By Malia Hill
Call it a partial win. For those of us who have been warning for years that public employee pensions were going to become an unsustainable drag on state finances, the Detroit bankruptcy is having some bittersweet repercussions. When being right carries such severe fiscal consequences, there’s no joy in saying “I told you so.” There is, however, some optimism to be found in the fact that this may have been the catalyst we need to get the media and politicians to finally start taking notice of the depth of the problem.
A recent article from CNBC, entitled “Pandemic of pension woes is plaguing the nation” raises the question that every state legislature and municipality should be asking: Detroit may be the first large city to go bankrupt, but who is next?
Our experience in Hawaii illustrates the difficulty of digging yourself out of the pension hole–not only would reform pit politicians against powerful and influential unions (a place no Hawaii politician wants to be), but it also involves a choice between austerity/budget cuts and/or raising taxes. It’s an unattractive package to take to voters, which may be why so many choose to just kick the problem down the line. And then there’s the fact that there’s no easy fix:
“Moving pension plans is like steering a blimp: You turn the wheel and you go 6 miles before it starts to turn,” said John Tuohy, Arlington County, Va., deputy treasurer, who chairs the pension committee of the Government Finance Officers Association. “In the political process, that kind of patience is very difficult.”
Many state and local governments have set aside enough money to comfortably make good on promised retirement benefits. Seventeen states have funded more than 80 percent of their projected pension liability, a level that’s generally seen as financially sound. Most of the rest have been scrambling to make up investment losses inflicted by the 2008 market collapse and the shortfalls in sales, property and incomes taxes produced by the Great Recession.
The CNBC article even calls out Hawaii specifically as one of the states headed toward disaster:
But even as the economy and housing markets have recovered, most states are still falling behind in closing their pension funding gaps. In the last year, 34 states have seen their pension funds stretched further as they’ve failed to make the full contributions needed to meet the projected cost of retirement promises.
Much like a family that fails to save regularly to build a retirement nest egg, shortchanging those contributions increases the risk that the fund eventually will go broke.
Nine states—Hawaii, Alaska, Kansas, Rhode Island, New Hampshire, Louisiana, Connecticut, Kentucky and Illinois—have now set aside less than 60 percent of what they need. Illinois has saved just 43 cents to cover every dollar of what it needs to pay 350,000 retirees and 500,000 current plan participants who are counting on a pension check.
Governor Abercrombie has pledged to address our pension shortfall, but one wonders whether he and the legislature have the stomach–and patience–to make the real reforms needed to avert disaster. In the meantime, we’re left to ponder a question we never thought we would have to ask: Will Honolulu be the next Detriot?