In 2013 I posted many times on the bankruptcy of the city of Stockton, California. You can read a couple of them here and here. If you really want the inside story you can download an early draft of my article Fairness and Risk in Stockton: Pensions, Bond, and Taxes.
In any event, municipal and state insolvency have several contributing factors but the single greatest reason why the long-term fiscal health of governments is at risk is underfunded pensions liabilities. In other words, states and localities have promised their employees lifetime pension but haven't been socking away enough money to pay them. The future effect of underfunding will be to stick it to the next generation of taxpayers who will be paying for their parents' retirements but not getting customary government services. Whether they'll stand for this remains to be seen.
There are two solutions to chronic underfunding of pensions: reducing benefits or increasing contributions. Reducing benefits is constitutionally difficult. Many state constitutions, like Michigan's, prohibit any changes in retirement benefits, and the United States Constitution bars states from "impairing the obligation of Contract," which can likewise be read to block efforts to cut existing benefits (although there's no constitutional limit to reducing retirement benefits for new employees entering state or local government employment).
After several years asleep at the switch, CalPERS, which manages retirement benefits for state and most local government employees in California, has begun to ratchet up contributions from California government employers. You can read about the increases for this year here. The increases are substantial and were opposed by both California's local governments and their public employee unions. Perhaps the pain of diverting ever more tax money into pension funds will finally cause Californians to give more serious thought to changing to defined contribution pension plans.
In any event, municipal and state insolvency have several contributing factors but the single greatest reason why the long-term fiscal health of governments is at risk is underfunded pensions liabilities. In other words, states and localities have promised their employees lifetime pension but haven't been socking away enough money to pay them. The future effect of underfunding will be to stick it to the next generation of taxpayers who will be paying for their parents' retirements but not getting customary government services. Whether they'll stand for this remains to be seen.
There are two solutions to chronic underfunding of pensions: reducing benefits or increasing contributions. Reducing benefits is constitutionally difficult. Many state constitutions, like Michigan's, prohibit any changes in retirement benefits, and the United States Constitution bars states from "impairing the obligation of Contract," which can likewise be read to block efforts to cut existing benefits (although there's no constitutional limit to reducing retirement benefits for new employees entering state or local government employment).
After several years asleep at the switch, CalPERS, which manages retirement benefits for state and most local government employees in California, has begun to ratchet up contributions from California government employers. You can read about the increases for this year here. The increases are substantial and were opposed by both California's local governments and their public employee unions. Perhaps the pain of diverting ever more tax money into pension funds will finally cause Californians to give more serious thought to changing to defined contribution pension plans.
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