Across the country, states are experiencing a pension crisis that could leave them defaulting on millions of dollars in retirement benefits. Fiscal irresponsibility enabled by the federal government has allowed pensions to go underfunded by anywhere from $1.5 trillion to $5 trillion dollars, now individual states are experiencing the strain of making unrealistic promises in defined benefit plans.
A state’s ability to fund their pension plans is determined based on net amortization, or the measure of whether funding policies in place in state and local governments are sufficient to reduce pension debt in the near term.
States such as Kentucky, have been consistently underfunding plans for decades. Currently Pew Charitable Trusts research concludes that only 41 percent of the promised returns from Kentucky’s pension system are currently funded, leaving a net amortization cost of about $1.7 billion. Nearly $1.3 billion alone comes from the states Teachers Retirement System.
But Kentucky is far from alone. In fact, only 14 states have at least 100 percent funding for their pension plans, leaving 36 at risk for potential default.
In New Jersey, a state 42 percent underfunded, this means a net amortization cost of roughly $6 billion, with both teachers and public employees being underfunded by nearly $5 billion alone.
Aside from the devastating economic impact this has on the states as a whole, the high pension debt causes an economic drain on all aspects of a state.
California, at 76 percent funded, is the national median. However, as Forbes.com contributor Scott Beyer explains, in Los Angeles alone the city owes anywhere from $15 billion to $26 billion, sucking money from core services. Beyer explains that throughout California, “unfunded pension liabilities have already caused bankruptcy in Stockton, Vallejo and San Bernardino; and eat up similarly large chunks of the budget in San Jose and San Diego.”
Similarly, in Dallas, the city’s D Magazine reported in March 2017 that this year the state will face “inevitable periods of austerity, the potential of higher taxes, even more crumbling or poorly maintained infrastructure and a slow corrosion of the very services and infrastructure that give cities their competitive advantage” due to a clear inability to fund public employee pensions. As a state, Texas remains only 79 percent funded.
While Dallas might be attempting to cut spending, other states have ignored this clear problem.
Despite being underfunded in teacher’s retirement systems an estimated $71.4 billion alone, the state continues to make promises for high teacher salaries and pension promises. Between 2010 and 2014, the Northwest Herald reports this causes 89 percent of new dollars spent on education to go to retirement costs. Rather than assisting teachers with resources and materials in the classroom, states are struggling to meet unrealistic pension promises.
One reason states might be ignoring the consequences of defaulting on these payments is simple, perhaps they believe the federal government will save them.
Currently, under Section 14(2)(b)(1) of the Federal Reserve Act the Fed can purchase municipal bonds from state and local governments for periods of 6 months. If a state is unable to make payments to state pensions for example, this would allow the Fed to essentially take the debt from the state governments and bail them out of their situation.
Essentially, states are not bound to fiscal responsibility because they have the printing press of the Federal Reserve to save them from default.
Luckily, U.S. Rep. Brian Babin (R-Texas) has introduced legislation to solve this problem. The State and Local Pensions Accountability and Security Act would prevent the Federal Reserve from providing “any loan, grant, or other form of financial assistance to a pension plan established or maintained by the government of any State or political subdivision…or to the government of any State or political unless such government, agency, or instrumentality certifies that the financial assistance will not be used, directly or indirectly, to fund such a pension plan.”
Babin’s legislation forces states to be accountable for the money and reign in on promises that only harm the state’s financial plans. By eliminating the fall back for states, they will finally have to renegotiate their pension deals to something more sustainable.
The state and local government pension crisis places strain on everyday public employees who were falsely promised extravagant retirements, in the meantime bankrupting entire cities. Babin’s legislation prevents the federal government from enabling this blatantly abusive practice, putting states on alert that they had better get their acts together and save themselves.