Why the State and Local Pension Problem Will Get Worse
Steven Malanga writes in the City Journal that the way Detroit’s underfunded pension system is being reorganized “isn’t possible elsewhere.” Regardless of how it’s to be done, a day of reckoning will arrive for all the state and local governments that made impossible-to-fund promises to government employees.
Note the words “impossible to fund.” In some places the “underfunding” might not be terrible, but in most places what has been created are unsustainable and un-fundable pension and benefit plans. My favorite state government pension expert likes to say that if something is impossible, it won’t happen.
Yet the think tanks and the media write endlessly about “solving” this underfunding problem. This could be due to the fact that too few people are good at math, or it could be that they think the minority (government employees) have the right to as much money from the majority (born and unborn taxpayers) as they wish.
In many states, by contrast, local laws and state court rulings have made it virtually impossible to cut back retirement benefits for current government employees, even for work that they have yet to perform. These state protections, which go far beyond any safeguards that federal law provides to private-sector workers, are one reason why so many states and localities are struggling to dig themselves out of pension-system debt, amid sharp increases in costs. It will take significant reforms to state laws—or bigger and more painful bankruptcy cases—to make a real dent in the pension crisis.
The courts do not have the power to tax, and when fiscally impossible contracts are signed for thirty or more years, no judge anywhere has the power to print the amount of money needed to honor them. Malanga is not wrong in his analysis. He just leaves out something called economic reality.
The article also touches on my home state’s pension problem:
Legislators in Illinois have taken a different approach. Their state constitution bans changes to pensions, and costs have soared for both the state and its municipalities. Last year, legislators passed changes in defiance of constitutional protections, arguing in court that the state faces a “severe financial crisis” that makes reform “a valid exercise of the state’s reserved sovereign powers.” Unions are now challenging the reform law, and if they succeed, Illinois faces a $187 billion pension tab—equal to more than four times its revenues—with no plan to reduce the debt.
Illinois has lots of company. Without some way to amend the terms of retirement plans, states and municipalities groaning under the so-called California Rule face years of increasing costs and pressure on budgets that inevitably mean higher taxes and fewer services—in other words, the worst of both worlds.
Malanga’s piece evidently went to print before the Illinois supreme court decided that the pension reform legislation — passed by a very liberal General Assembly and signed by a very liberal governor — is not permissible. Here’s the thing: I know of no existing structure for those seven justices to implement a tax increase, order it collected, and distribute the money to places, for example, like the judges’ pension fund. So, guys, good luck with that.
At the end of the day it doesn’t matter what the courts rule. They can issue judgments as often as they want but they won’t be able to find the dollars to pay for what amounts to legalized theft.
Oh, and by the way, Illinois’ constitution also has a clause protecting our God-given right of religious liberty — yet now Illinois has legalized “gay (fake) marriage,” violating the religious liberty of millions. So our liberal state government can ignore religious liberty and even nullify the U.S. Constitution’s First Amendment, but evidently pensions for state employees, well, those are sacrosanct.
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