Pension costs rising in local governments

Long Island villages are contending with increasing contributions to the state pension system. They expect to be billed $1.2 billion this fiscal year for school district employees, public workers, police and firefighters. Maryland counties can expect to begin footing part of the pension tab for teachers in a cost-sharing plan put forth by Governor O’Malley. And Rhode Island municipalities are asking the governor for increased state aid to fill their pension shortfalls and budget deficits.

What is worth noting in all of these cases is how this funding crisis highlights both the importance of accurate accounting, and the fiscal relationship between the state and local governments. Where localities participate in the state plan but do no make annual contributions (as in Maryland), there is a tendency for fiscal illusion to take over. The plans seem inexpensive and thus counties may end up expanding other parts of the county budget. Billing local governments for their portion of the pension tab makes for good fiscal discipline and transparency.

In the case of Long Island, the costs are already shared between the state and local governments. Rhode Island municipalities participate in the state run plan and in many cases operate their own local plans. Here the problem is the same as it is across the country – pension promises have been undervalued and thus underfunded. Costs are rising fast. State and local governments are going to be sharing in the growing burden in the form of higher taxes, service cuts and/or increased debt. Pension plans will be reformed and restructured. But the first step must be an accurate accounting as we found in our recent research on New Jersey.

In New Jersey pension costs are shared between the local and state governments. As with all plans the costs are obscured for the purposes of accounting leaving a good portion of the mounting expense off the books. Accounting choices that push costs forward or hide them altogether have turned pension funding into a looming nightmare for city governments, public sector workers and taxpayers across the country.