Don't Let States Rob COVID-19 Funds to Bail Out Pensions

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Now that Congress has passed its broader humanitarian aid packages in response to the COVID-19 virus, it’s likely that the nation’s most fiscally irresponsible states will request bailouts for something completely unrelated to the virus: their bankrupt pension plans.  

Bad as that may be, it’s likely some sort of assistance will materialize from Congress. If that happens, any support should be conditioned on pension reform.

It’s not a stretch to think that federal money will somehow find its way into the nation’s most dysfunctional pension plans. New Jersey’s Phil Murphy, governor of a state with one of the worst pension crises in the country, is seeking a multi-billion-dollar, flexible block grant. Meanwhile, Chicago Mayor Lori Lightfoot, whose city is already junk rated largely due to pensions, has warned “this is a B-sized problem, meaning something that can only be solved with billions in needed stimulus support from the federal government.”

With the shortfall in pension funds exceeding what Stanford’s Pension Tracker says was $5 trillion even before the meltdown, you can bet those governments most mired in pension debt will seek additional help. They could demand direct aid for their state and local pensions, or for their own operations that indirectly support those pensions. But states and cities that bankrupted their funds through corrupted governance long before the current crisis shouldn’t get a free pass. 

Many states, including Illinois, New Jersey and Connecticut, have refused real reform for decades, wreaking havoc on their residents and the retirement security of their workers. That’s reason enough to require preconditions for any federal support.

The rationale for requiring reforms with any aid is threefold. First, supporting irresponsible states with no strings attached is fundamentally unfair to those states that have already enacted major reforms. Second, structural reforms reduce the risk of future federal bailouts by setting those states on a path toward stability. Third, requiring reforms would reduce the cost of any potential federal aid to those states.

Illinois is a perfect example of a state that shouldn’t be bailed out at the expense of fiscally responsible governments. Gov. J.B. Pritzker, the state legislature and Chicago Mayor Lightfoot all reject structural pension reforms that would fix Illinois’ problems. They continue to block efforts to amend the state’s pension-protection clause through a constitutional amendment and they refuse to authorize the option of municipal bankruptcy, something that only requires a legislative majority. 

Instead, like their predecessors, they’re protecting the status quo. As a result, Illinois’ Net Primary Position – basically its net worth – has worsened by $190 billion since 2001. Those losses resulted primarily from growing unfunded pension and retiree health insurance liabilities. Illinois’ pension crisis is now the nation’s worst, both in terms of total shortfall and on a per capita basis, according to Moody’s Investors Service. The agency rates Illinois just one notch away from junk.

Conditions in New Jersey are no better. The Garden State’s pension funds were flush at the turn of the century, but since then, gross bipartisan mismanagement and pension holidays have led to near insolvency. S&P warned in June of 2019 that: “[The state’s] inability to contribute [its] annually determined contribution after 10 years of national economic recovery raises questions about what could happen in another recession.” 

Connecticut is also swimming in unfunded pension and retirement health care debts. Those obligations equaled nearly 40% of its GDP in 2018 – the highest among all states, according to Moody’s. And like Illinois, the state has resorted to decades-long reamortizations and is considering asset transfers instead of real, structural reforms.

If that’s not evidence enough, consider this. In 2018, the plans for Chicago’s 30,000 active and retired public safety workers were just 22% funded. The funding for Kentucky’s 90,000 state workers was even worse, at just 16%. And the plan for New Jersey’s 136,000 public employees was only 32%. All those workers lost their retirement security due to politicians’ corrupt practices long before the current crisis. 

The unwillingness of such states to make hard choices on their own is precisely why any help from the federal government must come with preconditions.

Defined contribution plans, cost of living reforms and increased retirement ages are all part of the suite the federal government should require. And for states that have constitutional protections, lawmakers must commit to removing them or lose out on aid.

Whether the federal government eventually provides direct aid to state and local governments remains to be seen. However, it’s imperative that any such support not be used to bail out pensions or enable irresponsible states to further ignore their retirement crises.

Ted Dabrowski is a former international managing director for Citibank and current president of Wirepoints, an independent, nonpartisan research and news organization focused on fiscal and economic policy.

Mark Glennon, a former bankruptcy lawyer and venture capital investor, is executive editor and founder of Wirepoints, an independent, nonpartisan research and news organization focused on fiscal and economic policy.



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