Big changes are coming and here’s why…
Public officials at all levels of government struggle with funding needs that are spiraling out of control. Yet, the prevailing trend is to cut funding at the state and local levels of government even more. Revenue shortfalls and the ever-growing critical needs at the state and local levels of government will soon result in huge changes – changes that are destined to impact citizens in ways that most may not have anticipated.
City leaders suffer because of employee pension responsibilities they cannot meet. They also struggle with the burden of decades of deferred maintenance to public facilities. Water resources are critical and too many cities have water pipes that are a century old. Municipal leaders also continue to get handed new and costly mandates – immigration responsibilities, enhanced security on school campuses, infrastructure reform and prevention of cyber threats. Almost every public official at this jurisdictional level is at a loss about what to do – there’s simply not enough revenue.
Help is available because private-sector capital is abundant and collaborative efforts on major projects are encouraged, but many cities pose financial risk that scares away potential investors and partners. New revenue streams must be found but citizens violently resist higher taxes or any kind of increase in service fees.
Just focusing on one critical municipal issue brings the revenue problem into full focus. Pension responsibilities, if these were the only problems, are enough to cause immediate concern and it’s enough of a problem to cause huge change – “disruptive change.”
The city of Alton, Illinois, was forced to sell its water system and water treatment plant and city leaders sent almost all of the proceeds to its pension program. Detroit declared bankruptcy in part because of its unmet pension obligations. And the cities of Dallas and Houston have seen their credit ratings fall because of continuing spikes in unmet pension liabilities.
State officials have similar problems. California is facing a $1 trillion unfunded pension liability. Similar scenarios are obvious throughout the country. State pension funds in the U.S. were operating under a deficit of $1.4 trillion as far back as Fiscal Year 2016. That amount was $295 billion higher than the previous year. Another contributor to the increased fund deficit was the fact that actual investment returns of 1 percent fell far short of state assumptions of 7.5 percent.
Approximately two-thirds of public pension plans get revenues from investments and the marketplace has not produced the return on investment that was anticipated. Additional funds come from employer and employee contributions, taxes and fees. When these revenues no longer meet pension funding obligations, other revenue options must be found. Options are to raise fees and/or taxes, increase employee contributions to the system, reduce benefits or cut public services. None of those options are popular with citizens, pension recipients or taxpayers.
In South Carolina, the state’s long-term pension liability has grown to more than $20 billion since 1999. New Jersey has been identified as one of the most vulnerable states. If the fund can’t support itself, the state will be forced to spend approximately $2 billion more each year to make up the difference.
The California Public Employees’ Retirement System, which manages pension and health benefits for more than 1.6 million state employees, retirees and their families, estimates that the unfunded contribution for cities in the state is likely to double from its current $1.8 billion to $3.9 billion by 2024. Counties in California face deficits that are just as great. Their unfunded contributions could triple, from the current $607 million to $1.5 billion in 2024. That translates to cities and counties being shackled with unfunded contribution payments of $5.5 billion by 2024, tripling from the current estimate of $2.8 billion.
Oregon has its own unique, self-inflicted problem with pension funding. Although the state economy is growing, so are its pension system costs. More government workers are retiring, and drawing benefits for decades longer than was projected. Some states are attempting to remedy the problem by selling public assets and other jurisdictional levels may soon be forced to curtail essential public services.
Big changes are inevitable…there is no other way. Financial shortfalls at all levels of government are disruptive and the result will be change that will impact citizens and taxpayers in ways that may be surprising. Public officials, unfortunately, are not miracle workers. They cannot continue to do more with less. Expect change throughout the U.S. in the not-too-distant future.