Local Losers

From the April 2006 Trumpet Print Edition

Beyond the federal government, state and local governments will also soon start to feel entitlement pains associated with their mismanaged retirement plans and a rapidly aging population. In fact, cities, towns, school districts and even water authorities are all in for the same kind of shock (New York Times, Dec. 11, 2005).

The Governmental Accounting Standards Board has now ordered states and communities to start reporting how much they owe their retirees for health coverage. Consequently, they will have to start properly funding their retirement plans (ibid.).

Take, for example, Maryland’s dire discovery, which will soon be repeated across the country. Maryland currently spends $311 million annually on retiree health premiums, but when the state calculated the total value of all the retirement benefits it had promised to current employees, the total came to $20.4 billion! Now, under the new accounting rule, Maryland will have to accrue $1.9 billion per year for retiree health plans—a sixfold increase (ibid.).

Pension experts say that the true costs, which governments at all levels have conveniently failed to keep track of, are staggering and that the “tidal wave of costs that eventually will hit agencies statewide will require taxpayer bailouts or service cuts and could bankrupt some agencies” (Daily News of Los Angeles, Sept. 25, 2005). Jan Lazar, an independent benefits consultant in Lansing, Mich., says that if people really understood the size of the “huge liability” that governments have, they would “freak out” (New York Times, op. cit.).

When the city of Duluth, Minn., found out that its health-care liabilities for its current and retired employees were more than double the city’s entire operating budget and growing, it knew it was in trouble. Mayor Herb Bergson was very direct in saying, “We can’t pay for it …. The city isn’t going to function because it’s just going to be in the health-care business” (ibid.).

These massive unfunded liability costs, once fully disclosed, are sure to have repercussions, some very alarming. Governments at all levels may have such huge liabilities that their bond ratings will plummet. That would drive down the value of any of their existing bonds and make it extraordinarily expensive or even impossible to borrow new money.