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Pensions for Public Servants to Force Government Failures

Wednesday April 13th, 2016   •   Posted by Craig Eyermann at 5:57am PDT   •  

bankruptcy-500-source-fbi Investor’s Business Daily editorializes on the biggest problem that state and local governments face across the United States:

A new report by Hoover Institution Senior Fellow Joshua Rauh shows that, unless action is taken soon, many local governments could face bankruptcy because they can’t meet their pension obligations.

“This study shows that unfunded pension liabilities are devastatingly widespread and only getting worse,” said Rauh. “With hundreds of state and local governments drowning in retiree benefit debt, the need for bold structural reform has never been so pertinent.”

The problem is surprisingly simple: States and cities overestimate returns on their pension fund investments, while systematically underfunding them. The result is a growing deficit that will require massive tax hikes or dramatic and painful cuts in government services and promised pensions to public workers.

The findings of the report, Hidden Debt, Hidden Deficits: How Pension Promises Are Consuming State And Local Budgets are summarized in the following synopsis – we’ve added the emphasis for the section that describes the scale and scope of the problem:

Despite the introduction of new accounting standards, the vast majority of state and local governments continue to understate their pension costs and liabilities by relying on investment return assumptions of 7-8 percent per year. This report applies market valuation to pension liabilities for 564 state and local pension funds, representing around 97 percent of the U.S. universe. Considering only already-earned benefits and treating those liabilities as the guaranteed government debt that they are, I find that as of FY 2014 accrued unfunded liabilities of U.S. state and local pension systems are at least $3.412 trillion, or around three times more than the value reflected in government disclosures. Furthermore, while total government contributions to pension systems were $109 billion in 2014, or 7.3 percent of state and local government revenue, the true annual cost of keeping pension liabilities from rising would be approximately $261 billion or 17.5 percent of revenue. Applying the principles of financial economics reveals that states have large hidden unfunded liabilities and continue to run substantial hidden deficits by means of their pension systems.

The need to keep the pension systems for government employees afloat is driving some anti-public service behavior among a number of state, local and territorial governments in the United States. For example, the most financially distressed government within the U.S., the territorial government of Puerto Rico, is acting to impose capital controls on its residents, preventing them from being able to take their money out of the territory.

Meanwhile, in New York City, the development of public infrastructure in the form of a much needed third tunnel to bring water to the city in case either of its two existing water tunnels fail is being indefinitely put on hold because of the city’s public employee pension liabilities, even though a critical part of it is almost finished:

Mayor Bill de Blasio has postponed work to finish New York’s third water tunnel, a project that for more than half a century has been regarded as essential to the survival of the city if either of the two existing, and now aged, tunnels should fail.

The new tunnel has already been completed and is carrying water into Manhattan and the Bronx. But segments that would supply Brooklyn and Queens, home to five million people, though also virtually finished, still await the building of two deep shafts.

If calamity or age forced the shutdown of City Water Tunnel No. 2, which is 80 years old, the primary water supply to much of Brooklyn and Queens would be lost for at least three months, city engineers said, the time it would take for an emergency activation of the sections of Tunnel No. 3 in Brooklyn and Queens that have already been finished.

The entire Brooklyn-Queens leg of the new tunnel was scheduled to be finished by 2021, with $336 million included in the capital budget in 2013 by Mr. de Blasio’s predecessor, Mayor Michael R. Bloomberg, for whom completion of the third tunnel was the most urgent and expensive undertaking of his tenure.

Scott Sumner identifies the real reason for Mayor DeBlasio’s bizarre decision to expose New York City to the increasing risk of structural failures from its aging public water supply infrastructure, which would impair the supply of water to over 60% of the city’s residents.

So the infrastructure that we supposedly need is started by a Republican, and abandoned by a progressive. The real “unmet need” is not infrastructure; it’s higher pay and fatter pensions for public employees.

Government is really all about priorities. In all these cases, the interests of government bureaucrats are being put ahead those of regular people. And because it is, their future failure is not being left to chance.

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April 2016