Tuesday, April 26, 2011

Gary Palmer: State legislators must not cave to AEA pressure

  Andrew Biggs' testimony regarding state and municipal debt should be required reading for every Alabama state legislator.  And every Alabama citizen should know what Biggs projects regarding the debt obligations that we taxpayers now face.

  Biggs, a former principal Deputy Commissioner of the Social Security Administration and former Associate Director of the National Economic Council, reported to the U.S. House of Representatives Committee on Oversight and Reform that states are facing a debt crisis of enormous proportions, most of which is in obligations for pensions and health benefits for state employees.

  According to Biggs, states currently borrow 23 cents of each dollar they spend, compared to the federal government which borrows 39 cents of every dollar it spends.  He quoted a General Accounting Office  report that estimated that it would require either a 12.5 percent cut in state spending or an equivalent increase in state revenues to stabilize state and local government debt.

  At the center of this crisis is the size of state and local governments. In Alabama, one in every five people (who now have a job) work for either state or local government. This is the 11th highest ratio in the nation. A recent study by J. Scott Moody and Wendy P. Warcholik, Ph.D. as commissioned by the Alabama Policy Institute found that if Alabama state and local governments reduced the ratio of government employment to the national average of one in every six, costs could be reduced by $2.4 billion per year.

  In addition, according to Moody and Warcholik, benefits for state and local government employees are 64.3 percent higher than for people with jobs in the private sector. This is the 12th highest in the nation. Simply bringing the benefits down to the national average could save another $945 million each year. That is $3.3 billion that could be put into schools, roads, and bridges or sent back to Alabama taxpayers to invest in our economy.

  As Biggs pointed out in his Congressional testimony, economists are almost unanimous in their belief that the accounting rules governing current contribution rates significantly understate the real size of state pension liabilities. He quoted an estimate from Wilshire Consulting that projects only a 6.5 percent annual return over the next ten years on state pension fund investments. The Retirement Systems of Alabama (RSA) projects an eight percent return. Consequently, for Alabama, as bad as the current pension liabilities may look, the problem may be much worse. To put this in perspective, the cost just for the unfunded pension liabilities is over $12,000 per Alabama household.

  In Alabama, state employees and the AEA, the education employee union, vigorously opposed the recently passed legislation that eliminated the costly Deferred Retirement Option Plan. No doubt they will also vigorously oppose any other needed reforms to state pension and health benefits.

  The AEA and the state employees association oppose reforms and argue that these high dollar benefits are justified because state government employees earn less than workers in the private sector. Several studies have shown that in terms of salary, state and local government workers are paid about seven percent less than the private sector. But when you take into account the benefits for government workers, they have a substantial advantage over workers in the private sector.

  According to Biggs' testimony, pension benefits increase government employee compensation by about 18 percent; health benefits add about seven percent more. When the value of the pension and health benefits are taken into account, state employees go from being about seven percent below the private sector to being about 18 percent above. And that doesn't include the job security premium that government employees have over private sector that is worth another five percent.

  While most of the attention has been focused on the federal deficit and the federal debt, the bottom line is that the debt of state and local governments poses significant problems as well. The federal government can print money, but states can only cut spending, raise taxes or do both. This is the fiscal reality that Alabama faces. It is critical to the future of Alabama that the legislature not cave to pressure from the AEA and get these costs under control.

  From 2004 to 2009, the amount of money needed to keep state retiree pensions funded has grown from $432 million to over $1 billion, an increase of 149 percent in only five years. For the next fiscal year, the state legislature will have to appropriate about $2 billion just to keep pensions and health benefits funded. Alabama already has an unfunded liability for health benefits of over $15 billion and unfunded liabilities for pensions that are reported at about $10 billion. But the actual unfunded liability may be as much as four times higher, based on analysis by public pension experts.

  About the author: Gary Palmer is president of the Alabama Policy Institute, a non-partisan, non-profit research and education organization dedicated to the preservation of free markets, limited government and strong families, which are indispensable to a prosperous society.

  This article was published by the Alabama Policy Institute.

1 comment:

  1. Might it be too much to ask that Gary Palmer, no stranger to being a kept man in drawing the wingnut welfare, label Andrew Biggs as now being part of the well-funded networks of policy shops? Dr. Biggs is back at the Cato Institute and is also affiliated with the American Enterprise Institute.

    Palmer's Wall Street financiers ruined the economy and now he and his want to hand the bill to the commoners. Palmer's ilk despises public employees as there are few ways to personally profit from working toward the common good.

    Palmer's source was part of Bu$hCo's effort to privatize Social Security. That would have worked out great given how the deregulation fetish set up Big Finance to melt our economy.

    These Cons have nearly destroyed the middle class and indeed private employees have 401Ks if they are lucky. They'd love to kill off public pensions and send that money up to the financial elites to draw fees and profits from handling the deals. John Gunn