Yesterday I spoke at AEI on the subject of public sector pensions and the policy choices facing state and local governments. My co-panelists included Jason Richwine, co-author with Andrew Biggs of Assessing the compensation of public school teachers and Scott Beaulier whose recent research covers how states might switch from defined benefit to defined contribution plans.
As part of the discussion we considered the drivers of the underfunding problem: the misvaluation of pension liabilities which has led to more investment risk exposure on the asset side. As Steven Malanga has pointed out the problem in underfunded public pensions is revealing itself more quickly and more dramatically on the local level. Central Falls, Rhode Island's bankruptcy was followed with Woonsocket turning off the street lights.
The reality is that many local governments will be confronted with rising costs for pensions and health care benefits in the coming months. Current accounting practices obscure the bill as Roman Hardgrave and I found in our research on local budgets in New Jersey. And in some cases long-standing funding policies will be reviewed. Maryland Governor O'Malley is proposing that counties cost-share in teachers' pension plan, a tab currently footed entirely by the state. It's a move that will bring some fiscal discipline to the local level where these services are provided. Look for more of the pension tab to be shifted among units of government.
And there is also indication that the reverse will occur as local governments run out of money. Governor Lincoln Chafee is considering a bailout of $2.6 million for Central Falls. Localities in Rhode Island are asking for increased state aid. A problem here is that when you get the accounting right, on the local level nearly all of Rhode Island's municipalities have funding ratios of less than 50 percent (the average funding ratio is just 28.8 percent): a fiscal reality obscured by GASB's accounting guidance.
That means a bailout of Central Falls is potentially just the start of multiple municipal bailouts in a state with fiscal problems of its own.
The reality is that many local governments will be confronted with rising costs for pensions and health care benefits in the coming months. Current accounting practices obscure the bill as Roman Hardgrave and I found in our research on local budgets in New Jersey. And in some cases long-standing funding policies will be reviewed. Maryland Governor O'Malley is proposing that counties cost-share in teachers' pension plan, a tab currently footed entirely by the state. It's a move that will bring some fiscal discipline to the local level where these services are provided. Look for more of the pension tab to be shifted among units of government.
And there is also indication that the reverse will occur as local governments run out of money. Governor Lincoln Chafee is considering a bailout of $2.6 million for Central Falls. Localities in Rhode Island are asking for increased state aid. A problem here is that when you get the accounting right, on the local level nearly all of Rhode Island's municipalities have funding ratios of less than 50 percent (the average funding ratio is just 28.8 percent): a fiscal reality obscured by GASB's accounting guidance.
That means a bailout of Central Falls is potentially just the start of multiple municipal bailouts in a state with fiscal problems of its own.
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