Regardless of how the economy is treating us and regardless of what we imagine the future holds, there’s an objective reality of unsoundness regarding public pension funding and the stability of public pensions. While you may think the overall crisis is partly — or largely — a matter of perceptions, feelings, that is absolutely not true vis-a-vis the health of the public pension systems.
Take a look at this recent Fortune article, The Public Pension Bomb. It uses New Jersey’s pension woes as a case study illustrating the danger all public pension systems face.
For years, states nationwide have shortchanged the retirement programs that cover teachers, police, and other public employees; now the stock market plunge has wiped out billions of dollars from already underfunded plans. California, New York and Illinois are among the states scrambling to plug multibillion-dollar holes in their pension systems. The growing obligations raise the specter of higher taxes, diminished services, or even another round of costly federal bailouts.
“States have long needed to reduce their unfunded liabilities, and widespread investment losses have made it even more necessary to put money in,” says Lance Weiss, author of a 2006 Deloitte study of state pensions. “But the market crash also means there’s less money available to use for contributions. Everything is coming together to create a crisis.”
The article presents a brief history of the last twenty years of pension fund decision making, all resulting in severe underfunding. But wait! There’s more.
For all the miscues, New Jersey’s pension woes can’t be blamed on particularly poor investment results. An examination of state reports shows that the fund’s returns have more or less tracked the broad stock market’s. The real problem has been the underfunding.
Meanwhile, the obligations keep mounting: Even while they were neglecting pension contributions, New Jersey politicians were sweetening the pot. In 2001 benefits for the state’s two largest groups of workers, government employees and teachers, were increased by 9%, creating an additional $4.2 billion in liabilities. In 1999 the state approved a “20 and out” measure that allowed firefighters and local police to collect pensions equal to 50% of their pay after 20 years of service – a perk previously available only to the state police. Benefits added since 1999 have increased liabilities by more than $6.8 billion, according to official estimates.
Solutions? Not so easy. Governor Corzine has attempted to increase contributions and roll back some benefits, steps that are referred to as “baby steps”. The political support just doesn’t exist for more drastic measures.
What then?
If New Jersey reaches the point where one or more of the funds in its system runs out of money, the state will have to pay retirees out of annual revenue, adding another burden to the budget. That’s how the state covers retiree health-care costs, expected to hit $1.1 billion this year. (An attempt to pre-fund those expenses began in the 1980s but was sacrificed to budget pressures in 1994.)
It would then have to slash services or boost taxes to balance the budget, a pair of ugly options. The Tax Foundation says New Jersey charges the highest state and local taxes in the country, the highest residential and commercial property taxes, and some of the highest sin taxes in the nation on cigarettes and alcohol.
If union concessions, cost cutting, and higher taxes are not enough, then what? Inevitably, New Jersey and other states would turn to Uncle Sam for help.
And so our troubles multiply!