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Kick the Can

Tom Sedoric

MANY EYEBROWS WERE raised during a recent city budget meeting in Portsmouth, New Hampshire. According to the Portsmouth Herald, the city manager told city councilors that Portsmouth’s mandated contribution to the state retirement system would balloon from $290,000 to a whopping $1.9 million per year. Councilors called the development, which would cause a sizable increase in the city’s 2022 budget, “ugly” and “a kick in the shins.” Had anyone been paying attention, this would not have come as a surprise.

The councilors in Portsmouth aren’t alone. The shock waves are shared by towns, cities, counties and states countrywide as they come to terms with the true depth of the pension crisis. In its 2020 report, the pension reform organization Equable noted, “While a few statewide pension plans recovered from the Great Recession, the majority of retirement systems have entered this next recession in a weaker position than they were going into the last recession.” Further, only five states—Idaho, South Dakota, Tennessee, Washington and Wisconsin—had funded at least 90% of their pension plans.

There’s a number of reasons we face this crisis. During flush economic times, when we enjoyed annual double-digit stock market returns and moderate inflation, it was easy for officials at all levels of government to be generous with increased benefits for police officers, firefighters, teachers and public workers. It was also easy for the public not to take notice as we kicked the proverbial can down the road.

A mid-2020 report by Pew Charitable Trust revealed that the 50-state $1.24 trillion pension funding shortfall between assets and future liabilities had improved slightly through 2018 after a decade of slow recovery from the 2008-09 economic crisis. As the pandemic took hold of our health systems and the economy, the report warned the gap would increase dramatically—by more than $500 billion.

The pension crisis is apolitical, impacting blue and red states with equal fiscal ferocity—and it isn’t going away. “We have a demographic crisis and that’s showing up in the nation’s retirement systems,” said William Glasgall, a senior vice president at The Volcker Alliance, an organization dedicated to good governance at all levels. “They neglected to fund them properly.”

It’s easy to blame local and state officials, along with public pension fund managers, for bad deals and risky investments. Yet when faced with a fiscal crisis, we as individual citizens and taxpayers need to look in the mirror and ask what we could have done to mitigate the crisis.

True, we can’t rewrite the past, but we can ask hard questions and do much better as citizens going forward. We can expand our civic duty and hold local officials accountable and question their due diligence when taxing and spending decisions are made. No one begrudges pensions for our public servants, but no one is well served by ignoring the potential fiscal blowback of ever-escalating liabilities.

The pension crisis is but one debt obligation being kicked down the road that will have an enormous impact on the future of our children and grandchildren. Other cans being kicked down the road are Social Security, Medicare, other entitlements and the overall federal deficit.

Many public workers have a pension, a union and a contract. But who represents the other taxpayers in this formula? I predict a swiftly rising tide of taxes and suggest you plan accordingly.

Tom Sedoric is executive managing director of the Sedoric Group, a financial advisory firm in Portsmouth, New Hampshire. A Wisconsin native, he loves being on the water, knows some amazing card tricks and can fix just about anything. Tom’s previous article was A Combustible Mix.

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