NCPA - National Center for Policy Analysis

How Retirement Benefits May Sink the States

May 2, 2012

State and local governments across the country have accumulated several trillion dollars in unfunded retirement promises to public sector workers, the costs of which will increasingly force higher taxes and crowd out other spending.  Already businesses and residents are slowly starting to sit up and notice.  Illinois is an object lesson in why firms are starting to pay more attention to the long-term fiscal prospects of communities, says Steven Malanga, a senior fellow at the Manhattan Institute.

  • Early last year, the state imposed $7 billion in new taxes on residents and business, pledging to use the money to eliminate its deficit and pay down a backlog of unpaid bills.
  • But more than a year later, the state is in worse fiscal shape, with its total deficit expected to increase to $5 billion from $4.6 billion, according to an estimate by the Civic Federation of Chicago.

Rising pension costs will eat up much of the tax increase.

  • Illinois borrowed money in the last two years to make contributions to its public pension funds.
  • This year, under pressure to stop adding to its debt, the legislature must make its pension contributions out of tax money.
  • That will cost $4.1 billion plus an additional $1.6 billion in interest payments on previous pension borrowings.

Business leaders are now speaking openly about Illinois' fiscal failures.  For example, Caterpillar, the giant Peoria, Ill.-based maker of heavy construction machinery, made the same point more vividly when it declined in February to locate a new factory in Illinois, specifically citing concern about the state's "business climate and overall fiscal health."

Bigger bills will fall due elsewhere.

  • For example, earlier this year, the Massachusetts Taxpayers Foundation examined unfunded retiree health care liabilities in 10 midsize municipalities, including Worcester and Springfield, and found the debt averaged $13,685 per household.
  • To pay those commitments over 30 years would require adding $565 a year to property tax bills on average, the group estimated.
  • In one community, Lawrence, the tab was $1,209 annually, a 50 percent increase over current taxes.

Source: Steven Malanga, "How Retirement Benefits May Sink the States," Wall Street Journal, April 27, 2012.

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