A Brutal Reckoning  Awaits . . . for Public Pensions

A Brutal Reckoning Awaits . . . for Public Pensions

January 3, 2011 Posted by J. Scott Moody - No Comments

Maine's Pension Crisis is a Ticking Time BombOver the weekend, the New  York Times ran an interesting story on the relationship between taxpayers and public pensions–“Public Workers Face Outrage as Budget Crises Grow” The article states:

Across the nation, a rising irritation with public employee unions is palpable, as a wounded economy has blown gaping holes in state, city and town budgets, and revealed that some public pension funds dangle perilously close to bankruptcy. In California, New York, Michigan and New Jersey, states where public unions wield much power and the culture historically tends to be pro-labor, even longtime liberal political leaders have demanded concessions — wage freezes, benefit cuts and tougher work rules.

It is an angry conversation. Union chiefs, who sometimes persuaded members to take pension sweeteners in lieu of raises, are loath to surrender ground. Taxpayers are split between those who want cuts and those who hope that rising tax receipts might bring easier choices.

And a growing cadre of political leaders and municipal finance experts argue that much of the edifice of municipal and state finance is jury-rigged and, without new revenue, perhaps unsustainable. Too many political leaders, they argue, acted too irresponsibly, failing to either raise taxes or cut spending.

A brutal reckoning awaits, they say.

I couldn’t agree more as a “brutal reckoning” awaits even here in Maine.  In FY 2011, Maine’s state government paid $326 million into the pension system.  By FY 2016, it is projected that the state payment will more than double to nearly $700 million.  Talk about your cost driver.  Depending on what assumptions you make about revenue growth, it is plausible that the increase in pension payments alone will consume every new dollar the state takes in over the next few years.  That would mean all other general fund spending would see little growth . . . maybe even no growth.

However, it gets much worse.  In a recent pension study (pdf) I did, I reported that new studies have found that Maine’s unfunded pension liability (liability minus assets) may be much higher than the reported $2.9 billion.  The unfunded pension liability could be as high as $13.2 billion.  Overall, the total pension liability (not counting assets) could be as high $24 billion which is 50 percent of state GDP–the 8th highest in the country!  In a nutshell, this means that above mentioned payment schedule is dramatically understated in order to pay this much higher unfunded pension liability.

Only serious pension reform can thwart this “brutal reckoning.”  More on this important issue in an forthcoming study.