The fight between fiscal conservatives and public employee unions in Wisconsin, New Jersey, Ohio, and elsewhere has again thrust the issue of government employee compensation into the limelight. Perhaps the most contentious debate centers around public pensions, as growing unfunded pension obligations are placing increased strain on already stressed state budgets.
Depending on the source and the discount rate used to determine future obligations, state pension systems across the U.S. face between $1 trillion and several trillions of dollars in unfunded pension liabilities (see, for example, these estimates: $1 trillion, $2 trillion, $3.5 trillion, $3.2 trillion to $5.2 trillion). For California alone, several academic studies have estimated the state’s unfunded pension liabilities in the neighborhood of $400 billion to $500 billion (see here, here, and here). That’s roughly $36,000 for every household in the state. And that does not even include another $50 billion-plus for retiree medical care.
Unfortunately, the nature of defined-benefit pension systems renders the actual value of these obligations little more than educated guesswork since such systems rely on a number of actuarial assumptions, such as how much the pension fund’s investments will earn on average each year, what average salary increases and inflation will be, when employees will retire and how long they will live, what portion of retirements will be subject to disability pensions, etc. These assumptions must be projected out decades into the future. If you think meteorologists are bad at predicting the weather next week, just try asking an economist or an actuary what economic conditions will be 20 years from now.
In an attempt to shed a little more light on the health of state pension systems, U.S. Rep. Devin Nunes (R-CA) has introduced the Public Employee Pension Transparency Act, H.R. 567 [also sponsored in the Senate by Sen. Richard Burr (R-NC) as S. 347]. The bill would attempt to increase transparency by establishing reporting requirements for state and local pension systems. In addition to existing pension system calculations, pension systems would be required to calculate liabilities based on uniform guidelines, including more conservative—and realistic—discount rates. The information would be reported to the Secretary of the Treasury and posted on the Internet for the public to see. Pension systems that fail to abide by the reporting requirements would lose their federal tax-exempt bonding authority. In addition, the legislation would specifically prohibit any bailouts of state or local pension obligations by the federal government or the Federal Reserve.
The prohibition on the federal government bailing out states for their pension liabilities is crucial, as such bailouts would not only be unconstitutional, but would set a terrible precedent that would open the flood gates for unlimited bailouts. This would not only be extremely costly, but would remove any remaining incentive for, or semblance of, fiscal responsibility on the part of the states.
The prohibition on the Federal Reserve essentially bailing out the states in a similar fashion is likewise critical, since the Fed might otherwise bestow such a power on itself as it continues to embark upon creative and extraconstitutional activities that are destined to further erode the value of the dollar and spawn significant inflation.
While the efforts to increase the transparency of state pension systems and their unfunded liabilities is certainly to be commended, the requirements to report on the compensation of current and former state employees to the federal government might violate the Tenth Amendment. The interstate commerce justification for the legislation, for example, seems rather weak. Just because the Interstate Commerce Clause has repeatedly been misinterpreted to grant the federal government authority that it should not have does not justify another such abuse. Individual states should be responsible for improving the transparency of their pension systems and unfunded liabilities, if necessary.
Nunes recognizes this as well, however, and though he favors more significant reforms to public pension systems, such as a switch from defined-benefit systems to the 401(k)-style defined-contribution plans common in the private sector, he describes himself as a “states’ rights guy” and acknowledges that it is not the federal government’s role to enforce such changes upon state and local governments. The fact that state pension systems and bonds do receive certain federal tax benefits makes it a more curious issue, however. While it would be nice if there were no federal strings attached to state and local government actions, the federal tax-exempt bonding authority afforded to state and local governments is a significant benefit, and a strong case could be made that the federal government has an interest in seeing that it is not abused through overly optimistic assumptions that understate actual obligations.
Given the magnitude of the public pension problem nationwide, the mere facts that public pensions are finally getting such attention, and that reform attempts are being made at all levels of government, are encouraging. While real, structural changes must be made at the state and local level—and the problems will not be solved until governments own up to their pension obligations and switch to defined-benefit systems with government employee pay and benefits set similar to those received in the private sector—the prohibition against federal bailouts, which would only invite even more fiscally irresponsible behavior, and efforts to increase public pension transparency are definitely a step in the right direction.
Adam Summers is a policy analyst at Reason Foundation.