There are approximately 90,000 state and local governments in the United States. Most of these entities provide a defined benefit pension plan for public employees as part of their overall compensation. State governments employ 5.3 million people and local governments employ 13.8 million, with 14.2 million of those being full-time employees eligible for publically supported pensions.
North Carolina, like every other state in the country, offers a pension to its public employees. In addition, local state and city governments within North Carolina also offer pensions for their employees. The rating agency Moody’s released a new report on pension burdens of the 50 largest local governments in the United States. According to their analysis, pension burdens increased for 31 of those 50 in fiscal year 2013. Some local governments are horribly underfunded and retirees are facing the realistic possibility of not receiving their pension payments, while taxpayers are facing increased rates to pay for a failing pension system. Here are some comments from the report,
As a percentage of operating revenue, Chicago remained at the top with adjusted net pension liabilities at 703%, followed by Dallas at 506%; Houston, 458%; Los Angeles, 410%; and Jacksonville, Fla., 403%. Among those with the lowest percentages are Washington, D.C., with 24%, followed by Cypress-Fairbanks (Texas) Independent School District at 25%, and Mecklenburg County, N.C., 29%.
It is comforting to know that Mecklenburg is mentioned as having one of the lowest percentages, yet the discussion remains — there is still significant unfunded pension liability.
According to a recent State Budget Solutions study, no state in the country is able to cover all pension payments it is obligated to make, and North Carolina is no exception. The state of North Carolina has an unfunded liability of $81 billion or 17 percent of the gross state product according to the study. That equates to an unfunded liability of over $8,000 per citizen. There is some debate about how this unfunded liability is calculated, but the fact is that a portion of both state and local government pensions in North Carolina remains unfunded.
After the 2008 Great Recession, many states and municipal governments faced the likelihood of a default on their pension payments to current and future retirees alike. The discussion of reforming these plans has been at the forefront for many states and local governments, but North Carolina lawmakers have decided not to broach the subject. Many states have started by amending the retirement benefits for new employees. Alaska started the trend in 2006 by implementing a defined contribution plan for new employees, followed by Michigan in 2010, Utah in 2011, and Oklahoma just last year. Other states have been unable to reach this level of reform, but have been able to give new employees the option of a 401(k) style plan or have implemented some other reform to lessen the risk of defaulting on their pension payments. North Carolina state employees are required to participate in the state’s defined benefit pension plan and have the option of an additional defined contribution 401(k) plan.
The most effective and best way to reform a state or local pension plan is to move all new and existing employees onto a defined contribution pension plan, which is similar to a 401(k) style plan found in the private sector. Other options for pension reform exist, such as increasing the retirement age, increasing the vesting period, requiring that rehired or retired employees pay for their pensions, or capping retirement benefits to be no more than the final average salary.
All employees who have worked for either municipal or state government in North Carolina have earned their pensions, and it is the responsibility of lawmakers to ensure they receive this benefit. Now is the ideal time for state lawmakers and city and county elected officials to champion pension reform, and give employees the opportunity to invest in a defined contribution plan for their retirement while protecting future taxpayers from unfunded pension liabilities.
Click here for the Fiscal Update archive.
You can unsubscribe to this and all future e-mails from the John Locke Foundation by clicking the "Manage Subscriptions" button at the top of this newsletter.