The financial picture is still grim in state capitals across the country. In California, for example, the once-again Gov. Jerry Brown has bailed $11 billion of red ink out of the budget, leaving him with $15 billion to go. A new poll of Golden State voters suggests that the drumbeat of fiscal calamity is starting to move citizens to favor drastic action: tax hikes, spending cuts and public employee pension reforms.
Now comes a new report from the Pew Center on the States warning that things are even worse than they seem. Following up on an influential study of public pension funds last year, the Pew Center reports that pensions and health care for retired state employees are now underfunded by $1.26 trillion.
That’s up 26% in a single year.
The number of states that fail to meet the federal standard for funding their pensions has risen from 22 to 31 in the past year. By contrast, only two states—New York and Wisconsin—operate fully funded pension plans. (Washington state comes close, at 99% funded).
“Just as failing to meet a monthly payment on a personal loan can result in higher payments down the road, a state’s failure to pay the annual bill for retirement benefits can mean it will have to pay more in the future,” warn the authors of the report.
The report goes easy on the cause of the pension crisis—a decade of cavalier politicians who happily agreed to perks for public employees in exchange for votes on Election Day. The tab for funding pensions in 2000 was $27 billion nationwide. By 2009, the price tag had climbed to $68 billion. But that didn’t bother the many politicians who by then had developed the habit of simply skipping scheduled contributions to the pension fund.
On the rare occasions that anyone asked about this folly, the answer was magical: sky-high investment returns would fill the gap. Amazingly, that magical thinking persists. Pew’s $1.26 trillion hole is based on average predicted returns in most states of 8% per year, forever. If the states were required to sober up and plan conservatively—as pension managers in the private sector must do—the shortfall would be closer to $2 trillion.
I recently heard about a teacher in one of our local schools who blanched at the idea of a 401-(K) plan. What, he asked, would happen if the markets crash?
Unless the states get their balance sheets in order—and fast—plenty of teachers, firefighters, police officers and other public workers are going to learn the hard way that a government pension is not a hall pass from economic reality.