LEGISLATIVE REPORT: Increased Taxes Might Have To Pay for Future Pensions



Pension Law and Policy,
By Michael Karsch,
Legislative Representative


Marketwatch.com had a cute title in late November: “Why Millennials should care about government pensions – even if they don’t have one.” Most younger adults in the millennial cohort don’t think about retirement or pensions, at least not for awhile. Any fiscal problems will hopefully be worked out by the time they retire. Then the article plunges into the dismal dollars that are not available to back up promised pensions. Across the country, state and local government pensions are 73 percent funded. More funding must be invested in the pensions, and that new funding will come from taxes. Increases in taxes will affect this cohort indirectly by making their cost of living increasingly costly. Public debt will be paid off by increased taxes, but this could mean cuts in public services, no new hiring of public employees, whether as police, firefighters, healthcare, etc. Marketwatch says, “This is not a red or blue state issue.” The writer for Marketwatch cites the states of Kentucky and New Jersey. Kentucky is near the bottom of states for worst-funded pensions (they have 16 cents of each dollar owed to fully fund their pension system). New Jersey is $48 billion short of fully funding its public pensions.

Illinois continues to have similar fiscal stress in its pension systems (there are 5 groups: suburban/downstate teachers, state employees, university employees, judges and the General Assembly). The debt is estimated at $133.5 billion; the funded ratio is 40.2 percent, and the reform of the systems to solvency by 2045 when it should be 90 percent funded. This reform however, is not accounting for the decrease in future employee buy-in to the pension system since those future employees will be receiving less take-home pay and possibly other benefit reductions.

Connecticut joins New Jersey and Illinois as the top three most indebted states. It’s funded at 38 percent of the expected demands of its pension promises. Their total liabilities work out to $21.2 billion. In all of these three states, the problem is not financial crises. They have always been poorly funded, according to Forbes.com. Officials reportedly claim that the system is “functionally pay-as-you-go.” While this sounds depressing, there is some truth in this, and it is not totally wrong. Municipal and state governments hardly ever go broke and into bankruptcy. They are able to meet the demands each year for their pension systems. A smoothing of financial risk for 15 or 20 years can restore some financial responsibility. With a strong economy, some financial assurance seems to continue with public pension funds. Detroit and several California cities have experienced bankruptcy, but most of the pensions in those cities survive, but at a lower rate. Bankruptcy in the private sector can lead to major layoffs and litigation over the pension funds. The multi-employer pensions in select industries like coal and trucking are seeking federal bailouts. FedEx has just announced closing its pension plan to new hires.

The Press Democrat of Santa Rosa recommends a “fair solution…locking into place benefits already earned while establishing a lower level of benefits going forward. This could be produced through collective bargaining but there’s a big obstacle: the California Rule.” The State Supreme Court earlier this year struck down add-ons to pensions such as Air Time purchases, but did not suggest changing the California Rule. Another appeal in this area will come again to that court in the near future.