Can states and localities manage their pension obligations? The answer, according to the Center for Retirement Research, is yes. In a new brief released earlier this month, researchers at CRR assess the true costs of pensions, other post-employment benefits (OPEBs), and debt service for states, counties, and cities. They then compare these costs to own-source revenue for these different levels of government. Their conclusion is that most state and local governments can manage their pensions and other obligations.
Much of the media coverage of public pensions is quite alarmist. Headlines warn of “trillion dollar pension deficits in the states.” However, as the CRR researchers point out, most of these media reports only focus on pension obligations and only focus on those obligations at the state level. A more accurate representation of long-term obligations would also consider OPEBs and debt service and would examine these obligations at the state, county, and municipal level. That is what the CRR researchers set out to do in their new brief.
The brief concludes that pension obligations are much more evenly distributed among different levels of government than many people assume. State governments, certainly, are responsible for the greatest amount of public pension obligations, but counties, cities, and even school districts are responsible for much of the public pension benefits that will be paid out.
After more accurately distributing the pension obligations among different levels of government, the researchers then consider the appropriate source of revenue against which pension obligations should be weighed. They ultimately decide that own-source revenue, while somewhat troublesome as a measure on the city and county level, is the most appropriate measure for comparing long-term obligations (own-source revenue is the revenue that these governments generate themselves). The researchers then conduct their analysis of long-term obligations against own-source revenue for these different levels of government.
What the researchers found is largely encouraging. Aside from a few well-known outliers, most states, counties, and cities can manage their pensions and other long-term obligations. As expected, Illinois, New Jersey, Connecticut, and Kentucky have the most difficult long-term pension obligations. Among cities and counties, Chicago and Cook County, IL, face the greatest challenges as do several of the larger counties in California. The majority of states have perfectly manageable pension obligations: “[pension obligations] are less than 10 percent of revenue in all but nine states and less than 5 percent in 24 states.”
The researchers conclude that for most states, counties, and cities, their pension and other long-term obligations are within reasonable bounds. The outliers are well-known and tend to be the focus of alarmist news stories. The CRR brief also emphasizes a point that is often ignored: “Looking at aggregate costs ignores the heterogeneity of the situation across governments. For example, New Jersey, Illinois, and Connecticut clearly have very large pension costs relative to their revenue base, but their situation is atypical. The overall state average of 4.3 percent is far below that of the most troubled states.”