Runaway Government Pension Obligations

I recently read a great article in the Wall Street Journal titled “The City with a Bright Future - $80 Million in the Hole” and felt the need to share it. The article is about Central Falls, Rhode Island, and its once very bright future. It is now an insolvent city due to huge financial obligations (much like my own neighboring city Harrisburg, Pennsylvania).

In the 1960’s, Rhode Island allowed public employees the right to collectively bargain, resulting in a huge accrual of retirement benefits (retire after 20 years of service and receive 50% of final year’s salary thereafter). Last year, labor costs (current and retirement) made up approximately 70% of Central Fall’s budget, and now the state has placed the city in receivership (meaning they are insolvent).
 
The courts have placed a retired judge in charge of “fixing” the city’s finances - taxes have sky rocketed, and the budget and city services have been slashed. This, of course, has driven out residents and businesses, which only makes matters worse. It has become a vicious cycle and one that may be repeating itself in other towns, counties, and states across the country. It may also be a precursor of what will happen to the United States down the road.
 
Last year I posted an update from the Social Security and Medicare Trustees stating that the plan has an unfunded liability in the amount of $107 trillion. This number is almost beyond comprehension. Each year we collect taxes from employers and employees to fund the payout of social security, but last year was the first year we paid out more than we collected. That is a bad trend and with the recent tax bill passage, we will have a tax holiday this year and not be paying in nearly 1/3 of the 6.2% payroll taxes. I am no different than the next guy and prefer not to pay taxes, but this will just make the problem worse.
 
These enormous retirement obligations are a ticking time bomb that could destroy many local and state governments...maybe our federal government as well. No one in city government, state government, or Washington has contacted me for advice, but if they did I have some suggestions.
 
First, we need to immediately stop defined benefit plans (i.e. non-contributory). This is where the fund owner/government guarantees a payout figure. This is very different than a standard 401(k) plan that is a defined contribution plan (when the employee puts a certain amount of money in and an employer can match).
 
Next, we need to immediately start restructuring the defined benefit plans currently in place. We have obligations and have made a commitment to pay; however, if we do nothing each government could end up just like Central Falls (or maybe Greece, and then who bails us out?). The current system is unsustainable. No pension was designed for people to retire at 55 and live another 30 years. We need to address annual accrual rates, minimum retirement ages and qualifications.
 
And finally, the next point (which I am sure will not be popular with many of my friends in government) is we need to disband public unions. I am firmly of the belief that unions, in general, and public employee unions in particular, have served their purpose and now cause our country harm. According to the Bureau of Labor Statistics, the average federal worker is paid 20% more than a private-sector employee, and this does not include the rich benefit package. This cannot continue because we all knowthat the private sector employees are ultimately paying the wages of the government employees.
 
I do hope that our elected officials all across this great country wake up and start making some difficult decisions to restore health to our government’s balance sheets before we all end up like that little town in Rhode Island. As always, I value your feedback and opinions.

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by Scott Heintzelman - Scott is a CPA, CMA and CFE living in Pennsylvania. Scott is a partner serving on the executive team at McKonly & Asbury LLP, a regional accounting firm with multiple offices in the Mid-Atlantic. The firm has been an IPA ALL-STAR as well as winning Best Places to Work in Pennsylvania for numerous years.

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