Another fiscal time bomb
Published 4:07 pm Friday, June 4, 2010
“You can pay me now, or pay me later.” In the 1970s, that was the axiomatic slogan for Fram, a maker of air and oil filters.
Its value goes far beyond auto maintenance, of course. It applies particularly well to personal finances — pay that credit-card balance now, for example, or pay a lot more later.
It’s a message that’s too often ignored by state lawmakers when it comes to funding public employee pensions. Predictably, it has created a fiscal problem that, in the absence of dramatic solutions, could soon become overwhelming.
Here’s the crux of it: Two of the state’s oldest and largest pensions, the Teachers’ Retirement System Plan 1 and the Public Employees Retirement Systems Plan 1, have long been underfunded and are at risk of running out of assets before all benefits are paid. And they must be paid — they are contractual obligations between the state and its retirees.
Nearly all the beneficiaries in these plans are retired, so they’re no longer making contributions. Without interest and investment income to pay benefits, taxpayers would be alone on the hook. Benefit checks would come out of the same general fund that pays for education, prisons and social services.
The state’s other pension plans are currently fully funded, but given the recent turmoil in financial markets, that may not hold true much longer. Lots of local government employees are in these plans, and contributions to them by employers (read city and county taxpayers) are projected to triple over the next six years.
Lawmakers, meanwhile, have failed to keep up with contribution schedules recommended by the state actuary. And that’s been the case in good times as well as bad — payments have been skipped when revenues were low, but weren’t made up when things got better.
Prudent planning also got scrapped in 1998 when, as the tech bubble was inflating stock-market returns, public employee unions sought and won “gain-sharing” — a benefit that kept billions from being set aside to guard against inevitable downturns.
As the governor enters contract negotiations with public employees, benefit enhancements must be off the table. Before legislative candidates hit the campaign trail in earnest this summer, they should study this issue and be prepared to explain what they’ll do to solve it.
As with the big federal entitlement programs heading toward fiscal calamity, the state’s pension problem is like an expanding balloon on the verge of bursting. If it does, the fallout will be higher taxes and deeper cuts to essential state and local services.
