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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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Public employee unions may be part of the problem, but they are not the whole problem. Full disclosure: I am a state employee, and one day, if I am so lucky as to live long enough, I will receive a generous and guaranteed pension from my state (not New Hampshire, by the way). I also am an economist who understands the nature of risk and the time value of money.
Public employee unions work to get the best deal for their members. Of course they do, just like everyone else does. Why don’t public employee unions demand higher salaries? Heck, I could make more as an employee of an investor-owned firm. Why, instead do public employees (through the unions that represent them) they settle for lower salaries accompanied by more generous pensions?
Salaries immediate; they are visible. Higher salaries cost real money right now, money that would appear in this year’s budget and would have to be raised now, either from taxes from deficit finance, or, even worse, from cutting some other expenditure. None of these options is very palatable to the representatives of the treasury.
The other alternative is to skip high current salaries and provide something that does not need to be financed now, like maybe the promise of a more generous pension. Its cost will accrue now, but will be financed and paid later. Of course, the cost is still there, but the state can provide more benefits now by postponing some of today’s costs to be collected later.
Why, why, you ask, does the state not provide an accrual budget, one that recognizes the costs of those promises now? Why did the City Manager of Portsmouth New Hampshire not provide information to the City Councilors back when we was signing those contracts? Most likely he did — if they asked for it.
Don’t blame the union, blame the people you elected, the ones pretending to be shocked, shocked!, at the ballooning pension requirements. They voted to approve the contracts. In this case it is the Portsmouth NH City Council. But it could be any local or state board. They agreed to the terms. Did they not understand them? Did they not ask questions?
Better yet, who voted for these people anyway? Did they ask questions? Did they demand to know whether employee costs in the budget represent the full present and future costs? Maybe the blame should be shared by the people who elected the representatives, yes, the voters, who want services now but would object if the costs were paid now.
Public employee unions are the problem. Even FDR opposed their formation. Part of the COVID bill provides for relief for the underfunded pension funds in irresponsible states that chose not to properly fund the pensions of their public employees, hoping the Feds would bail them out. It is a real kick in the pants to the responsible states that planned for this.
These public servants are more like the ruling class, enjoying higher pay and better benefits than their private sector benefactors. This cannot continue.
HannahKatz –
Please see this link below from Society of Human Resource Management:
https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/stimulus-legislation-provides-pension-funding-relief.aspx
From the SHRM article: The ARPA includes an expanded version of the Butch Lewis Emergency Pension Plan Relief Act, with eased funding rules for single-employer defined benefit pension plans and a massive infusion of federal funds for troubled union-managed multiemployer pension plans, with no repayment obligations.
See also this link to the Pension Benefit Guarantee Corporation:
https://www.pbgc.gov/american-rescue-plan-act-of-2021
From the PBGC article:
The American Rescue Plan Act of 2021 (ARPA), enacted on March 11, 2021, allows certain financially troubled multiemployer plans to apply for “Special Financial Assistance.” Upon approval of an application, the Pension Benefit Guaranty Corporation (PBGC) will make a single, lump-sum payment to eligible multiemployer plans to enable them to pay benefits at plan levels.
Plans are not required to repay Special Financial Assistance, which is funded by general revenues from the U.S. Treasury.
I agree that underfunded public employee unions are a problem (although I don’t think retired second grade teachers consider themselves to be “part of the ruling class”).
Please cite references that money from the American Rescue Plan went toward underfunded public employee union pension plans in irresponsible states. Thank you.
The situation is definitely NOT apolitical. Public service unions should not be providing campaign contributions to those (democrats) that decide their pay. It’s corrupt.
Always good advice to plan for possible tax rate changes.
Income tax has been on a downward trend for decades (people always seem surprised by this), but that seems unlikely to continue.
Great article. I’m concerned about the long term viability of pensions, too.
Question: is there a way to delete our own comments with the new comment system?
I’m very disappointed that towns/cities and states haven’t transitioned all their employees to having only 403(b) type plans. Transfer the PV of each employee’s current pension and enroll all new employees in a 403(b) type plan. No more pensions. If a municipal employee wants to convert their retirement plan to an annuity at retirement, they can do so. This kicking the can garbage is so very frustrating. Oh and future return expectations in these plans should come down (if they haven’t already) so that means more taxpayer dollars funding the plans instead of investment returns doing the hard work. If I’m missing something, please enlighten me. Please
I think you would be hard-pressed to find a public employee union contract that allowed conversion to a defined contribution plan without the union’s consent.
You nailed this one. I served on several task forces for three different governors evaluating pensions and benefits for state workers. The basic problem is the alliance between politicians and public unions. One demands more and the other gives it, but with no money to fund the promises.
Even today if you look at BLS data you will see the benefits and total compensation of government workers significantly above the private sector.
It gets worse. Should anyone attempt to raise taxes or adjust future benefits they are vilified. This is especially true for teachers. Citizens make no connection between the benefits they may have (or not) and the taxes they pay to support overly generous programs for state workers.
In NJ the state lottery was supposed to provide benefits for education programs and services. Recently, that was distorted and the lottery was made an asset of the pension fund.