Thomas Healey writes in Barron’s about one state’s efforts to tackle unfunded public pension liabilities.
Kicking pension problems down the road is widespread. There are currently $3.4 trillion of unfunded pension liabilities in states and large cities, according to Wharton finance professor Robert Inman. That equates to roughly $10,000 for each American citizen. The five most troubled states–Illinois, Connecticut, Hawaii, Kentucky, and New Jersey– have combined debt and retirement costs (if properly funded) in excess of 25% of their states’ revenues, according to a recent JPMorgan report.
Two decades of fiscal and political irresponsibility have led New Jersey to one of the worst pension funding ratios in the U.S., along with repeated downgrades of the state’s credit ratings. Elected officials of both parties made pension promises they refused to honor through appropriate funding. They spent money on things voters can see rather than stowing it away in funds only actuaries can appreciate. This pattern reached its zenith in 2000, when lawmakers significantly hiked pension benefits without any bona-fide means of paying for them, a folly later flagged in a Securities and Exchange Commission review of the state’s bond disclosures.
Saddled with a $95 billion pension funding shortfall (by new Government Accounting Standards Board reporting standards), New Jersey had the courage to explore comprehensive reform. In 2014, a bipartisan blue-ribbon panel was appointed by Gov. Chris Christie to develop new ways to right New Jersey’s rapidly sinking benefits ship. The panel responded with a fair and pragmatic package designed to maximize savings to taxpayers and the state while minimizing the impact on employees and retirees.
For retirement benefits, the commission proposed freezing existing pension plans and providing new benefits through an affordable “cash-balance” plan—a hybrid between a defined-benefit pension plan and a defined contribution savings plan. No employee would lose a single benefit credit for service before the freeze, and no current retiree’s pension check would be affected. …
… In New Jersey, the general public has met dire warnings of fiscal chaos with resounding yawns, while public employees have sought to strangle reform by a constitutional amendment mandating that existing pension benefits be maintained and funded in full, regardless of cost. Although such constitutional guarantees have made reform more difficult in other troubled states, New Jersey taxpayers have been told that revenue growth will ensure the proposed amendment will not cost them a dime in new taxes or service cuts.
If a state chooses to sanctify its benefit payments, its officials should be forced to provide permanent funding for the promises they make to public employees.
Elected officials have an obligation to look beyond short-term political expediency and undertake comprehensive reforms that do right by their employees, retirees, and taxpayers. Everyone must wake up to the fact that unfunded pension and health benefit liabilities are explosive.
