Without comprehensive pension debt reform, states face continued financial pressures and diminished flexibility for future budgets.
Pension liabilities are retirement obligations contractually promised to public workers. In any sense of the word, an unfunded pension liability is a debt, yet it is not treated the same as other government obligations. State and local governments have long engaged in the practice of issuing various types of debt instruments to finance infrastructure and other public endeavors. But, despite holding the power to levy taxes, these governments aren’t always able to repay those obligations.
The Panic of 1837 was a U.S. financial crisis that collapsed credit and commodity prices and triggered bank failures. During the seven-year period of economic depression that followed, several states defaulted on infrastructure bonds. In the 1920s and 1930s, Arkansas borrowed for highway construction but defaulted in 1933 during the Great Depression. These and other defaults led states to widely adopt constitutional and statutory limits on the issuance of general obligation (GO) debt, protecting both present and future taxpayers from fiscal imprudence.
Many public policy makers do not understand that public pension liabilities are not legally treated as general obligation-type debt and are not subject to the safeguards restricting GO debt undertakings. In some states, these pension obligations have even stronger claims on the full-faith and credit of the state than GO debt.
The lack of general obligation debt type safeguards constraining public pension liabilities has significant implications on the financial risk position of state and local governments, which currently have issued about $4.9 trillion in long-term debt. About $1.5 trillion of that, or 32%, is attributable to unfunded public pension liabilities—that is, the gap between currently held assets and the total estimated cost of public employee pension liabilities.
Therefore, it is important for policymakers to understand the policy rationale for general obligation debt limits and why public pension obligations in many states can be more serious than GO debt. Fortunately, there are ways to reclaim fiscal control, including new-tier reforms. <center>Continue reading at Reason.org</center>