New Evidence on Public Pensions and States’ Budgets

by Jack Rasmus

Jack Rasmus

A new study released May 18 by a pro-business source, Meredith Whitney Advisory Group LLC, confirms what this writer and others have been pointing out about current State budget crises: namely, state employees’ pensions and retirement health benefits are not the cause of States’ current budget deficits. Moreover, the underfunding gap in state employee pensions that does exist has been due primarily to state politicians and pension fund managers having failed to make necessary contributions to state pension funds for more than a decade.

The Whitney report estimates “that about $1,000 billion of (states’) spending over the past decade came from not adequately funding pensions”, according to the business newspaper, The Financial Times. The Times further notes that “the research concludes that state debt has surged over the past decade as states have subsidized budgets by not adequately funding retirement pledges”.

In other words, the states diverted contributions to pension funds on a massive scale—$1 trillion—creating the current pension funding gap and then used the money to finance spending excesses elsewhere. They also used the diverted funds to offset billions in revenue loss due to widespread reduction in business taxes, in an escalating ‘state vs. state’ race to the bottom aimed at competitively lowering business taxes in order to lure companies to their own state. The ‘race to the bottom’ in state corporate taxes continues to this day, and is in fact accelerating

So public workers have been, in effect, subsidizing State budgets for years, not draining them. And not only have they been subsidizing state budgets, but the diversion of contributions to their pensions has enabled states to cut business taxes as well.

Whitney summed up her report in a guest editorial piece in the Wall St. Journal on Wednesday, May 18. In the article she points out “The States have racked up over $1.8 trillion in taxpayer supported obligations in large part by underfunding their pension and other post employment benefits”. She added that the off-balance sheet portion of that $1.8 trillion—i.e. the pension and retiree health benefit share of the total obligations—constitutes $1.3 trillion of the total. In other words, $1 trillion and another $300 billion represents the contributions that should have been paid, respectively, into state employee pensions and health benefit funds but weren’t; funds that, if they had been paid, would have otherwise prevented the current $ 1 trillion public pension funding gap.

Politicians were able to get away with this scam so long as the economy was growing up to 2007 and other sources of tax revenues were maintained. But the recession blew a hole in the game by reducing all forms of revenues. The Obama administration plugged the hole temporarily with $260 billion in subsidies to the states in 2009-2010. Then the Obama subsidies disappeared and the hole reappeared by the end of 2010.

In anticipation of loss of funding from the federal government, the issue of underfunded pensions quickly came to the fore late last year. The crescendo of blame focusing on public workers pensions began escalating, led by the business press, Republican governors, and Teaparty politicians. Underfunded pensions obligations were targeted as the prime cause of States’ deficit problems—i.e. underfunded pensions that State politicians over the past decade themselves created by refusing to make contributions to their pension and retiree health benefit plans.

It is truly ironic that the diversion of $1 trillion in public workers’ pensions actually filled the states’ deficit hole for more than a decade, but public pensions are now being blamed for the budget deficits going forward.

Instead of addressing the real causes of states’ budget deficits, the politicians’ focus is on cutting public workers’ pensions and health benefits. It is a classic case of blaming the victim (i.e. public workers) for a crisis politicians created by diverting pension fund contributions to cover business tax cuts and other expenditures.

As an alternative solution, why not have the Federal Reserve Bank provide underfunded pensions a temporary $1 trillion bridge loan to cover the gap? After all, the Fed gave $9 trillion in similar loans, at an interest cost of 0.25%, to banks during the recent financial collapse–$1 trillion of which went to foreign banks. Pension funds are financial institutions. So why shouldn’t they be given similar bridge loans? That is, roughly the same amount that was given by the Federal Reserve to foreign banks? Public workers, who didn’t cause the crisis nor caused the underfunding gap, shouldn’t have to pay for a problem they didn’t cause. They’ve already given up $1 trillion in diverted pension and another $300 billion in retiree health care funds. Cutting their pension and health benefits would be requiring them in effect to pay twice for something they didn’t cause in the first place

Jack Rasmus is the author of the book,Epic Recession: Preludge To Global Depression, Pluto Press and Palgrave, May 2010; and the forthcoming,Obama’s Economy: Recovery For The Few, Pluto Press, 2011. His blog is jackrasmus.com and website: www.kyklosproductions.com.

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