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Fiscal Policy Richard Falknor on 01 Mar 2011 09:51 am

Wisconsin’s Uproar Makes Us Face Vital Pension Fixes Here

“While the fight over reforming public-employee pensions has only just begun, state coffers are already running perilously low. What we need now are serious reforms—plans that focus on the underlying causes of pensions’ excessive costs and excessive risks. The good news is that the looming pension meltdown is still within our power to avert. The question, then, is whether lawmakers and public workers can muster the discipline and political courage to do it.” Josh Barro

Via Yuval Levin at NRO yesterday, Josh Barro’s “Dodging the Pension Disaster” (National Affairs) lays out some tough paths that governors and state legislators must follow if our state politicians can plausibly claim to have put their public-pension systems on a sound path.

If Barro is to be believed (and we do believe him), few governors can say they have taken the necessary (if politically unpalatable) steps necessary to reform their state’s pension systems and thereby have saved their state’s financial condition in the long run. 

Here are some extracts from Barro’s illuminating article — which might well have been titled “Shooting Niagara” (Underscoring is Forum’s throughout):

Paying Out Over-Promised Benefits Will Squeeze Out Core Services


“Concern about this impending crisis should extend far beyond state capitals, because its consequences will affect much more than state balance sheets. The staggering burden of paying out retirement benefits is increasingly preventing state and local officials from financing all the other services that citizens expect their governments to perform. For example, Camden, New Jersey—one of the most crime-ridden cities in the country—recently had to lay off nearly half its police force because the state’s public-sector unions, including those representing police, were unwilling to cut costly benefits provisions from their contracts.”

Taxpayers Are On the Hook for Very Generous Pension Benefits

” . . . [T]axpayers aren’t even fully aware of the degree to which they are on the hook for state workers’ generous benefits. Indeed, one of the inherent dangers of defined-benefit pensions is that such schemes allow lawmakers to promise future payments to state workers without having to fund those benefits adequately in the here and now. And because the present costs of state workers’ benefits are never transparent to the voting and taxpaying public, politicians enact more expensive benefits provisions than they could get away with otherwise.”

State Debt Grossly Underestimated 

“Estimates from the Cato Institute and Credit Suisse put states’ unfunded health-care liabilities alone north of $1 trillion. And economists Robert Novy-Marx (of the University of Chicago) and Joshua Rauh (of Northwestern University) find that pension funds are short by more than $3 trillion. These numbers are enormous, but their true magnitude becomes more clear when they are placed in fuller context. Consider that the total outstanding bond debt of state and local governments is about $2.4 trillion. If one accounts for pension and health-care debts using the figures supplied by Novy-Marx and Rauh (among others), the total outstanding obligations of the states rises to as much as $6.4 trillion—meaning that our sub-national governments are nearly three times further in the red than they appear to be at first glance.”

Cleaning Up The State Pension Mess: A Core Strategy

“. . . [T]here are three general principles that states can follow if they want to enact meaningful reforms with a chance of staving off pension disaster.

First, pension reforms should include all benefits that will be accrued in the future, not just benefits that will be accrued by new hires. As mentioned earlier, most states are limiting their pension reforms to new employees only—which means they are likely dooming their reforms to failure.”

. . . . .

“Second, serious pension-reform plans should abandon the defined-benefit model. Three states—Michigan, Alaska, and Utah—have enacted reforms that will move many employees to defined-contribution retirement plans, or at least to sharply modified defined-benefit plans that shift most investment risk away from taxpayers. In most states, however, pension reform has been a matter of tinkering: increasing employee contributions, adjusting benefit formulas, raising retirement ages, and so on.”

. . . . .

“Third, states should consider voluntary buyouts of existing pension benefits. The two reform principles outlined above address only the costs of pension benefits going forward; they do not help resolve the very real problems associated with states’ existing pension liabilities—those that were incurred by governments as payment for labor that employees provided in the past. Here, there are no easy policy maneuvers: Short of defaulting on these debts, the only way states can eliminate unfunded pension liabilities is to fund them. Unless, that is, employees voluntarily agree to sell their pension benefits back to their employers. Even if governments can be trusted to make pension-benefit payments as scheduled—which, given some states’ current circumstances, is a big ‘if’—many employees would probably accept significantly reduced pension payouts if they could get their benefits in one up-front, lump-sum payment.

Barro’s is a thoughtful, meaty article, in which we can only point to some highlights.

What does all this mean for Maryland and Virginia. Local Tea Partyers and grass-roots conservatives might consider assembling informal study groups to review the basics of fundamental state pension reform — “working parties” that try to include one management expert with at least some some of the skills of Utah’s state senator Dan Liljenquist, through whose efforts that state “narrowly escaped catastrophe.”

Our grass-roots need to take the time to understand and articulate some essential pension reforms.

Without on-the-ground and savvy support from local, informed citizen groups, will state politicians, to repeat Barro’s phrase, be able to “muster the discipline and political courage” to accomplish these reforms?

And of course, a very tough barrier to overcome will be the political class denying that there is a pension problem that requires serious restructuring. “Not in our state, maybe in some other one” — you can hear it now from elected officials who may, of course, move on before the worst happens.

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