The promises that politicians make to campaign donors and taxpayers are often good only till the next election. By contrast, the commitments they make to public employees—such as firemen, teachers and bureaucrats—are for life. America’s state and local governments are struggling to meet pension and health-care obligations to their retired workers. So many of those governments are dreading a new accounting rule that will make them report clearly on the size of the problem.
The new rule, issued by the Government Accounting Standards Board (GASB) in 2004, goes into effect on December 15th. It will require public-sector employers to treat their health-care promises to workers the same way they already handle their pension obligations: by reporting on the total size of their future commitment, instead of just this year’s cost.
The states are having a hard enough time meeting their pension promises. Falling share prices earlier this decade ate into their pension assets, while generous pledges to increasingly long-lived employees drove up liabilities. By 2004, assets in the average state’s pension fund were enough to cover only 84% of its accrued pension liabilities, according to Standard & Poor’s (S&P), a rating agency.
West Virginia has the biggest gap as a percentage; its pension assets are less than half its liabilities. But taxpayers in Rhode Island and Connecticut face the biggest burdens: roughly $3,500 of unfunded pension liabilities per citizen (see chart).
For the 50 states as a group, S&P reckons, the 16% shortfall is equal to $284 billion, almost as large again as their combined general-spending debt. Many American cities are in a similar bind. Of the 20 biggest, Philadelphia has the largest shortfall, with funding for only 53% of its pension liabilities.
As hard as it will be for state and local governments to meet public employees’ pension costs, paying for their retirees’ health care is an even bigger challenge thanks to rapidly rising costs. California, for example, faces $49 billion in unfunded pension liabilities, but believes that its health-care shortfall is another $70 billion. Maryland estimates that its unfunded health-care costs top $20 billion. That is $300,000 per public worker, nearly eight times its pension shortfall.
Chris Edwards and Jagadeesh Gokhale of the Cato Institute, a libertarian think-tank, reckon that America’s state and local governments face a total shortfall in their health-care plans of $1.4 trillion. They arrive at that staggering sum by extrapolating from 16 states and 11 local government employers that have tried to gauge their health-care liabilities, which amount to roughly $135,000 per state or local employee. Even if Messrs Edwards and Gokhale have overstated the problem, many experts agree that the health-care shortfall is much bigger than the pension gap.
Fortunately for public employers, they probably have more leeway than with pensions to tackle the problem. Courts in many states have issued rulings that make it hard for those governments to break a pension promise to their employees. Health-care plans are less sacrosanct. The sooner public employers start breaking those vows the better. The new accounting rule, though dreaded by some officials, should help—by shedding some much needed light on the problem.