In the group’s fifth annual report card on the nation’s 75 biggest cities, Irvine retains its title as the fiscally healthiest city in America — even while the vast majority of its brethren, both in California and across the nation, sink more deeply in debt thanks to promises they’ve made for pensions and retiree health care that are far more expensive than they ever expected.
Joining Irvine in the black was Stockton — testament to the restorative power of municipal bankruptcy — and the city of Fresno.
In the red in California, from least-in-debt to most-in-debt, were Long Beach, Chula Vista, Bakersfield, Riverside, Sacramento, Los Angeles, San Diego, Santa Ana, Anaheim, San Jose, San Francisco and Oakland.
All told, total debt for the 75 most populous cities exceeded $333.5 billion at the end of the 2019 fiscal year. Most of that was pension debt — $180.1 billion — while the rest was for retiree health benefits, at $160.1 billion.
The spike in Milwaukee’s annual pension contribution will be one of the top challenges facing the next mayor — and he or she won’t have much time in office before big decisions must be made.
Next year, current estimates predict the city’s annual pension contribution will increase from about $71 million to about $130 million, according to the city budget office. It is expected to remain elevated for years to come.
The projected increase is driven by factors including a drop in the anticipated future earnings on the city’s pension fund, from 8.24% to 7.5%.
With no solution, a quarter of the city’s workforce could be let go between 2023 and 2025, affecting services the city provides to residents, according to a report from the city’s Pension Task Force.
The average interest rate paid by Washington on its debt has fallen from 8.4 percent to 1.5 percent over the past three decades. However, economic variables tend to fluctuate, and only a fool would assume that a current economic trend will last forever. In the past, economic forecasts and markets told us that high inflation and high unemployment cannot happen simultaneously, that the late-1990s tech-stock bubble wouldn’t burst, and that national housing prices can never fall. Just last year, the Federal Open Market Committee consistently underestimated current-year inflation by three full percentage points. Interest-rate forecasts have proven spectacularly wrong for 50 years.
But now, economic commentators assure us that soaring federal debt is affordable because interest rates will remain low forever.
By contrast, the Congressional Budget Office projects that rates will nudge up to 4.6 percent over three decades. That is easily possible. After all, a broad range of studies show that the projected 100 percent of GDP increase in federal debt over the next three decades should, by itself, add three percentage points to interest rates. Added federal debt over the past 15 years also put upward pressure on interest rates, but this was offset by low productivity, baby-boomer savings, and Federal Reserve policies that pushed rates downward. For interest rates to remain low, those offsetting factors would have to accelerate much further to counteract the three-percentage point effect of future debt.
For example, Pritzker wants to set aside $500 million to pre-pay pensions. To do that, he would take $300 million out of the unexpected extra revenue this year, and $200 millino will come out of the 2023 General Fund budget.
In Illinois politics, pension underfunding is like the weather. Everyone complains, but no one does anything about it. Why? It’s hard to do, and laboring to fix pensions doesn’t resonate with voters. There is little political bang for the buck. That’s why state pensions have been underfunded year after year for a century.
There is value in prepaying pension debt beyond what is required by the so-called ramp, as Pritzker proposes. Because of double compounding — less money must be borrowed to be repaid with interest and investments on the added money yield more returns — $500 million spent now will save the state $1.8 billion later.
Citing an improved economic outlook in the COVID-19 pandemic, Gov. J.B. Pritzker’s latest budget proposal will devote an extra $500 million to Illinois’ nearly insolvent pension funds, pump $200 million into a “rainy day” fund and tamp down the state’s unpaid bill backlog — all while providing $1 billion in tax cuts, freezes and rebates, administration officials said Wednesday.
Pritzker was scheduled to outline the ambitious $45.4 billion election-year spending plan during his “State of the State” speech at noon in Springfield, in a downsized event held at the Old State Capitol Building due to a massive winter storm sweeping the state.
In a media preview ahead of the speech, the governor’s top advisers claimed the new spending plan keeps the state on track to end in the black for back-to-back years for the first time in 25 years.
Yet an analysis by the CT Mirror shows that more than six out of every 10 federal relief dollars built into the new state budget that began July 1 effectively will wind up in public-sector pension accounts.
And while Gov. Ned Lamont and others insist the new state budget — and the billions Congress sent to Connecticut via the American Rescue Plan Act — will be used to heal the state’s wounds, others question whether the administration’s priorities are askew. Pension debt deserves to be addressed after being ignored for decades, they say, but that shouldn’t come at the expense of the state’s response to a once-in-a-century health and economic crisis.
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Analysts project the newly adopted $46.4 billion, two-year state budget will close in July 2023 with $2.3 billion left over — an amount that exceeds the $1.8 billion in federal coronavirus relief built into the budget. Because the state’s rainy day fund already is filled to the legal maximum, those dollars must go into either the pension fund for state employees or the retirement system for teachers.
And that’s in addition to the nearly $6 billion in required pension deposits Connecticut already plans to make as part of the two-year budget. That’s a supplemental payment of more than 35%.
Spending in the state budget actually has increased – significantly – under Gov. J.B. Pritzker relative to baseline expectations in the state budget. Even if lawmakers and the governor make no further increases to spending in the fiscal year 2023 budget, which is unlikely given that Pritzker has proposed spending increases in each February budget address of his term, then total spending during Pritzker’s first term will be up nearly $5 billion, or 3% higher than when he took office.
The past year has been a fiscal nightmare for Nashville. Covid-19 helped punch a $332 million hole in the city’s $2.46 billion budget. Tennessee state comptroller Justin Wilson warned that, without drastic action, the state might take over management of Nashville’s affairs. In response, the city council raised property taxes 34 percent, spurring a citizen revolt in the form of a ballot initiative to overturn the tax hike. Without the extra revenue, however, Mayor John Cooper’s administration said that drastic cuts would be unavoidable: “Few corners of the Metro government, including emergency services and schools, would be spared significant reductions or eliminations.”
Nashville’s budget woes predate the pandemic: the city began borrowing money to cover deficits after the Great Recession of 2008–09. City leaders, at the same time, went into heavy debt to build new government-owned attractions, offered workers health retirement benefits that they haven’t funded, and deep-sixed pension reforms that saved the state billions of dollars. In fact, back in December 2019, the state comptroller issued a similar warning to Nashville about its shaky finances.
The Music City isn’t alone. The Covid health emergency and accompanying economic downturn caused budget crises for municipalities—cities, counties, and school districts—across America. A February letter from 400 mayors to President Biden said that the pandemic-inflicted strain on municipal budgets had “resulted in budget cuts, service reductions, and job losses” throughout local government. America’s largest city, New York, grappled with a nearly $10 billion budget deficit in the spring of 2020, while Chicago struggled with a $2 billion gap. Dozens of local governments used the crisis to justify budget maneuvers that fiscal experts generally frown upon, from borrowing money to close deficits to issuing bonds to fund employee pensions.
The tax on pensions moved many retirees to flee the state for no-tax states like Florida. I attended one of Dale Zorn’s town halls shortly after his 2011 vote. I told him the huge cost to my pension that I didn’t expect after I retired. He told me they, the Republican Party, will revisit this at a later date. IT NEVER HAPPENED! Since 2011, the Republican Party controlled both houses and could easily have voted to repeal this tax they passed in 2011. It incredulous how they have spun this issue.
Now Gov. Gretchen Whitmer is pushing to repeal this tax this year in her State of the State speech. She knows with inflation pressures how seniors are being affected. She knows this will free up disposable income to be spent in local communities across the state. She knows its good for small business.
Newcomers to the state of Illinois may find it odd to see the word “bipartisan” show up anywhere in reference to Illinois, but they forget that the state’s history includes jailed governors from both political parties.
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Nothing especially persuasive emerges from these studies, except for one: “Polarization and Policy: The Politics of Public-Sector Pensions,” by Sarah Anzia and Terry Moe, published in 2017 at Legislative Studies Quarterly.
Their main argument: before the Great Recession, in those states with un/underfunded pensions, both parties were the cause of the underfunding. Simply put, the public at large simply had no interest in pension funding, but was very much interested in a high level of government services and a low level of taxation. There was therefore no incentive for politicians of either side to fund pensions.
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And a review of the history of Illinois’ pension funding is a case study in how this pre-Great Recession bipartisan pension funding indifference played out. The whole history was outlined in great detail in a 2014 report by Eric Madiar, who at the time served as Chief Legal Counsel to Illinois Senate President John J. Cullerton; while the objective of much of his document is to argue a political point, his history lesson is extremely helpful, and starts with a 1917 report by the Illinois Pension Laws Commission lamenting that pension plans were not being funded and calling for the legislature to begin to fund pensions when benefits are earned. Throughout the 40s, 50s, and 60s, dire reports were issued by similar commissions, to no avail, with the result that the Illinois constitution of 1970 essentially treated the pension protection clause as an alternative to funding pensions.
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So there you have it: a century-long legacy of unfunded pensions in Illinois.
According to the U.S. Treasury, in fiscal 2021, the amount of interest paid on the national debt was $562 billion including government transfers. The amount actually paid out to holders of U.S. securities was $413 billion.
That figure alone, which is over 20% of what we paid in income taxes in FY 2021, should be alarming when compared to other government expenditures.
Compare the $413 billion we pay in interest to holders of these securities to the annual budgets of other parts of the government. The State Department annual budget is “only” $35 billion and the Justice Department $39 billion.
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Interest rates are still near an all-time low. According to the Monthly Treasury Statement, in 2001, interest paid on the national debt was an average of 5.4%, about 3½ times what it is now.
If we get back to that rate, which is far from inconceivable, interest on the debt would cost American taxpayers $1.4 trillion, based on our present level of national debt. That is twice the budget of the Defense Department.
In 2019, the state of Illinois introduced a pension buyout system that allowed pension plan holders to receive a lump sum of cash now as opposed to keeping their money invested in the pension system. The payments are funded by a state bond issue of $1 billion.
Now, however, politicians are concerned the funding for this program will run out of money. Illinois state Representative Bob Morgan introduced a fast-tracked bill that is currently pending in the state House to renew this program for another two years and authorize another $1 billion in funding.
With over $130 billion in unfunded liabilities statewide, the state of Illinois has been actively searching for ways to help alleviate its financial burdens.
