The future impact in Wisconsin
Throughout history, there has been a conflict between the business of government and the politics of government. The political side of government has a time horizon that extends no further than the next election and an attraction to spending that borders on addiction. As a result, the business side of government has been handed a towering stack of IOUs. State and local governments throughout the U.S. have made promises that they cannot afford and have financed their decisions by passing IOUs along to future generations. The philosophy of government is best described as deferred responsibility: spend today and worry about the accounts payable tomorrow. Now those IOUs are coming due and the amount is staggering.
The IOUs discussed in this paper are the ones related to benefits promised to public employees when they retire. This paper will detail the price tag of the promises of pension and health care payments made to retired state and local government workers. How bad is it? The IOUs state and local governments around the U.S. are passing on to their successors stand at $3.5 trillion. This consists of:
- Debt: $1.85 trillion
- Unfunded Pension Liability: $0.34
- trillion Unfunded Retiree Health Care: $1.40 trillion
Wisconsin taxpayers will not escape the cost of deferred responsibility. This paper will show that state government will spend $3.6 billion to retire its unfunded liability for pension and retiree health care. Local governments, including schools, will pay an estimated $13.8 billion to retire its unfunded liabilities. The exact amount will not be known until 2009, but it is already clear that there are either tax hikes or program cuts in the future for Wisconsin taxpayers.
The IOUs will be particularly troublesome for Wisconsin public schools. Since the mid-1990s, school spending increases have been capped, so the repayment of IOUs for employee retirement benefits will directly affect classroom support. Either school boards across the state will cut staff or they will turn to the taxpayers via referenda to pay for their deferred responsibility.
The concept of deferred responsibility is engrained in Wisconsin government. In an earlier Wisconsin Policy Research Institute Report, it was shown that Wisconsin’s budget is $2.2 billion in the red, meaning it has promised 17% more spending than it has money to pay.
Across the border in Illinois, a succession of governors and legislatures has deferred action on filling a hole in its pension fund for so long that one dour legislator lamented, “In coming years we will have an unbearable burden for money we owe the pension systems. All of our (revenue) growth will go to pensions. It will stagnate the state.”
State and local governments’ spending proclivities are most pronounced when the economy slumps. Early in this decade, as the economy struggled to recover from the 2001 recession, businesses went through multiple rounds of budget reductions and painful workforce cuts. At the same time, state and local government spending rose by 30% (from 2000 to 2004) and 711,000 new workers were added.
Fortunately, recent improvements in accounting standards have put government bookkeeping on a par with private industry. For the first time, the true magnitude of deferred responsibility is apparent. The emerging picture is that government has been spending beyond its means, especially on benefits for retired government workers.
This report offers a number of recommendations of steps government leaders need to take to prevent govern- ment’s IOUs from taking over state and local budgets, as is the case in Illinois. The list includes:
- Bringing pension and retiree health care costs into line with what government can afford. Government must stop the practice of making promises to its employees for which there is no money.
- Moving retiree health care benefits from defined benefit to defined contribution programs.
- Creating a trust fund for the advance funding of employee benefits. Trust funds must be off-limits for general spending. If government cannot afford the advance funding of benefits, it should reduce benefit levels.
- Keeping elected officials from participating in the retirement plans they control.
Looking ahead, a concern is that the same government leaders who have sat idly by watching the IOUs mount are the same leaders that expected to solve the problem. They have two clear choices. Either they can cut spending — especially spending on benefits that will rise in the future — or they can continue to spend and eventually turn to the taxpayers for more money. Given the record of accomplishment to date, taxpayers should be prepared for the worst.