The End of Public Promises? Governments and the Pension Deficit Disorder [Futurist, The]
By Bencini, Rob | |
Proquest LLC |
Generous public employee retirement benefits and other vestiges of the past are severely straining state and local government budgets. In order to survive, the public sector may have to learn how to operate in an era that doesn't promise eternal growth.
On
These two examples represent the outcome of a variety of economic pressures impacting governments of all sizes in
Pensions, retirement plans, and retiree health care may very well be the straw that breaks the back of state and local governments. Local governments are now required to calculate the future cost of other post-employment benefits (such as life-insurance or health-care premiums and deferred compensation arrangements) that they owe to their retirees and those vested in the retirement system. The figures are staggering; in many cases, the retirement indebtedness is 100% of the annual operating budget-and climbing.
"On average, pensions consume nearly 20 percent of municipal budgets,"
More alarming is the deficiency in funding for state retirement plans. And again, the problem seems so insurmountable that it is being ignored, because addressing it in current budgeting would wreak havoc immediately (as opposed to kicking this giant can down the road).
For years, GM had done three things consistently regarding its pension liability:
1. It kept the pension plan fully funded (even going so far as to tender a monstrous
2. It "won" against unions demanding higher salaries by agreeing to increases for retirement pension and health-care benefits.
3. It did an amazingly poor job of identifying the growing pension-deficit trend before it was too late. Now the same issue is coming to a head in the public sector.
Economic Futures Misjudged
Investment writer
"Without 8% returns, the shortfall for the Texas Employees Retirement System (ERS) could be twice the current projections," Mauldin warned in the
Let's put it very plainly. Most towns, cities, counties, and states in
Those who live in a wonderland of 5% unemployment and 4% annual growth, and are meeting current obligations easily, really can't relate to the angst in most locales over their current and projected fiscal woes. The government entities that have a fighting chance to remain solvent are those that (1) have grown in population by at least 10% over the last 20 years (0.5% per year), (2) have undertaken no major public works projects using debt that is not selfliquidating (pays for itself), and (3) are not responsible for human service or education demands.
Though these benchmarks are somewhat subjective, you get the gist of how towns and cities get into trouble:
* By having no (or very little) growth, which means that the rising costs of operating the city cannot be covered by a naturally growing revenue stream.
* By taking on debt that has to be paid offwith existing revenue.
* By providing services to people, especially those who have greater needs than the revenue they provide.
The places that are failing are mostly counties, small towns, and cities in decline; those dealing with the fallout of some level of human suffering; or those that are only marginally capable of meeting any level of additional educational support.
There are two concepts that originated in the 1930s and have since become permanently embedded in the American DNA: The first is that "Growth is eternal," and the second is that "Growth pays for itself."
Surviving the shared challenges of the Great Depression and
All systems were thus built around the concept that everything -demand and supply-was always going to grow: water, electricity, education, transportation, health care, and retirement benefits. And all these things did grow. U.S. agricultural prowess and manufacturing muscle kept everyone working in a low-cost environment and made the promise of eternal growth self-fulfilling- until it suddenly didn't.
When the eternally expanding economy no longer provided growth in local tax revenues; when the costs of building roads and schools and of providing health care and social services and retirement benefits escalated well beyond the rate of growth of revenues; when the expected investment returns that Americans had been getting since the 1930s actually went negative- then governments couldn't adjust quickly enough.
The public mindset for generations only knew growth, and so governments made long-term commitments in many areas that couldn't be unraveled. Now they are stuck with debt, with life-dependent service provision, with maintenance of overbuilt infrastructure, and with medical and retirement commitments that cannot be abandoned.
Bigger, Better,
Of course, with the onset of the 2007-2008 recession, the economy turned negative, bringing the eternal-growth thinking to a screeching halt.
A corollary to the eternal-growth theory is that growth pays for itself. In America, that concept has generally worked. With the postwar baby boom, neighborhoods sprang up. The costs of building roads and providing water and sewerage (and then schools), were amply met by the taxes on new houses and new shopping centers that were pouring into government coffers.
Incomes also became more stable as workers leftfarms for manufacturing jobs. This, too, provided more income taxes for states to expand their offerings. Sales taxes paid by a more-affluent new middle class provided revenue for these additional services, providing evidence that growth could pay for itself.
That is, again, until it couldn't.
New technology has been another major change driver in the U.S. economy. The heyday of local government revenue was the era of big manufacturing, where property taxes on the big manufacturing equipment helped pay the freight of growth. Steel mills, auto manufacturing, textiles, apparel, fabric and shoe manufacturers, oil, tobacco, furniture, and many more, all with huge physical-plant footprints, provided a nice business tax base for local governments. But today's tools of productivity are different: Laptops and tablets simply do not tax as high as looms, lathes, and presses.
Another part of the problem is from the expense side: Who is responsible for what?
In
Counties, on the other hand, are in the "people" business, providing human services: the health department, social services, mental health services, ambulances, law enforcement, and the county jail. They are responsible for building schools. In "ordinary" good times, full of growth and prospects for more, counties were much like cities. The school was already built; the public buildings were built to serve the people; another ambulance was easily justified.
But when the eternal growth period ended, things changed. Long lines of people in need formed at the human service agencies. Ambulances became the routine doctor visit method of choice. And schools became a social service agency to every human ailment at every level of economic standing.
There are those who rant that "we need to run government like a business," but choosing not to educate a child once a school building is full (for instance) is not an acceptable option in the public sector. Just because you have met the monthly quota of poor people at the social services office doesn't mean you can take the rest of the week off. They keep coming. Getting a credit card number verified before an ambulance is dispatched places that modest revenue above our humanity. Government is different from business for a reason.
The big problem today is that most people don't pay for themselves. It costs more to service the needs for most people than they contribute to the local economy in taxes, usage payment, and fees. Their presence and life situations cost the county more than they bring to the economic table. Failing to recognize this has contributed mightily to the economic plight that counties (and perhaps states and the federal government) are facing today.
An example of how we fail to realize this lesson-and how our public policies contribute to this situation- comes from the realm of economic development. It plays out like this:
It is politically expedient among the elected officials to address the high unemployment rate in their locale by "creating jobs." In most cases, it doesn't matter what the jobs are or what they pay. Success lies in "creating jobs" at any level, and even projects that provide low-wage jobs for low-educated and unskilled workers are declared victories for the community. And because job creation in one place will often attract workers from other places, the community must then commit more services to more people without necessarily resolving the local unemployment problem. In fact, economic development projects like this often leave the jurisdiction much worse off. In addition to any incentive payments, the jurisdiction may have substantial social service and school subsidies to pay that far outweigh the purported tax and job creation benefits.
The dilemma is this: Contending with state, municipal, county, and utility service solvency and fiscal management should mean cutting services and benefits, but governments have made promises that have legal standing. Bonds and other debt agreements, commitments for retiree health care and pension payments, contractual agreements for privatized service, and other commitments can't just be dismissed.
Searching for Responsible Options
Public-private partnerships (such as in the production and conservation of energy) are a relatively easy approach but not as aggressively pursued as they might be. Shareduse parks and recreation management is another example of partnerships that can help jurisdictions save on operating expenses. This is just a starter set of possibilities. Futurists with governmental backgrounds can offer more.
A daunting challenge is that public officeholders tend not to be very receptive to futurist thinking or to change in general. Government is just simply slow to move on new initiatives, preferring to maintain the present course because of the possibility of unpredictability with change.
What these change-resistant leaders don't realize is that the current course-business as usual-actually poses the greater risk. Once these issues come to a head and the realization sets in of what has happened, they may impulsively make massive budget, personnel, and service cuts, or impose huge tax increases, or declare bankruptcy, or all of the above.
Our challenge as futurists is to successfully gain entry into the halls of the decision makers, explain the trends, and help them figure out their best method of handling their unique situations.
The transition to new ways of doing things-public-private partnerships, shared community resources, crowdsourced input, more self-reliance- will not be painless. We are seeing it play out all over America. But bankruptcy and defaults are also painful and will be shared beyond bondholders and affected retirees. Virtually every retirement plan, bond fund, and money market fund contains debt paper from governments feeling these stresses.
We tend to lose track of the importance of the public services we count on every day, but we ignore them at our peril. The impacts of those public promises that can no longer be kept have been unfolding for years and are finally reaching a tipping point.
Just being aware of these trends before they reach maximum impact gives us the opportunity to prepare for the potential consequences. If aware and receptive, local governments can commit to acting with foresight to mitigate these issues. But time is running short.
Lawyer
Crowd gathers in
"America is in a fix of retirement-benefit overreach, state and local bond indebtedness, social program funding insufficiency, educational funding shortfalls, and general budgetary pressure."
"Most people don't pay for themselves. It costs more to service the needs for most people than they contribute to the local economy in taxes, usage payment, and fees."
About the Author
Copyright: | (c) 2013 World Future Society |
Wordcount: | 2750 |
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