*First appeared in the August 1, 2013 edition of the Laurel Chronicle.
News of Detroit filing for bankruptcy protections shook the financial and political worlds, but I felt their "surprise" at this revelation was hollow. After all, the Wall Street Journal re-affirmed what I had previously assumed: That Detroit's demise has been long-coming.
The Journal recounted that "nearly 70% of parks have been closed since 2008, and four in 10 street lights don't work. The city has cut its police force by 40% in a decade...Detroit residents pay the highest property and income taxes in the state...About 40% of revenues go toward retirement benefits and debt, much of which was issued in the last 10 years to finance pension contributions. Payments on $1.6 billion of pension-related certificates of participation consume nearly every dollar of property tax revenue."
How the Detroit fiasco plays out could have huge implications in how governments deal with unaffordable pension obligations. Forces like unions and creditors have driven governments to a borrow-tax-spend cycle at the expense of taxpayers. As the Journal notes, a Detroit "bankruptcy shows the party is over, as it may also soon be for many other cities."
Oakland, Cali. has the state's highest crime rate yet recently laid off upwards of 100 policemen to fund retirement benefits and pension-obligation bonds. On top of this, the city borrowed another $210 million to finance pensions, putting the municipality in even worse financial straits.
To make up for years of short-changing its retirement fund, Philadelphia, Penn. is currently spending about 20 percent of its budget on pensions. The Journal points out that Philly has raised sales, property, and business taxes, yet the city council is currently discussing using revenues from a one-percentage-point sales tax hike in 2009 intended for schools to finance pensions.
Former Obama White House Chief of Staff turned Chicago Mayor Rahm Emanuel declared recently that "the pension crisis is no longer around the corner; it has arrived at our schools" after the city's public schools announced 2,100 layoffs. Although Chicago (supposedly) is planning to transfer 30,000 retirees on Medicare and the Obamacare exchanges in 2017, all its savings will go toward pension payments which will triple in 2015. The Democrat mayor warned taxpayers that this could mean a 150% spike in property taxes.
According to groups like the Pew Center and Boston College's Center for Retirement Research, pension obligations run into the trillions of dollars (the last estimate I saw was roughly $3 trillion). This means that many governments "have more than likely promised their workers more than they can reasonably expect to deliver," according to the New York Times.
Clearly, pension obligations have the potential to bankrupt cities and states, both large and small. Mississippi, pay attention.
Our state retirement plan is in better condition than these examples, but the trends concern me. Although taxpayers have put significantly more money into the system, its funded status continues to decline. In 2003, the system had a funded status of 79 percent; today that number has dropped to 58 percent. Pension experts consider healthy plans to have a funded status of 80 percent or higher.
These numbers are particularly gloomy, since taxpayers have seen their contributions to the system increase more than 62 percent in the last decade. In Fiscal Year 2013, the state (taxpayers) contributed about $835 million to fund a portion of the retirement system; this level could jump above $900 million in Fiscal Year 2014. That's higher than state financial support for Medicaid!
I don't believe Mississippi's retirement system is on the verge of collapse, but there are warning signs within the system that should be addressed by policymakers, retirement board members, and taxpayers. The current plan is too costly (see above) and puts too large a fiscal burden on taxpayers who are trying to build their own non-government funded nest eggs. Small but important tweaks can be made now to ensure an affordable and sustainable future.
The Economist recently featured an insightful piece on pensions in America, writing that "it may take a financial crisis [like Detroit] for states and cities to face up to the scale of their pension shortfalls. When a crisis occurs, public-sector workers are more likely to accept the need to sacrifice."
In Mississippi, I hope we'd take actions to avoid a crisis rather than let pension obligations escalate to an unsustainable level.
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