When will state pensions bankrupt your state?
There seems to be a high likelihood that future generations will have to bear the substantial burden of making up pension benefits for previous generations of state employees. While citizens of states that are particularly hard-hit by the pension crisis may be able to escape to other states, an acceleration of this demographic phenomenon would leave a dwindling taxpayer base behind in the states facing the largest liabilities.
This would increase the likelihood of a federal taxpayer bailout in which taxpayers in all states would bear the burden of the states in default. The problem of state and local pension liabilities is therefore a problem for all US taxpayers, not just those in the states with the largest deficits.
What happened in Bell City 14 miles south of Los Angeles would be entertaining if it was not so, well – “revealing”. You can read more about what happended at Bell at the ABC News link given at the end of this posting.
But, the essence of the thing is that Bell City Manager, Robert Rizzo, was being paid a salary of $770,000 per year. Bell City is primarily a blue-collar town of about 40,000 people. A typical salary of a Bell City resident is about $28,000 per year. About 17% of the town lives in poverty.
The Bell City Council worked it out so that Rizzo would get a near 12% raise each year and they themselves – the City Council – paid themselves about $100,000 per year for part-time work.
Rizzo got fired. But that does not mean he will lose his pension of $709,607 per year. Depending on how long Rizzo lives, the total payout of pension benefits could be close to $30 million dollars. And that $30 million dollar pension for one person is on the backs of the taxpayers.
The Ruthless among us
There are a couple of interesting things going on here. First, we may have spotted a high density of what Dr. Martha Stout calls “The Ruthless among us – those without a conscious” (read). According to Dr. Stout, one in twenty-five people lack a sense of what is right and wrong as judged by the standards of the “rest of us”. So, it looks like we found a cluster of “the ruthless” on the Bell City Council along with the City Manager.
Does a red flag go up in the minds of these City Council people when they pay themselves $100,000 per year and the City Manager $770,000 per year knowing that this City Manager salary also presents a $30 million dollar pension liability for the city for a single person? Do you (as part of the “rest of us”) see something wrong with this? Residents of the city average only $29,000 per year. It seems that this is the new standard of moral and ethical behavior by the City Council and the City Manager as “city servant” – at least in Bell. How many other places is this going on? Is Bell unique or just the tip of the iceberg?
Trajectory of financial collapse
Second, how many other cities (and states) are on the trajectory of financial collapse under the burden of pensions in general? Cities and states have taxing authority so the folks managing these budgets never have to earn money in the same sense as a private sector business. What they need they simply take from the taxpayers – if they dare to do so. The fox is guarding the financial hen-house.
The first column is the year that each state will run out of pension fund assets assuming they earn 8% on their assets and that they use future contributions to fund new benefits in full. The starting points for pension assets are the September 2009 values from Pensions and Investments.
The second column shows the average annual benefit payments that will be owed over the 5 years following the state’s estimated run-out, but only including 2008 promises.
The third column shows the average annual benefit payments that will be owed over the 5 years following the state’s estimated run-out, including projections of future benefits for existing workers.
The fourth column shows 2008 tax revenues.
The fifth column shows the ratio of annual promised benefits to 2008 tax revenues. The final column shows the ratio of annual projected benefits to forecast tax revenues assuming 3% annual revenue growth. That is, revenues in the year of the run out are estimated by [2008 Tax Revenues] * (1.03)^[Years Left].
Read the full report here –
Department of Finance, Kellogg School of Management, Northwestern University
PEW Report – U.S. state pension funds have $1 trillion shortfall