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Unfunded Liabilities for Public Employee Retirements

Monday September 7th, 2015   •   Posted by Craig Eyermann at 7:04am PDT   •  

5136500_S People who work for the federal, state, or local governments in the United States are really well compensated compared to their peers in the private sector.

That’s not so much because of the take-home pay, which is often in the same ballpark as what people with similar education and training earn in similar occupations in the private sector, but because of the fringe benefits they receive.

A very good case in point are the retirement benefits that federal, state, and local government employees collect. Many government workers are able to retire far earlier than their private sector peers because of the extraordinarily generous pensions and retiree medical benefits that their government employers promise.

The problem is so bad it goes by a special name—unfunded pension liabilities—and the average state government unfunded pension liability in the United States is $15,052. The Manhattan Institute’s Diana Furchtgott-Roth and Jared Meyer summarized the findings of their recent research on how that largely invisible form of public debt has grown so large in a CBS Marketwatch article:

States are in this situation because during economic booms they deliver more generous pensions to their employees, but during economic downturns, these increases are rarely pared back. This means that states make promises to public-sector unions that they usually cannot afford.

Absent major concessions, these pensions will have to be paid over time to the 19 million men and women who work for a state, county, municipal or school-district government. If pension-fund income is insufficient to cover those obligations, as is expected, those who will be on the hook to pay will be today’s young Americans, who have college loans, high unemployment rates and lower incomes than the public-sector workers. As they progress in the workforce, they will be responsible for the debts.

Unfortunately, unlike the private sector, where businesses are required by law to continually set aside sufficient funds to fully pay such defined benefits to their employees when they retire, public-sector entities have no “full-funding” requirements. They instead choose to set aside only a fraction of the promised benefits and then count on their power to hike taxes on their residents to make up any shortfall between what they’ve promised and what they can actually deliver to their retired employees.

In fact, that is exactly what is happening in Chicago, Illinois, where the city government has a long history of promising far more in benefits to its employees than it can ever hope to deliver. A. J. LaTrace of Curbed Chicago reports:

The city’s budget crisis isn’t going away anytime soon, but in order to help fill the hole, Mayor Emanuel has proposed what is being widely reported as “the biggest property tax hike in recent Chicago history.” The mayor is looking to raise $500 million through the hike, which will squeeze an additional $500 annually from homeowners whose property is worth $250,000. In addition, the mayor wants to start charging for garbage collection separately, which will come to somewhere around $10 to $12 per household per month.

Alderman Patrick O’Connor tells the Tribune that the plan would provide $450 million for police and fire department pensions while $50 million would be used for a Chicago Public Schools construction program. While the mayor attacked his opponent Jesus “Chuy” Garcia for voting for a big property tax hike during the Harold Washington years, the one that Rahm is currently proposing would be over triple the amount when adjusting for inflation. Weary homeowners may have suspected that the city would raise property taxes to help provide some relief from the pension crisis, and it appears that some sort of tax hike is on the horizon.

And yet, notice that even the largest property tax hike it its history won’t be enough to end Chicago’s fiscal problems. The public employee beneficiaries of the city’s excessively generous retirement pension, and medical benefit plans, should really start planning to have those benefits made less generous.

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September 2015