NCPA - National Center for Policy Analysis


July 22, 2005

States are facing dire financial consequences as they struggle to meet pension obligations to their public service employees, says BusinessWeek's Nanette Byrnes. Excluding federal workers, some 2,000 states, cities and agencies owe $2.37 trillion to 14 million public servants and 6 million retirees.

While it is known that public sector workers receive generous benefits and job security in lieu of high salaries, many public servants receive better pay than private sector employees. Add to that generous pensions benefits and it's no surprise that states cannot meet their obligations, says Byrnes:

  • According to the U.S. Department of Labor, state and local government managers earned $42.87 an hours last year, compared to $41.52 for comparable private-sector employees.
  • Furthermore, the average public-plan retiree received $16,188 a year in 2003, compared to $7,200 a year for private company counterparts.

Observers cite a number of reasons for the shortfalls -- politicians tend to vote for benefit hikes during good times, leaving them coming up short during bad times. In Colorado, for example, the state pension plan went from being 105 percent funded to just 76 percent during a bear market, forcing officials to withdraw many of its holding from equity markets.

Solutions to the state's budget crunches are not easy, nor popular, says Byrnes:

  • Labor groups prefer raising taxes, an idea that does not resonate with state legislatures; many fear that taxpayers will simply move to another state in better financial shape.
  • An effort in California to shift more investment risk to public workers through the use of 401(k)s stalled in the legislature.
  • State and local governments have resorted to borrowing in the past, issuing more than $30 billion in pension obligation bonds over the past 10 years, but borrowing is risky and will cost future generations.

Source: Nanette Byrnes, "Sink Hole!" BusinessWeek, June 13, 2005.

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