Hoping it will Go Away? Employee Benefits Breaking Budgets

During their first gubernatorial debate, Maryland Governor Martin O’Malley and former government Robert Ehrlich didn’t tackle the question of Maryland’s $33 billion pension and health benefits shortfall. As The Washington Post reports, it is a sum equivalent to the state’s entire budget. In fact, the tab is much higher when applying the risk-free discount rate.

Regardless of what discount rate is employed, states will have to contribute much more to their pension systems. The Center for Retirement Research at Boston College projects scenarios for several states. They find California, Illinois, and New Jersey will have to increase contributions to 8 percent of their current budgets (when using an 8 percent discount rate) and to 12.5 percent (when using a 5 percent discount rate). On average, states contributed about 3.8 percent of their budgets to their pension systems in 2008.

This represents a significant shift in spending priorities for many states.

Local governments are sure to be under even greater fiscal strain. At The New York Times, Mary Williams Walsh reports that taken together the cities, counties, and authorities of New York have promised more than $200 billion in health benefits. And they have set almost nothing aside.

A new report from The Empire Center for New York State Policy notes that while the state doesn’t have to come up with sum immediately budgetary reality will become increasingly painful for New Yorkers.

So far attempts to rein in costs by billing retirees for part of their premiums have met with lawsuits. And governments are only recently coming to terms with the size of these promises. Calculating the cost of Other Post- Employment Benefits (OPEB) is a new requirement for governments. As the NYT reports Schenectady, “found the cost too overwhelming to calculate, warning that it ‘will be astronomical, with the potential of bankrupting municipalities.'”