State Governments Must Address Pension Reform

NCPA August 23, 2013

State governments face many obvious problems, including stagnant school performance, soaring Medicaid budgets and gridlock on urban roads. Their ability to fund improvements to services is challenged by a topic that seldom sees the light of day: Pensions for state and local government employees, says Utah State Senator Dan Liljenquist.

In most situations, retired public sector employees have a legal right to their pension checks. Ironically, they have no guarantee during their working years that legislators will put away enough money to pay for those checks. The sad fact is that political calculations give legislators strong incentives to promise generous benefits and few, if any, incentives to make good on those promises.

• "Unfunded liabilities" is the term used to describe these promises that lawmakers have made but cannot keep.
• Estimating the size of those liabilities is a difficult task, but they range anywhere from $750 billion to more than $4 trillion, enough to cover a $60,000 salary and benefits package for 625,000 to 1.2 million new elementary school teachers for 20 years.

In the most extreme cases of fiscal distress induced by poorly managed pensions, some cities have had to go to court to seek bankruptcy protection and restructuring. States do not have that option. Even so, unfunded pension liabilities can get so out of hand that legislators lose much of their discretionary authority.

• As overseers of the public treasury and the public workforce, legislators, regardless of ideology or policy goals, need to review the health of government pensions in their states.
• In many cases, they will need to look for both short-term patches and long-term cures. Before looking in the toolbox, though, they should establish some principles for reform.
• These should include eliminating the possibility that the state will go functionally bankrupt from pension-related costs, meeting the obligations that the state has incurred in the past, and making future obligations predictable and sustainable.
• Other principles include ensuring that the public does not bear all the risk of retirement systems and shielding employees from unsystematic risk (risk inherent in individual decisions, such as making a big bet on one stock) rather than risk inherent to investing, such as a decline in the overall stock or bond market.

Once they establish principles for reform, legislators can choose from a menu of options. Tinkering with existing plans is the most obvious, and sometimes the easiest.

Source: Senator Dan Liljenquist, "Keeping the Promise: State Solutions for Government Pension Reform," American Legislative Exchange Council, August 2013.