by Joe Snyder
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There is a fiscal crisis pending in "America the Beautiful" that involves over $3 trillion in pension pay-outs which threatens the fiscal health of cities and states nationwide. The Pew Charitable Trust now estimates that states will spend trillions of dollars on pensions, health care and other retirement benefits for their employees over the next three decades.
I am old enough at 90 to not have to be concerned about this problem but some major cities, squeezed by declining property tax revenues and rising pension costs, have even considered another option: bankruptcy. This is like a tumor – it keeps growing," says Jack Dean, editor and publisher of PensionTsunami.com, a site that monitors the issue. "Ultimately they have to make decisions. "Do we sell the parks? Do we stop putting bulbs in the lights?"
Ford, GM, and other corporations can freeze or restructure pension benefits that threaten their financial viability. Such moves are politically unpalatable for public entities, however.
In New Jersey, where the state’s debt burden exceeds $32 billion and pensions are badly underfunded, Gov. Jon Corzine proposed raising billions by leasing the state’s biggest toll roads – including the famed New Jersey Turnpike. Citizens and legislators are concerned the governor’s plan would lead to higher tolls, however, and Corzine backed off.
In California the city of Vallejo, a San Francisco suburb, declared bankruptcy in May. The reason: A $16 million fiscal deficit caused by declining property tax revenue due to the mortgage crisis and excessive police and firefighter salaries and pensions – which eat up 80% of the city’s annual budget.
When pension obligations drive local governments towards bankruptcy, it can have widespread consequences. Jobs are often cut and many valuable programs have to be cut, some most valuable to society. Taxes may go up leaving a city less desirable to live in. Once in bankruptcy, financing new roads and schools becomes difficult. A closer look, however, can show a different picture. Sixteen state budgets are less than 75% funded – meaning they owe more than they currently contain. Plus, declining real estate values are putting pressure on city and state budgets nationwide.
The Government Accountability Office reports that 40% of state and local pension systems are severely underfunded. Yet more people than ever are working for state and local governments. In 2007, those employees made up about 12% of the nation’s workforce, meaning the impact of a pension shortfall would be substantial.
This looming crisis is mostly a result of spotty assumptions and a lack of transparency. State and local governments estimate when employees retire, how long they will live, and how the pension fund’s investments will fare. Quite often the assumptions pensions are based on are so complex that the retiree doesn’t understand them, plus those on the pension boards don’t understand them, either.
This worsening pension mess involves promises that will not be easy to keep. We’ll see!