Currently the state and local governments have promised to pay current employees and retirees about $403 billion over the next 30 years. But they have only set aside $240 billion, by Nation’s calculations. The difference between the two -- $163 billion – is known as the “unfunded liability.”
A few years ago that number was estimated at $0. So how did we get into this mess? That depends on your perspective.
According to Nation, the problem dates back to 1999. In that year, the Legislature passed a law allowing state and local governments to make more generous deals with employees. The employees could contribute less to their retirement programs, and yet would get more generous pensions.
The generous pensions looked possible at the time because the government’s retirement fund investments were doing very well. Now investments are doing much worse, and the recession has taken a bite out of tax revenues.
Public employee unions take exception to the idea that they got too much. Dave Low, executive director of the California School Employees Association argues that the state of California can afford the payments it currently owes.
He acknowledges that cities, schools and counties are in bigger trouble. Some have already declared bankruptcy. “The biggest problem in these local jurisdictions is that they poorly managed their money,” he says.
Some of them stopped paying into their pension funds and instead spent the money on new projects like parking lots or ball parks.
Now employees are going to have to pay for those mistakes to the tune of $60 billion. That’s the maximum the new legislation is expected to cost them, in a variety of ways, most of which apply to future, rather than current employees or retirees. Here are some of the most important:
• It limits how much of a worker’s salary can be used to calculated a pension – to about $130,000 for public safety workers and $110,000 for everyone else.
• It forces workers to pay half the costs of their pensions.
• And it raises the age at which workers can retire with full benefits, up to 57 years of age from 50 for public safety workers and to 67 up from 55 for others.
Problem solved?
Here’s where Nation and Low disagree the most. Nation says the amount governments will owe for pensions is going to keep increasing because of higher costs and because the money will have to come out of other projects that could have provided value.
Calculated this way, he thinks the unfunded liability could reach about $600 billion. The $60 billion in savings will take care of only about 10% of that, and governments will have to keep slashing services until the public employees give up more, he predicts.
Low disagrees. Since state workers are paying more for their pensions -- not tax payers -- this is not money that the state would have had for other projects.
He thinks the $60 billion should just about cover the pension problem. Rather than credit card debt, he compares the unfunded liability to the mortgage on a home. Sure you owe more now than you have in the bank, but what’s important is that you can continue meeting your payments. The state can do that, he says.
Let’s hope the Legislature figures out who is right.
Think of it this way: Your friend Cal has run up a really huge credit card debt. Every month, Cal only pays a sliver of what he owes, so the debt just keeps getting bigger. To afford his minimum payments, he has moved into a smaller apartment, sold his car and stopped taking his prescription medicine. But still the debt keeps growing.