States Want Federal Assistance for Debt-Riddled Public Pension Plans
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Commentary

States Want Federal Assistance for Debt-Riddled Public Pension Plans

Many public pensions systems were facing financial crises before the pandemic and subsequent market crash and a poorly-conceived taxpayer-funded bailout now would not set them on a path to sustainability.

With the coronavirus pandemic, economic downturn and government-imposed economic shutdowns slashing state and local government revenues and reducing pension fund assets, some state officials are calling for federal taxpayer assistance to pay for shortfalls state public employee retirement systems.

Prior to the coronavirus, states across the nation already owed $1.2 trillion in pension debt. The Pension Integrity Project’s initial estimates suggest that these systems could see their unfunded liabilities increase to between $1.5 trillion and $2 trillion—depending on the current fiscal year’s final investment returns. Because many systems were facing pension crises long before the pandemic, a poorly-conceived taxpayer-funded bailout now would not set them on a path to sustainability.

Last week, Illinois State Senate President Don Harmon asked Congress for $42 billion in assistance, including $10 billion for its underfunded state and local pensions. The Chicago Tribune reported that Harmon wrote to Illinois’ members of Congress:

“I realize I’ve asked for a lot, but this is an unprecedented situation, and we face the reality that there likely will be additional, unanticipated costs that could result in future requests for assistance,” Harmon wrote in a Tuesday letter to members of the state’s congressional delegation.

The first-year Senate president noted that last year’s passage of a bipartisan state budget and comprehensive infrastructure package helped the state “turn a corner.”

“This outbreak and its lingering effects threaten the progress Illinois has made,” he wrote.

Then, Harmon’s New Jersey counterpart, State Sen. Steve Sweeney proposed a federal pension lending program. Sweeney’s proposed Pension Infrastructure Finance and Innovation Act (PIFIA) would provide up to $500 billion of federal loans to state and local governments for the purpose of making irrevocable contributions to their pension systems. The loans would carry Treasury interest rates and 20 percent of proceeds would have to be invested in infrastructure projects. Only state and local governments carrying investment-grade ratings would qualify—a limitation that may exclude Illinois if that state continues to be downgraded.

Senate Majority Leader Mitch McConnell positioned himself against state government bailouts by suggesting that Congress instead give states the ability to file Chapter 9 bankruptcy petitions. During a state bankruptcy procedure, it may be possible for governments to reduce their pension liabilities by adjusting or reducing pension benefits. But recent bankruptcy proceedings in Puerto Rico, Detroit, San Bernardino, and Stockton have had relatively little or no impact on existing employee pensions (although retiree health care benefits were severely reduced in Detroit and Stockton).

Given Sen. McConnell’s position, it is hard to see how either the Harmon or Sweeney proposals could become law in their current forms. Though, as Reuters notes, there is already some significant Republican support for bailing out states:

Republican Governor Larry Hogan of Maryland, who chairs the National Governors Association, joined with Vice Chairman Andrew Cuomo, the Democratic governor of New York, in calling for “robust support from the federal government,” in a Tuesday letter to congressional leaders.

Republican Senator Rob Portman of Ohio echoed that call.

Republican Senator Bill Cassidy of Louisiana wants Washington to open a $500 billion stabilization fund for state and local governments.

State Sen. Sweeney’s plan calls for the pension contributions funded by federal loans to be irrevocable, but that is not adequate protection for federal taxpayers. State and local governments could simply reduce or cancel their annual contributions to “recoup” the borrowed funds for other spending priorities and skip making their full actuarially determined contributions. Ironically, New Jersey itself is currently doing a version of this with the New Jersey Lottery, which it transferred to the pension fund as an asset a few years ago, immediately lowering the required annual contributions to the pension system.

The Sweeney and Harmon proposals also fail to initiate any reform whatsoever of the faulty public pension plan designs, benefit adjustment mechanisms, and actuarial assumptions that have driven over a trillion dollars of the current public pension underfunding in the first place.

Additionally, the proposals fail to envision any mechanism to compel repayment of the loan if states fail to make their payments back to the federal government, leaving the door wide open for the loans to easily become bailouts.

With few exceptions, state and local governments across the country have failed to structure and generating funding necessary to keep pension promises they’ve made to government workers. The inability of some governments to fulfill their pension commitments has been laid bare by this economic downturn.

Congress should not saddle future federal taxpayers with more debt. State and local governments seeking funding for unfunded pension systems need to find ways that make them accountable for solving their own pension challenges and minimize the chances that these financial problems reappear in the future.

Marc Joffe is a senior policy analyst at Reason Foundation.