ALEC on Hispanic Marketing & PR Podcast: Unfunded Liabilities Represent Taxes Owed in the Future
The reason why people should be concerned about unfunded liabilities is because it is government debt and that represents taxes that are owed in the future.
Thomas Savidge, research manager at the ALEC Center for State Fiscal Reform, was recently featured on the Hispanic Marketing and Public Relations Podcast sharing details from the 6th edition of Unaccountalbe and Unaffordable report looking at the states’ unfunded pension liabilities.
Host: Let’s start really basic; what are we referring to when we say public pension liabilities? Is that the uniform definition across the board for purposes of our discussion? For purposes of the states?
Thomas Savidge: Sure, definitely, that’s pretty much a uniform definition across the states. A pension liability is basically a promise. The state has guaranteed public employees this particular benefit that they would receive upon retirement. Most public pension plans are what we call a defined benefit system, where upon retirement; states receive a certain amount of benefits. And that is based on things like their Final Average Salary, any cost of living adjustments, and any accrued over time. And you know that calculations vary from plan to plan within the same state. And they vary, of course, across the states, but generally, it is a promise to pay out a portion of a retired public employee’s salary through their retirement years. In some cases, if a retired public employee passes away during a certain period of time, those benefits are extended to their spouse.
Host: What is unfunded public pension liability?
Thomas Savidge: So unfunded pension liabilities refer to pension promises that aren’t already covered by existing pension assets. So most pension plans have a trust in which assets from contributions from taxpayers as well as contributions from public employees go into this trust, there invest there, and those assets are invested in helping grow the pension fund. And you take those numbers and the dollar value of those assets, subtract the liabilities, and any remaining liabilities not covered by the assets are considered unfunded liabilities.
Host: What does your new report reveal?
Thomas Savidge: Sure. So our report finds that unfunded state pension liabilities across the states total 8.28 trillion dollars and that accounts for public pension plans managed by state governments for all 50 states. And that’s roughly $8.28 trillion. The victim, to put that into perspective, that’s about $25,000 for every man, woman, and child in the United States, about $100,000 for a family of four. And the reason why people should be concerned about that is because it represents government debt, taxes that are owed in the future. Because at the end of the day, when governments guarantee these benefits, it’s the taxpayers that also that have to foot the bill. And so when we’re thinking about large pension debt, especially in states like Illinois, California, New Jersey, and New York, as these pension liabilities grow, the spending, government spending elsewhere gets crowded out, to pay out these pension promises, because as we show in the report, you’ll see in section one, page eight, figure seven, we look at the various legal protections that these pensions have. And basically, most states are obligated to pay out these promises. Even in the case of an economic downturn, or any fiscal prior fiscal crisis, the states are still on the hook for paying out these promises. So we want to ensure that the states can keep their promises to public employees, which they’ve promised to have a fully funded retirement benefit. And they also have to keep promises to taxpayers, you know, specifically that they promised taxpayers that they’d have affordable public services of good quality.