Last month, Truth in Accounting (an organization with ties to groups that attack public workers’ retirement security) published a misleading report titled “Financial State of the States” which grades states based on their supposed fiscal health. The report deceptively cites unfunded pension liabilities to unfairly suggest that public pensions are a burden on taxpayers.
Below, we outline three reasons why this report does not hold up to the facts on public pensions.
1. Unfunded liabilities are drastically taken out of context.
Truth in Accounting goes to great lengths to exaggerate the unfunded liabilities of pension plans. The organization mentions a state’s overall unfunded pension liabilities in a single year while failing to highlight the bigger picture, which is that pension plans are specifically designed to be invested in the long-term.
An unfunded liability is similar to a 30-year mortgage in that banks and credit agencies understand that each is meant to be paid off over a determined period of time, not all at once. As we’ve noted before, with an unfunded liability, “the system never needs all that money at one time.” For a public employee who will retire in 20 years, for example, their plan will have that same amount of time to earn investment returns to pay out benefits in retirement. Using unfunded liabilities to rank each state’s fiscal effectiveness in a given year, then, is highly misleading.
In a select few states, lawmakers have repeatedly skipped or deferred their required contributions to the pension system, despite public employees paying their fair share with every paycheck. This will make their overall unfunded liabilities seem larger because there isn’t enough money invested to earn optimal investment returns. Skipping or deferring contributions can also threaten a state’s credit rating (making it more expensive to fund future projects). The vast majority of pension plans, however, are well-funded, and it’s not too late for leaders in those few states to reverse course and practice fiscal discipline to meet their plan’s obligations and to maintain their state’s credit rating.
2. Pensions make up little of a state’s overall budget.
Overall, pensions make up very little of a state’s operating budget. According to the National Association of State Retirement Administrators (NASRA), less than five percent of all state and local government spending was spent on public pensions in the fiscal year 2017. Furthermore, pension plans are primarily funded through investment earnings, not taxpayer contributions. NASRA has also found that investment earnings have accounted for 63 percent of all public pension revenue since 1989.
For each state that is listed as “in debt” in Truth in Accounting’s report, the organization claims that there is a “taxpayer burden,” inferring that each taxpayer is personally on the hook in order to pay off their state’s level of debt. This is unfair to the taxpayer, who is not going to receive a bill for this “taxpayer burden” number. And it fails to note that the responsibility falls on state lawmakers to practice fiscal discipline and to make required contributions to their state’s pension plans, just as public employees do with every paycheck.
3. Public pensions are a benefit to taxpayers.
Finally, research from the National Institute on Retirement Security (NIRS) shows that public pensions benefit taxpayers. According to NIRS, expenditures stemming from pension benefits supported $202.6 billion in federal, state, and local tax revenue in 2016. This will be an especially valuable source of revenue for state and local governments because the coronavirus-induced economic crisis has decimated personal income and sales taxes, leading to drops in overall revenue for most states.
As the aforementioned economic crisis affects state and local governments across the country, policymakers would be wise to ignore a misleading report from a source that has repeatedly attempted to undermine public workers’ retirement security.
