States Should Not Expect a Federal Bailout of Underfunded Public Pensions

State May Get No Pension Help from Washington

January 17, 2011

Carolina Journal — A North Carolina legislator says the state should not rely on the possibility of a federal bailout and fully fund state retiree benefits.

“The federal government didn’t get us into this position, mismanagement did,” said, Rep. Dale Folwell, R-Forsyth.

While no specific bailout plans are under consideration, one U.S. representative is taking a step that would caution states not to expect help from Washington.

Rep. Jason Chaffetz, R-Utah, has introduced H.Res. 23, stating Congress’ opposition to any federal intervention meant to “bail out state and local government employee pension plans that provide post-employment benefits to state and local government retirees.”

State governments are waking up to the fact they’ve underfunded their pension and retiree health plans drastically. Last February, The Pew Center on the States released a report saying states collectively have a $1 trillion deficit in pension plans and a $555 billion deficit in retiree health benefits.

North Carolina’s preparation for employee pensions and retiree health benefits has been mixed. Until the current fiscal year, the state always made its annual required contribution to the pension system. It has never funded the retiree health fund fully, however, and now it faces a $32.8 billion unfunded liability, according to the state’s actuary. Every private sector employee would have to pay $10,444 right now to fill that unfunded liability, according to 2009 census data.

That liability is “pushing off payments that we think we’re going to have to make into the future and accruing debt in a really meaningful way, so to that extent, yes, it is an increase in total state debt that one should recognize,” said N.C. State University economics professor Robert Clark.

It is unlikely that the General Assembly will put state retiree benefits back on track this year. Since last year’s short session failed to make the pension’s annual required contribution, the legislature would need to pay an extra $1 billion in the next fiscal year just to catch up with last year’s shortfall.

Restoring the retiree health fund to full fiscal balance would require an additional $3 billion payment in the next budget, according to the state’s actuary. That $4 billion total would be in addition to the state’s acknowledged deficit of $3.5 billion.

The new federal health care law could complicate any state-based fixes to public pension and health plans. To meet its cost-saving targets, the health care law is scheduled to cut Medicare reimbursements to doctors. If the cuts are made, North Carolina’s state health plan would be required pick up the difference for retirees between the amount Medicare pays and the actual cost of services billed by health care providers. As part of the state’s promise to retirees is a health care plan that pays for all medical benefits that are not covered by the federal government.

“If Medicare was to be reduced, that actually puts greater pressure on the states, not less,” Clark said.

Despite the financial setbacks facing the state, Folwell argues a federal bailout is unwanted.

“If we don’t want the federal government telling us what to do, then we need to fix our own problems,” he said. “I don’t want the federal government flushing any more financial responsibility down on the state, just like the cities and counties of North Carolina don’t want us flushing anymore financial responsibility down on them.”

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