Taxpayer Bailout of State Pension Plans?

A recent CNN/Money article suggests that state pension plans will need a bailout from the federal government in the coming years.

"This is a problem of monumental proportion," said Rauh, an assistant professor of finance at the Kellogg School of Management. "Given that we see the same issue in many states, the total size of a federal rescue plan could exceed the seriousness of the recent economic crisis and potentially cost more than $1 trillion total."

Let's see if I have this right. States are either unable or unwilling to raise enough taxes from their own residents to make their pension plans solvent. So, instead, they may want the federal government to tax those same people, and then transfer the money back to the states?

Huh?

Here's a better idea. How about the states that have massive pension shortfalls simply reduce the defined benefits that have been promised to state workers to a degree that the pension plans are, voila, no longer insolvent?

Annual compensation (i.e., salaries and benefits) for workers at the federal and state level are already significantly higher than pay for workers doing similar jobs within the private sector.

Simply put, there is simply no plausible reason that the fatcats working for government should be bailed out at the expense of the rest of us.

Public Pension Deficit Exceeds $3 Trillion?

An article in the Wall Street Journal written by Andrew Biggs argues that state pension plans are underfunded to the tune of $3 trillion.

"Pension plans for state government employees today report they are underfunded by $450 billion, according to a recent report from the Pew Charitable Trusts. But this vastly underestimates the true shortfall, because public pension accounting wrongly assumes that plans can earn high investment returns without risk. My research indicates that overall underfunding tops $3 trillion.

The problem is fundamental: According to accounting rules adopted by the states, a public sector pension plan may call itself "fully funded" even if there is a better-than-even chance it will be unable to meet its obligations. When that happens, the taxpayer is on the hook. Yet public pension plans ignore market risk even as they shift into risky foreign investments, hedge funds and private equity."

Biggs' argument is that the pension plans are assuming unrealistic future investment returns that will meet their mandated, long-term payout amounts.

Politicians are fond of using taxpayer money to buy votes. In this case, they have over promised pension amounts to public workers, and will expect taxpayers to make good on these promises in the coming years.

Taxpayers should keep a close eye on these pension amounts in their states and municipalities, and start taking action now to ensure that politicians are aware that they need to ratchet down these promises in their ongoing negotiations with public unions.

State Pension Shortfall Portends Tax Hikes or Spending Cuts

A new report issued by the Pew Center on the States indicates that US state pensions plans are collectively underfunded on a massive scale.

"U.S. states face a total shortfall of at least $1 trillion in their funds for employees' pensions and retirement benefits, and their financial problems are quickly mounting."

In a nutshell, US states have dramatically over promised benefits to their employees over the years, and this deficit provides that evidence.

In addition, the Pew report only analyzed data through the summer of 2008, so it's possible the deficit is worse at this point (although the stock market rally over the past 12 months potentially helped).

"Because the analysis did not encompass the final six months of calendar year 2008 -- most states' fiscal year's end during the summer -- it does not include the market downturn that devastated many funds' investment portfolios."

States are obviously at a crossroads with this issue. They know full well that the pension plans are not going to be able to invest their way out of this mess. The two logical, remaining choices are to either increase taxes on their residents as a means to compensate for the excessive benefits promised to state workers, or to re-write the defined benefit plans to provide for less future benefits to employees.

Considering that it is the rare private company that still offers pension benefits to its employees, states would be well advised to ratchet down promised future benefits as a means of correcting this deficit.

CA Public Employees Get Set to Square off with CA Taxpayers

In what's likely to result in a nasty fiscal skirmish between California public employees and over-taxed California taxpayers, the California state controller's has pointed out that the sweetheart retirement benefits promised to state workers are currently being underfunded.

Controller John Chiang's office issued a report Tuesday showing the growing divide between what the state owes retirees for health and dental benefits and what it has saved so far.

The gap has grown to nearly $52 billion, about $3.6 billion over last year's estimate.

While promising outsized retirement benefits to state workers might have previously seemed like the politically expedient thing to do, it's clear now that such generosity is no longer feasible or possible.

The best course of action for state lawmakers to take, perhaps with a little urging from California taxpayers that, you know, actually care about whether their private property is stolen for the benefit of other people, is to drastically reduce the retirement benefits offered to California retirees.

In an era when it's the rare worker who receives a defined benefit pension from a private company, it's time for state workers to realize that the public can't afford the same for them.