Tuesday, December 21, 2010
Today's Generosity: Tomorrow's Unfunded Mandate
Not too long ago, the American people were asked to bail out a bevy of large financial institutions whose names we all recognize. Shortly after that, our wallets were raided once again, this time in the name of large American automotive manufacturers General Motors and Chrysler. We were told by talking heads that these giants of the global economy were simply too big to fail, and that if they did fail, large scale economic ruin would surely follow. Many people now think the 'too big to fail' moniker was spurious; that there is no business deserving an eternal guarantee of solvency pledged on the back of American taxpayers.
These days, another heir to the too big to fail throne has appeared, with a much more legitimate claim to that dubious honor. It has become clear that state and local governments across the country are dangerously in the red. We have become accustomed to hearing elected officials bemoan tight government budgets, all the while increasing government expenditures with a devil may care attitude. These budgets, however, aren't just tight; they are downright frightening. The very financial future of state and local jurisdictions is in serious doubt, and business as usual is a surefire recipe for fiscal failure.
One of the major culprits for this impending financial disaster is the extravagant benefit packages offered to many public sector employees, such as teachers and agency bureaucrats. The company-funded pension system is well nigh extinct in the private sector. Companies long ago determined that funding pensions was far too costly over the long run, and instead opted for making much smaller contributions to retirement investment accounts such as a 401k or a 403b, that are mostly employee funded. The critical hang up of pension systems if of course that companies remain responsible for pension payments long after, sometimes decades after, that employee was last engaged in gainful work on behalf of the company.
Many American manufacturers, such as Bethlehem Steel, and the aforementioned GM and Chrysler, were led nearly to financial ruin thanks in large part to benefits package that seemed like a good idea at the time, but that proved utterly unsustinable over the long term.
It is safe to say that the retirement paradigm has shifted. Individuals now bear the responsibility for saving enough money for their own retirement. The options for acheiving this are seemingly endless. While you can certainly bemoan the fact that pension benefits have evaporated, you better be saving for retirement while you whine; it's just a fact of life.
A fact of life for everyone except public sector employees, it seems. The state of Maryland currently has $33 billion in unfunded liabilities related to it's pension system for state employees. To put that in perspective, the entire operating budget for the state in 2011 totals $32.1 billion.
Unlike businesses, those who hold the purse strings of taxpayer funds don't have to worry about profitable bottom lines or even fret much about accountability, because while today's generosity is tomorrow's unfunded mandate, the challenges of the future will fall to someone else. And generally speaking, a local government jurisdiction probably isn't going to go out of business or go bankrupt; but as the bills for these extravagant pension plans come due, the likelihood of that unthinkable scenario, namely massive government defaults, increases dramatically.
Now in Maryland, there is a movement afoot to transfer responsibility for these pension benefits to local county school boards; a wildly irresponsible passing of the fiscal buck. If this were to happen in already cash strapped Queen Anne's County, it would more than likely put the county out of business.
Public employee unions like AFSCME, SEIU, and the NEA have made these benefit packages an untouchable 'third rail' issue for elected officials. This simply cannot continue to be the case, politicians must stand up to public sector employee unions and take back control of state budgets.