Part of the Washington Examiner's weeklong commentary series on labor unions. To see the entire series, click here.
Federal government debt of $18 trillion represents just a fraction of America's total debt. States hold an additional $5 trillion in liability, of which $4.4 trillion represents debt for pensions and other post-employment benefits, according to the fourth annual State Debt Report, published earlier this year by State Budget Solutions.
A true picture of America's fiscal position should also include state liabilities. Just as federal debt represents a future commitment by those who pay federal income taxes, state debt represents a future liability of taxpayers in states with substantial debt.
To cover the total unfunded liabilities of state governments, each person in the United States would have to pay $14,130. At some point, taxes — sales, property, income, or estate — will have to rise to cover this liability.
Unfunded liability differs greatly among the states, correlating closely with unionization requirements. All 10 states in the best financial shape with the exception of two (Wisconsin and Washington) are right-to-work states, where employees do not have to be represented by a union as a condition of their employment.
In contrast, all 10 states in the worst condition, with the exception of Nevada, are forced unionization states where employees cannot opt out of union representation.
The American Federation of State, County, and Municipal Employees frequently uses the power of its campaign contributions to push for higher pensions, which states cannot always afford.
AFSCME was the biggest spender in both the 2010 and 2012 election cycles, with contributions of $88 million and $65 million respectively, according to the Center for Responsive Politics.
AFSCME supports candidates for state office who promise to keep pensions high, and politicians elected through AFSCME’s efforts raise the compensation of public employees — which increases dues that go into AFSCME’s coffers. These dues enable more contributions.
But this cycle is breaking because people are voting with their feet, moving to states with low debt and low taxes. These states will become more attractive over time for individuals and businesses.
States were lulled into complacency because a growing economy propelled increases in stock prices for many years, enhancing the coverage of many pension plans, public and private.
interest rates were higher, too. Prudent planning cannot assume that interest rates will rise to prior levels or that stocks will resume their prior course. States must devise ways to reduce their debt so as not to burden their taxpayers, present and future.
The Pew Center on the States, a nonpartisan research organization based in Washington, estimates that 34 states have funding levels below 80 percent of full coverage. In 2010, Wisconsin was the only state with a fully funded public pension plan.
There is no tidy approach to resolving these problems. The states are essentially autonomous. Congress does not regulate their pension operations.
The Employee Retirement Income Security Act, enacted in 1974, applies only to private sector pensions.
Rather, state and local pension funds operate under guidelines of the Government Accounting Standards Board. It is essentially a federally sponsored, private sector advisory body, without enforcement power.
Underfunded public pension plans are legal obligations of the states, and have to be paid either with taxpayer dollars, or with increased contributions from new state employees, or both. State and local tax rates will have to rise to pay for this.
Some analysts think the problems are so severe that the federal government will end up bailing out states.
About 5 million state and local government workers are not covered by Social Security. Therefore, if their pension plans become insolvent, they would be in dire straits upon retirement.
States could gradually raise the age at which government workers can retire. In some states, employees can quit at 50 and start collecting benefits, at the same time they get another job — and start accruing a second set of pension benefits.
Alternatively, states could allow workers to retire at the same age but postpone the age at which workers begin to collect benefits.Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, directs www.Economics21.org at the Manhattan Institute. Follow her on Twitter here.