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Unfunded Liabilities Loom Just Down The Road

By DAVID M. WALKER

July 20, 2012

In just the past month, three California municipalities — Stockton, Mammoth Lakes and San Bernardino — have filed for Chapter 9 bankruptcy. Consider this a warning shot for state and local governments across the country, especially in Connecticut.

The Institute for Truth in Accounting, for which I am an adviser, just released its annual financial rankings for the 50 states, and it's bad news for the vast majority. When you consider current liabilities, underfunded pension and unfunded retiree health obligations, a mere six states have sufficient assets to cover their liabilities and obligations per taxpayer. That leaves 44 states with more liabilities and obligations than assets per taxpayer, with Connecticut at the very bottom. (The ranking of all states is at http://keepingamericagreat.org/new-2010-state-of-the-states-report/.)

Those numbers are bad in many cases as well for Connecticut's cities and towns. For example, the total liabilities and unfunded promises per taxpayer in Bridgeport were about three times as high as Stockton as of June 30, 2010. Although Stockton's financial problems are more immediate, Bridgeport's overall financial condition is worse.

A major cause of these disturbing numbers is the amount of unfunded pension and retiree health care obligations that state or local governments have amassed. These burdens were a key factor behind the recent gubernatorial recall election in Wisconsin and those California bankruptcy filings. They're taking Connecticut toward a fiscal crisis, too.

Time is against us. Demographic trends — and basic math — mean that the finances of Connecticut, Bridgeport, and most states and localities will continue to deteriorate, absent meaningful structural reforms. Their financial situation will be further complicated when the Government Accounting Standards Board's recently issued pension accounting standards are implemented.

More damaging will be the effect when the federal government finally restructures its finances. Among other things, the federal government will need to significantly reduce its spending, including support to state and local governments. In 2011, Connecticut received almost 40 percent of its revenue from the federal government. The restructuring "bad news" will flow downhill and add to the fiscal challenges of states and localities.

Governors, mayors and other government officials, along with legislatures, need to recognize reality and put their financial houses in order. A critical step will be restructuring pension and retiree health care obligations. In doing so, elected officials must recognize that fairness is a two-way street. Government employees should receive compensation and related benefits that are reasonable compared with those offered by major private employers. Fairness to taxpayers, however, requires that these plans be affordable and sustainable over time.

These determinations must be made by comparing the public and private sector plans (e.g., participation requirements, benefit levels and formulas, employee contributions, retirement ages, indexing provisions).

At a minimum, the following reforms need to be considered:

•Pension and retiree health care plans for new government workers should be competitive with current plans of major private employers. This will result in revising the type of plans and limiting their promises.

•Plans for current workers should be revised to eliminate abuses and better control costs. For example, overtime, vacation and sick pay should not be included in calculating pension payments. In addition, individuals should not draw a government pension when they are working for that entity as an employee or a contractor.

•Pension payments for current employees should not be reduced, but they should be capped. Annual pension indexing should be limited so that retirees cannot make more than a stated percentage of the pay of a current employee in an equivalent position. This percentage should vary based on the retiree's years of service.

•Individuals who are eligible for employer related health coverage should not be eligible for government funded retiree health care benefits. Those retirees who are receiving such benefits should stop getting them upon becoming eligible for Medicare. In addition, eligibility standards for retiree health care should be tightened.

Government officials and legislatures should reform public employee retirement plans to get the power of compounding working for them rather than against them. Although Connecticut made retiree health care reforms within the past year, they were far short of what is needed.

Government workers deserve competitive plans; however, it's neither reasonable nor equitable to expect taxpayers to pay significantly higher taxes in the future to fund retirement benefits that are much more generous — for jobs that are much more secure — than they will ever have.

The time for truth, transparency, taxpayer activism and action by responsible public officials is now. Connecticut and Bridgeport can either lead the way to a brighter future or face their own day of reckoning.

David M. Walker is former U.S. comptroller general and CEO of the Comeback America Initiative based in Bridgeport.