Tag Archives: Mary Williams Walsh

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.'”

Pass the Debt

Last month Harrisburg, Pennsylvania failed to pay its bondholders. The municipality asked and received help from the state’s “Distressed Cities” program. It worked so well the first time, this month Harrisburg officials have asked the state to cover their bond payments again.

If it sounds familiar, it is. The same moral hazard problems that the stimulus introduced to the states, exist when the state bails out its municipalities. In essence, a bailout weakens the incentive to deal with the underlying problem. Mary Williams Walsh writing at the The New York Times reports that the growing resort of local governments to the state’s coffers is coming at time when states are facing their own fiscal problems, putting further strain on state finances.

Is going to bankruptcy court a better plan for distressed municipalities? Consider what happens when many municipalities enter into a no-man’s-land: unable or unwilling to fix their finances and kept alive with state infusions. A state bailout of municipalities can morph into a federal bailout of states – again.

To Lessen Pension Troubles Maine Looks to Social Security

In addition to collecting a pension, most public employees also participate in Social Security. A few states, such as Maine, never integrated with the program, which means their public sector workers don’t collect Social Security, nor are they subject to the 6.2% payroll tax.

Mary Williams Walsh reports that in an effort to solve their pension underfunding Maine is considering changing its Social Security holdout status. Maine’s state employees would begin paying into and collecting Social Security without having contributed to the system over their working lives. While reducing Maine’s risk of paying for large losses, the move doesn’t address the $4.1 billion hole in Maine’s pension plan (a hole already underestimated since assumes a 7.75% return on assets). And there is the instability of the Social Security program which is projected to begin running a deficit in 2017.

However, integrating with Social Security could be part of a transition to an improved state retirement system. Joshua Rauh explains at the New York Times‘ Room for Debate how the federal government might step in to head off the state pension crisis.