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01.11.2012 0

Hatch report reveals massive public pension underfunding

By Rick Manning — U.S. Senator Orrin Hatch released a shocking report on Jan.  10 on the outstanding public debt that threatens to sink our state and local governments in a sea of red ink.

Hatch, who serves as the Ranking Member of the Senate Finance Committee rings alarm bells over the public pension debt shortfalls that beset state and local governments which may exceed $4 trillion.  Perhaps as stunning as the overall public pension shortfall is the fact that a key member of the U.S. Senate cannot definitively report on exactly how much debt is owed because there is little transparency for public employee pension plans.

Adam Bitely of Americans for Limited Government reported in July of 2011 how the Commonwealth of Virginia was manipulating their budget to appear to have a surplus while underfunding the public employee pension fund writing, “Each year, the General Assembly is supposed to make payments to the Virginia Retirement System (VRS), a pension fund for state employees. For the past two years, the General Assembly, along with Governor McDonnell, have neglected making these payments in full, allowing VRS to be underfunded. Currently, the state owes around $620 million to the VRS.

Conveniently, the payments are being skipped until 2013, the year that Governor McDonnell leaves office.

As Virginia political blogger Doug Mataconis put it, “Here in Virginia we have a ‘surplus’ of $311 million. That money will go, by law, in to education funding and into the state’s ‘rainy day’ fund. In reality, though, is what we’ve got a cooked set of books that says ‘+$311,000,000’ with a little entry at the bottom of the page that says ‘I.O.U. $620,000,000.00.’”

But Virginia is hardly alone in facing a future public employee pension funding crisis as the Hatch report states that 31 states have underfunded plans and eleven states are projected to have exhausted all of their pension assets by 2020.

To make matters worse, the report finds that there is an acute risk of these pension debts leading to the insolvency of large states like California or Illinois that, “could damage the fiscal health of the United States.”

Hatch points out that the California economy alone is around the size of Italy, and the demand for a bailout from a state with 1/9th of the Members of the House of Representatives would be intense.

The Utah Senator rightly asserts, “A Federal bailout of the states must be avoided at all costs.  Responsible states that have prudently managed their pension plans and pose no risk of financial contagion to their neighbors, and the American taxpayer, cannot be asked to bailout states that have underfunded pension liabilities for public employees.”

However, the underfunding of public pensions also bring the risk and probability that government retirees and employees will end up with much lower retirement payments than they planned on receiving.

Municipal bankruptcies in Vallejo, California; Pritchard, Alabama and Central Falls, Rhode Island all have retirees facing the loss of expected retirement benefits, and given the dire projections for state retirement plans it is likely that a shockwave will hit state retirees in the years ahead.

As state legislatures head back into session, it is time for elected officials to rethink the entire public pension promise.  The American Legislative Exchange Council, an organization comprising nearly 2,000 state legislators, produced model legislation last year that would convert old style defined benefit plans to modern defined contribution plans – essentially converting the pension to a 401(k) plan like most private sector employees have.

Hatch’s report is a clarion call to the coming crisis.  It is time for the taxpayers of each state to demand that their elected state representatives tackle it before their state gets overwhelmed with debt and the very public employees who will fight change find themselves with little pension and no future.

Rick Manning is the Communications Director of Americans for Limited Government

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