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Public Sector Employee Pensions Devouring Tax Revenues

Posted by Steve Markowitz on February 4, 2015

Often proponents of big government justify the related spending on some supposed some altruistic motive. On the Left the justification often relates to helping the less fortunate, education and “investing” in infrastructure. The Leftists also promote their share of crony capitalism by backing pet projects such as green energy, the education and the social services industries.

While the Right likes to portray itself as fiscally conservative, they too are not against spending on favored program programs that often include defense spending with its industries also benefiting from the corporate welfare, crony capitalism. The proof is in the budgetary deficits that have increased under both Democratic and Republican administrations, although Barack Obama has taken this to new heights.

One of the incestuous relationships between government and special interest resides with public sector employees. This con game is simple.   Politicians promise public sector employees increased wages and benefits in exchange for their political support. For pension benefits, they hide the real cost to taxpayers through unrealistic actuarial assumptions that temporarily mask the deficits these increased benefits create.

Steve Malanga wrote an op-ed last month in the Wall Street Journal titled The Pension Sink Is Gulping Billions in Tax Raises that lays out the insidious effects of the incestuous relationship between politicians and government employees. Malanga points to specific examples of the growing crisis in state and public employee pension funds that include:

·      This year California will need to increase funding for its employee pensions by $1 bil. The funding increase will grow to nearly $4 bil. by 2021.  This increase funding will basically offset a $6 billion annual tax increase that Gov. Jerry Brown promised Californians would be used to improve public schools. Instead, it was in actuality a benefit to state workers.

·      The pension situation in Pennsylvania is also dire. According to the PA Association of School Administrators, nearly every district in the State has increased pension cost for 2014 with three quarters of the districts having increases of at least 25%. This will require higher taxes for the benefit of the State’s public employees. The situation in Philadelphia is even worse with its school system’s pension bill of $55 million in 2011 increasing to $139 mil. in the current fiscal year. At the same time, the school programs are being cut due to lack of funds.

·      West Virginia has had to allow its municipalities to raise taxes to fund their pension challenges. Its largest city, Charleston, added $6 million in local sales taxes to go on top of the $10 million it already contributes to that City’s retirement program.

·      Illinois municipalities reported that their pension funds are only 55% funded. For example, in the early 1990s Peoria spent 18% of its property tax on pensions. That is grown to about 57% this year, clearly an unsustainable number. Chicago’s pension fund is only about 35% funded, a disaster waiting to happen.   It is estimated that the Windy City’s pension bill will be nearly $1 bil. next year, requiring a huge increase in property taxes. On a statewide basis, it is estimated that over the next three decades nearly $150 billion of increased taxes will be required in Illinois.

This is a national problem. The estimated total shortfall for the United States for municipal pension funding is between $1.5 tril. and $4 tril. Assuming the absence of radical pension reform, i.e. cutting benefits, these shortfall will have to be made up by whopping increases in taxes that will not add to the benefit or social welfare of any, but public employees.

The public employee pension crisis began decades ago with politicians of both parties, but with a strong tilt towards the Democratic Party, buying votes by offering benefits that states and municipalities could not be afforded, but would not become problematic until sometime in the future. Detroit, which declared bankruptcy in part because of its huge pension obligations, is but a in the mine.

While the pensions problem can still be rectified, it would not be without significant pain.   Taxpayers will have to pay more for not managing their politicians better, and public sector employees will have to receive less since much of the overpromising of benefits was based on an incestuous relationship with politicians. It is likely that neither these special interests will give in easily, but instead will wait until the can can no longer be kicked down the road.   The likely result will be many more municipal bankruptcies. The irony is that many of the union leaders and politicians who are responsible for creating the pension crisis will be living off fat taxpayer sponsored pensions benefits.

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