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The Elephant in the Room: Unfunded Liability for State and Local Government Employees
I was listening to The Dennis Prager Show the other day and he had on Daniel DiSalvo, Assistant Professor of Political Science at the College of New York, and is with the Manhattan Institute. DiSalvo recently wrote a book called Government Against Itself: Public Union Power and Its Consequences. During the interview Dennis asked him what the unfunded liability of benefits and pensions for public employees were. DiSalvo stated that the total unfunded liability across the states is $4 trillion.
This is not federal employees, this is only state and local pensions and benefits. Obviously the big question is, when will this all collapse for the heavily unionized states, like California, Illinois, and most of the Northeast? Scott Walker made the necessary changes in Wisconsin to prevent that state from being consumed by this leviathan, but in states like mine, Connecticut, we just re-elected our totally-in-the-union’s-back-pocket governor Dan Malloy and kept our majority Democrat legislature. Maybe Wisconsin, Michigan and Ohio are serious about this issue, but states like Illinois, California and New York they just want to keep the gravy train going, until it falls off a cliff.
In Connecticut, there is a $76 billion deficit in unfunded liabilities. This is a small state with only 5 million people and it is hemorrhaging jobs due to the unfavorable business climate. A state like Connecticut will go broke before New York or California and with much smaller impact on the rest of the country. But once that first domino falls, many will follow.
I know that many federal issues consume our news cycle and there are more discussions regarding immigration, Obamacare and terrorism. These all are super important issues we should concentrate on, but the pension issue is never discussed (probably intentionally) but it needs to be. Scott Walker showed the way to deal with this issue, maybe because Wisconsin was up against it more than, say, Connecticut. But $4 trillion in unfunded liabilities for State and Local pensions is a number that could give even the most hardline Democrats pause (i.e., Rahm Emmanuel).
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If true, that’s only $13 per capita or $52 per family of 4. Not impossible to either tax or reduce government spending to cover. So I assume with $4 trillion across all states, the Connecticut number is much higher.
Whoops have to Edit Thanks Vectorman, Connectcut’s unfunded liability is $76 Billion. I do believe that makes things clearer that a state with 5 million people in it can have the massive an unfunded liability.
As a fellow CT resident I share your concern. As bad as the pension shortfalls are for CT and many other states, the retiree healthcare cost shortfall is even worse.
Tim Hardin wrote a song called Don’t Make Promises You Can’t Keep and we are not going to be able to keep all the promises made.
Hmmm? I can’t really read this because the text is bleeding over into the right ad column. How did you do that? [when I quote or copy/paste it doesn’t show].
My brother is a retired State employee, with full pension and full health-care benefits. He was quite upset recently when they either threatened to or did raise his health co-pay. (I think he blamed the Wascaly Wepublicans in the Legislature.) This from a guy who had open-heart surgery, stopped looking at the bills when they went north of $100K, but ended up with only $3K out-of-pocket.
The State, as of last fall, had a $27 billion unfunded retiree shortfall, or about $9400 for each taxpayer.
My governor, Chris Christie, also did reform public employee pensions. Although I don’t recall if he did enough.
Many private companies expect you to be on Medicare after 65, even if you’re still working. Why can’t government workers do the same?
The bigger question for me is when the bubble burst, will the Federal Government bail these states out? Sure hope not.
That said, my father was a State employee and enjoys a nice pension with good healthcare benefits. However, in his time he worked for much lower wages than he would have made in the private sector. He accepted the lower wages because of the pension at the end. Today this is no longer the case. Now government employees enjoy better pay, better healthcare benefits, more time off, and better pensions than the private sector.
You can find Amity Shlaes’ review of Dan’s book here. I hope we can get him on one of our podcasts.
In Illinois, any sensible solution to our pension underfunding ($100b and counting) has to clear a Constitutional hurdle as well (Art. XIII, Sec. 5). A recent State supreme court decision on retiree health care benefits doesn’t bode well for reform of pensions.
I spent a lot of time last year arguing for a change from a defined-benefit to a defined-contribution system for state employees, but there are only 3 ways for that to happen in Illinois: (i) a total change of heart on behalf of unions (0%), (ii) a constitutional amendment removing the pension guarantee (2%), or (iii) the checks start to bounce (100%).
Unless change happens, and soon, Illinois will become a giant pension plan that performs (ever declining) incidental state services.
To steal a phrase from Full Metal Jacket: “It’s a great big sh*t sandwich, and we’re all gonna have to take a bite.”
The taxpayers will take a whack, but public employees are going to have to take a write-down too.
Flagg- that is a great idea to see if they could have Dan on. I hope the Yeti sees this and gives it a shot
Unlike…certain…of the bigs, you can PM Yeti.
Done!
The plan, of course, is to dump this mess on the federal government. Under no circumstances, should the other states be made to ante up. What we need is a federal bankruptcy law that makes provision for state bankruptcies.
The obvious follow-up question is:
“And how will the Federal government bail them (the states you mentioned) out?”
As a Federal employee, I feel certain that my pension is fairly secure – the Feds can simply print more money. However, I’m not smug about this, and my mother lives off of a state retirement pension from my stepfather, but at least the state of North Carolina is not in as bad a shape as the states mentioned in your post (I hope).
This raises a question, maybe one that Jim Peth . . .Pethacoo . . . the Jim P. economic guy can answer:
Is the defined-benefit pension model unsustainable? We hear about “sustainability” from the environmental folks a lot, but it seems to me that when it comes to retirement, a pension is highly vulnerable to the success – or failure – of the parent organization, which makes it unsustainable if the economy tanks in general.
I can answer it for you – it’s not sustainable. Every state has different levels of unfunded liabilities, but they *all* have them, and the reason they don’t address it is because it would require tax hikes to fund the liabilities at an acceptable level. It’s been much easier to kick this issue down the road because there’s no short-time bite in the *ss for politicians. In fact, in Vermont, this issue has been raised, loudly, back in the late 1990’s, but pretty much every legislative session and governor throws a little bit of money at the problem, and that’s it.
It’s funny how Vermont’s unfunded liability is in the $3 billion range, yet our state was just in the process of establishing single-payer which would have cost $2.2 billion – annually – to fund (that’s the low estimate, by the way). The governor, who campaigned heavily on single-payer as being the most critical issue facing Vermonters, was a “job creator” (my eyeballs nearly popped in my head when I heard that one), would insure the uninsured, we have to have it NOW, etc – just threw in the towel on his original single-payer plan as being too expensive.
The reality is that single-payer, like the pension and existing health care liabilities, are easy political sells but much more difficult, if not impossible, to fund on when the bill comes due. It’s putting the tax burden on future earners, in some instances the children of Vermont who didn’t even get to vote for or against these politicians, all for the short-term convenience of staying in office to promote policies just like these that help them retain their position.
I’ll put it simply: These people are garbage. I’d no sooner spend someone else’s money on something that I then handed them the bill for than I’d purposely fall down an open elevator shaft. But year in, year out, those pensions are promised and their funding goes ignored.
Why? Because Democrats. That’s why.
Great synopsis Chris. My worry is what will happen when these states go bankrupt. I think Paul Rahe has a great point that bankruptcy laws for states that go bankrupt so that more financially responsible states are not stuck paying for them
and, not insignificant in this economy, more job security!
I predict a 100% chance of bailout by the federal government. Paid for by the only sizable chunk of money that is “available” which is taxing 401k retirement accounts. Can’t you feel the irony in the fact that the government will have to bail out unfunded pension liabilities by taxing funded ones?
“In Connecticut, there is a $76 billion deficit in unfunded liabilities. This is a small state with only 5 million people and it is hemorrhaging jobs due to the unfavorable business climate.”
Realizing this is an ancillary point to the post, it appears in the graph below that there is steady growth in employment in CT since the recession. Is it really hemorrhaging jobs?
If there is a special tax on 401K’s, how would it be implemented? The 401K Roth accounts have the tax paid upfront. For ordinary 401K’s, you pay tax when you pull it out. Are you (or anybody else) suggest taxing them while the account is growing? Or is it a surtax during withdrawal, such as 25% when you are in the 15% bracket? More likely might be some extra tax on Roth distributions, similar to the cost basis used on after tax IRA’s, i.e., your contributed money is yours but the growth is taxed.
I expect the approach will be similar to Argentina’s and Poland’s. The Federal government will confiscate the assets in your retirement accounts, and issue you a promise of an actuarially equivalent increase in your Social Security payments. (Empasis on “promise”.)
Nonfarm employment includes government workers and also any population growth. I recently noticed that Connecticut cities take up much more of the car atlas map than when I drove through there in the 70’s. But the gun manufacturers are leaving.
In the early 1990s CT adopted a personal income tax for the first time. Since then net private sector job growth is zero. The only growth has been in public sector employment.
The root cause is the difficulty in a democracy of undoing the effects of a bad decision when the bad decision itself creates its own new concentrated interest group vested in the preservation of that bad decision. It is why the decisions to allow state and local employees to unionize has been so damaging to the ability of state and local governments to operate in a financially sound way – those decisions created very powerful interests dedicated to preserving the status quo. The unionized interest groups in effect run a number of states (including my state of CT) and many, particularly large, municipalities. They can mobilize not just influence, but money and most importantly voters who are ready to act on their own behalf.
Gun Manufactors are leaving for greener pastures, as well as Sikorsky Aviation has plans to leave the state. UBS is downsizing its staff in Stamford, and many shipping companies are moving their operations from Connecticut down to Houston.
Also our esteemed governor has a habit of bribing companies with Tax payer money to stay, putting the state further into debt.
You’re probably right. Detroit has filed for bankrupcy, the federal bankrupcy judge said that pensions are on the table and are not protected. That hasn’t seemed to change anyone’s mind. Scott Walker has a billion dollar surplus in his state after making changes to the union rules in Wisconsin, but no one wants to talk about that (who isn’t conservative). It seems that most people have to learn things the hard way, doesn’t it.