employee benefits, especially pensions.  According to the schools’ proposed FY2011 budget, employee benefits costs are increasing by $98M, of which $71M is for pensions and another $15M is for retiree medical benefits.’

The school board has been less than straightforward with the community about this.  During her opening remarks at the forum, school board chairman Kathy Smith talked about cuts to band and sports, and bigger class sizes, but never acknowledged that the cuts were being made to pay for increased benefits costs.School board members urged the audience to ask the supervisors to raise taxes.  If taxes are not raised, then the board will cut band and sports and increase class size to make the pension payments.” (Underscoring Forum’s.)

We suggest that readers read our entire detailed post on the thorny public-employee-pension matter.

Where’s the Public-Pension Fixes Offered by the Maryland GOP Contenders?

The supposed public pension fixes are nowhere, apparently, on Bob Ehrlich’s nor on Brian Murphy’s websites. 

What are some possible initial steps?

  • Putting all new public hires in 401K-like retirement programs.
  • Requiring current retirees to shoulder a larger part of their own health-insurance costs.

No wonder, according to the MarylandReporter’s Barbara Pash, we learn that – –

“The commission created by the legislature to review the long-term prospects for the state’s pension system has yet to be appointed three months after it was signed into law, and its first report is due Dec. 15. Aides to the governor and legislative leaders who will appoint seven of the commission’s eight members say that the appointments will be announced soon. But at least one union official speculates that the process has been slowed to avoid any discussion of controversial changes before the election.(Underscoring Forum’s.)

What About Virginia?

The problem is bigger than Maryland, of course. In February, the Pew Center on the States released a survey (“The Trillion Dollar Gap“), which covered overall state pension liabilities, not just those of teachers’ plans.  The February Pew findings for Virginia are here.

Yesterday Virginia governor Bob McDonnell addressed the General Assembly’s Senate Finance, House Appropriations, and House Finance Committees – –

“One of the toughest choices we made in the FY 2011/2012 budget was to defer about $620 million in payments to our retirement system to avert further spending cuts. Pension solvency and security is a top concern and priority for me and most governors, and such actions are bad long term policy for our state employees. While our deferral is far less than those in other states, it is still significant money that must be paid back. I know we are all committed to paying at least the $74 million per year noted in the Appropriation Act, and as times allow, I will accelerate those repayments.” (Underscoring Forum’s.)

Wrote D. J. McGuire in The Right Wing Liberal yesterday about “a $71.2 million discretionary balance in the general fund as of June 30, 2010” – –

“Put the rest into closing the VRS [Viginia Retirement System] gap: McDonnell himself noted that he would take every opportunity to accelerate the payback of the skipped $620 million to the retirement system.  No time like the present, I say.” (Underscoring Forum’s.)

We don’t see much Virginia movement toward major structural change in public-employee pensions.  A measure that would have created “a new defined contribution retirement plan for all employees who begin employment on or after July 1, 2010, in lieu of participating in any other retirement plan administered by the Virginia Retirement System” died in a House of Delegates appropriations subcommittee.  

As Fairfax County taxpayer advocate Arthur Purves warns, “America’s biggest industry [is] state and local government.”  

Virginia conservatives might want to consider pushing for reform sooner rather than later before the Old Dominion’s public-pension burden becomes unmanageable. Don’t count on many GOP politicians to be far-sighted and willing to take the heat on this one.

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