As Baby Boomers begin to enter retirement, the reality of the threat that an estimated $3 trillion in underfunded pension liabilities poses to states’ financial futures and taxpayers is starting to set in with lawmakers and the public. An American Enterprise Institute study found states claim to be underreporting their unfunded public-employee pension liabilities by more than $2 trillion. In fact, more realistic estimates show that the unfunded pension liability in California alone exceeds that figure. A more recent study by Northwestern found the collective unfunded liability to be even higher at $5 trillion.
With that said, Public Sector Inc. recently released a timely evaluation of how governors are approaching the ticking pension time bomb in their states. Issues addressed include employee compensation, collective bargaining, and pension reform. Eight states have been evaluated thus far: Maryland, Massachusetts, Michigan, New Jersey, New York, Pennsylvania, Virginia, and Washington. Interestingly enough, of those eight states, not a single one received an ‘A’ grade—NJ Gov. Chris Christie led the way with a ‘B.’ The following are summaries of the reports:
Maryland: Governor Martin O’Malley received a ‘D’ grade. Gov. O’Malley will be asking current state employees to increase their contribution to the pension system from 5 to 7 percent or to reduce benefits in the future. According to Gov. O’Malley’s budget proposal, this would save $104 million. Maryland reports an unfunded pension liability of $19 billion but it is actually several times larger and will run out of assets by 2024.
Massachusetts: Governor Deval Patrick grades out as a ‘C.’ Gov. Patrick has proposed some insignificant measures such as postponing a $900 million payment that was due in July but this is only a temporary solution. In fact it puts future generations at a significant disadvantage because they will be paying heavy interest costs. Gov. Patrick has also proposed a measure that would save $7 billion over the next 30 years. He has also garnered union support for a measure that would save money by making pension benefits less expensive for future workers.
Michigan: To date, Gov. Snyder has said little concerning state pensions. In his State of the State address, he mentioned the state’s $54 billion in unfunded pension liability but offered no solution. He is on record as saying that ending collective bargaining in the public sector is “not a viable option in the Michigan system.” This may tie his hands if/when he reveals a plan for containing employee compensation costs.
New Jersey: Governor Chris Christie received a ‘B’ grade. Gov. Christie enacted a property tax cap which limits local levy growth to 2% per year but exempted public pensions from it. New Jersey did not meet its annual required contribution to employee pension funds in the past year—it should have paid more than $3 billion on a fund of $28 billion. For the next year, Gov. Christie wants to cut back pension benefits for new hires and to trim the benefits of existing state workers. He also wants to increase the amount of employee contribution and reduce the benefits.
New York: In his State of the State address Governor Andrew Cuomo stated that in New York “taxes are 66% higher than the national average…The costs of pensions are exploding…The State of New York spends too much money…”. While he plans to leave taxes at their current level, Cuomo also plans to cap the growth on local property tax levies, freeze state employee pay, while ignoring calls for collective bargaining reform and a freeze on local government spending. More is likely to be known on February 1st when he reveals his Executive Budget.
Pennsylvania: It is too early to issue a grade for Governor Tom Corbett. We do know that he will not offer public employee unions a one-year extension of labor contracts. This is important because 17 of the state’s 19 unions will have contracts expiring soon. Lt. Gov. Jim Cawley said that they will “seek meaningful and workable pension reform;” beyond this, little is known about Governor’s plans.
Virginia: Governor Bob McDonnell received a ‘C.’ Gov. McDonnell canceled a $620 million payment into Virginia’s public pension system. This is essentially the same thing as borrowing to fund the system. Virginia is one of four states where employees do not contribute to their pension. Gov. McDonnell has proposed an employee contribution rate of 5%. The system costs $311 million a year but has unfunded liabilities in the tens of billions.
Washington: Governor Christine Gregoire received a ‘D.’ The state pension system is in a hole after losing $16 billion in the stock market over the last two years. Gov. Gregoire is yet to propose a long-term plan to prevent the government from being forced to lay off thousands of state employees.