Almost all public pension funds assume investment returns somewhere around 7% (and some as high as 8%+). That’s highly unlikely due to the debt we’ve accumulated, and debt is a drag on future growth. If you make more realistic assumptions on future returns the unfunded liability becomes $6 trillion according to the American Legislative Exchange Council. Of course, this was before Coronavirus, who knows what it is now.
To measure a state’s solvency one could look at two measures – see here, your state’s solvency strength (see map below). The underfunding percentage – an underfunded pension plan is a company-sponsored retirement plan that has more liabilities than assets. In other words, the money needed to cover current and future retirements are not readily available. The other is the total amount of the underfunding. This is important, as it will indicate the total federal bailout that would be needed. Here is yet another way from Mercatus to look at state pension funding levels.
Politicians simply have over-promised government workers to buy their votes. And to make it even more interesting, the beneficiaries often no longer live in the states that pay them. Retired public employees from the Northeast might live in Florida now, for instance. They can’t even vote for the people who govern their incomes. Unfunded debt is 12 Times higher in Democratic-run states with liberal one-party control which have an average liability of $22,214 per taxpayer vs. $1,814 in red states. This obviously makes a partisan divide in any potential solution.
A more conservative and realistic approach would force the state and local governments to fund those pension plans at a much higher level. They have only two ways to do that: either raise taxes and/or reduce services. A third option is bankruptcies. Any way we do it will hurt either the pensioners or taxpayers. Who should be the winners or losers?
The cries for bailouts are in the air during this time of Coronavirus. Senate Majority Leader Mitch McConnell (R-Ky.) this week suggested it would be better for states to be able to declare bankruptcy rather than have the federal government provide more money to help them through the coronavirus crisis.
“I would certainly be in favor of allowing states to use the bankruptcy route,” McConnell said on conservative talk show host Hugh Hewitt’s program. “There’s not going to be any desire on the Republican side to bail out state pensions by borrowing money from future generations,” he added.
A senior Senate GOP aide said McConnell’s comments came after he was asked specifically about the issue. The leader doesn’t see allowing states to file for bankruptcy as being a priority for the next coronavirus bill and is well aware of the law. But the aide said McConnell’s larger point was that some states were in tough financial straits due to prior mismanagement or overspending. The U.S. bankruptcy code does not include provisions that allow states to declare bankruptcy. Local governments have the ability to file for bankruptcy under Chapter 9 of the code, but only if their state authorizes them to do so.
The National Governors Association earlier this week asked Congress for $500 billion in direct aid to states to replace their lost revenue. Most likely this is a mere down payment for future bailouts. The group’s leaders, Maryland Gov. Larry Hogan (R) and New York Gov. Andrew Cuomo (D), have both blasted McConnell’s comments on bankruptcy. Yes, even some Republicans.
The Hill – Very few localities have filed for bankruptcy over the years, with the most prominent recent example being Detroit in 2013. Congress passed a law in 2016 that created a bankruptcy-like process for the federal territory of Puerto Rico. Professors who have studied the issue say there would be obstacles to Congress allowing states to declare bankruptcy, and that a law on this topic would likely spur a legal case that would likely go to the Supreme Court.
Kenneth Katkin, a law professor at Northern Kentucky University, said that a law about states filing for bankruptcy would set up a debate over whether Congress’s ability to write bankruptcy laws preempts the prohibition in the Constitution on states impairing their own obligations under contracts. “It’s not clear how the court would rule,” he said. Aside from the legal aspects of state and local bankruptcies, what should we do?
Right Wire Report is not being a big fan of Mitch McConnell, nevertheless, he may have this one correct. Unfortunately, some wobbly-legged Republicans are not totally supporting McConnell in his comments. A few Republicans have not been true to conservative values. The solution is quite simple, let the free market reign. States and local governments must live within their means or suffer the consequences. If the parties can find a middle ground through some bankruptcy process, so be it, but not with federal help.
After the cleansing of these mismanaged states, perhaps then they can have balanced budgets and be honest with voters and government workers. Bond buyers will not think they will be bailed out if their investments go bad. Sheesh … is this conservativism or just common sense?