Maine’s Pension Crisis is Worse than Reported
In my recent study on Maine’s pension system, I discovered that two Chicago-based economists found that Maine’s pension liabilities may be as high as $24 billion, or 50 percent of Gross Domestic Product. This is the 8th highest pension liability in the country.
A rash of media stories, such as this one, have been making hay from the recent announcement by the state that their pension payment over the next biennium will climb by $287 million to a whopping $916 million.
As bad as that news is to policy-makers . . . they should sit down when they hear the results of this new study by Joshua D. Rauh. He finds, using conservative assumptions, that Maine’s pool of assets set aside for the pension system will completely run out by 2026. In other words, the current payments to the pension system (as noted previously) is insufficient and the state will have to cash-in their assets to pay benefits. Forget about the 2028 deadline set by the Maine Constitution on paying the unfunded liability, the system will be bankrupt well before then.
The study goes on to make an estimate of what payment would be required to make the pension system solvent. Are you ready? The required payment needs to be 75 percent higher than current payments. That means Maine should be making a payment that is $687 million higher over the biennium, or $1.603 billion in total.
In a state that already has one of the smallest private sectors in the country and is losing population, where will policymakers find an additional $687 million on top of the additional $287 million that was just announced? Maybe the Maine State Employee Association should worry less about suing the state to restoring their longevity pay and worry more about sad state of their pensions.
And for those folks who have been up-in-arms about recent federal bailouts, the mother-of-all-bailouts may be just around the corner. Consider this quote from the pension study:
“There seems to be a high likelihood that future generations will have to bear the substantial burden of making up pension benefits for previous generations of state employees. While citizens of states that are particularly hard-hit by the pension crisis may be able to escape to other states, an acceleration of this demographic phenomenon would leave a dwindling taxpayer base behind in the states facing the largest liabilities. This would increase the likelihood of a federal taxpayer bailout in which taxpayers in all states would bear the burden of the states in default. The problem of state and local pension liabilities is therefore a problem for all US taxpayers, not just those in the states with the largest deficits.”
Posted on Aug 10, 2010
Can the State of Maine simply declare bankruptcy, and be placed in forclosure? Than hope for a judge in Bankrutcy court declare us insolvent so we can start over from scratch with no debt under new management?
Posted on Aug 10, 2010
Steve, great question. No one knows for sure. While several municipalities have declared bankruptcy, no state has attempted to do so. I have a feeling we may find out soon as states like Illinois and California are already insolvent thanks to their runaway pension costs. Unless, of course, we get a federal bail-out first.
Posted on Aug 11, 2010
Municipalities cannot default on loans in Maine. The State of Maine is required to step in and bail the towns/cities out. There is a significant cost to the taxpayers for this service. What many people fail to realize is when a municipality borrows money (bonds), the full faith an credit of the municipality is pledged as collateral to back up that bond. The bondholders (lenders) have claim on everything in that municipality. Everything. Not just the library, the fire station or the town hall. Any private residence, business, non-profit is fair game. If people knew that the municipal officials were "putting their houses up" to borrow for the football field, perhaps they would be a bit more watchful of their borrowing.