By Chuck Reed
State and local government contributions to pension funds have increased $0.59 for every $1.00 in additional tax revenues between 2007 and 2015, according to an August 10th presentation to the National Conference of State Legislatures Legislative Summit, by Donald Boyd and Yimeng Yin of the Nelson A. Rockefeller Institute of Government.
That’s good news for government workers and retirees, but even with additional tax revenues, many governments are not paying enough to keep pension debt from rising. Most are betting on risky investments to make up the difference, and are coming up short.
What happens when the economy goes into recession and rising costs are not offset by rising revenues? Higher taxes, reduced services and even greater pension debt, which will drive more taxes and more cuts in services. Already on numerous occasions we’ve seen it play out in states and municipalities across the nation—as more and more public retirement plans face insolvency, policymakers tend to pull funds from critical public services like education, public safety and transportation to pay down pension debt.
For weaker local governments, that will set off a spiral into insolvency and bankruptcy. Pension reform can help avoid insolvency, but must be taken before it’s too late. As we have seen in Detroit, Stockton, San Bernadino, Vallejo and Central Falls, waiting until bankruptcy to take action just increases the pain.
U.S. public retirement programs are more than $1 trillion in debt, resulting in tremendous budget challenges for states and municipalities. It’s time that we stop the losing streak by depending on risky investments to pan out and start fully funding our pension obligations, so that taxpayers receive the services they have paid for and public employees receive the benefits they have earned.