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Paying for Your Golden Years, and Theirs

Local- and state-government employees need a dose of reality.

Worried about retirement? You’re not alone. The 33rd annual Retirement Confidence Survey, conducted by the Employee Benefit Research Institute and Greenwald Research, found that the “confidence both workers and retirees have in their ability to finance their retirements” has “dropped significantly.”

Here’s more reason for concern: In the decades to come, taxpayers will fork over an unfathomable sum to cover the golden-years promises made to “public servants.”

The Manhattan Institute recently explored the health of the pension plans of “America’s 10 largest cities by population.” Seven municipalities in the American Southwest made the cut: Phoenix, Houston, Dallas, San Antonio, Los Angeles, San Diego, and San Jose. Between 2011 and 2021, each experienced growth in pension expenditures and pension expenditures per FTE. Phoenix “shows that the emerging cities of the Sun Belt are not immune to the travails that plague older cities.” It “now contributes three times as much to its pensions as it did in 2011.” San Jose spends “a frightening 16%” of total revenue on its retirees’ income.” (On the bright side, Houston and San Antonio were standouts for responsibility.)

Earlier this month, The Pew Charitable Trusts took a snapshot of how prepared states are to handle other post-employment benefits. The the picture wasn’t pretty:

In 2019, the most recent year for which comprehensive data is available, states collectively reported $749 billion in OPEB liabilities but only about $69 billion in assets to pay for these benefits, resulting in a funded ratio — the share of benefits already earned that have been pre-funded — of just 9.2%.

Kudos to Arizona (100.6 percent), Utah (81.1 percent), and Oklahoma (79.4 percent) for their impressive OPEB funding rations. But the remaining five states of the American Southwest are in terrifying territory: Colorado (19.3 percent), New Mexico (18.9 percent), California (1.5 percent), Texas (1.4 percent), and Nevada (0.1 percent).

Next month, the American Legislative Exchange Council will issue its annual assessment of states’ unfunded pension liabilities. In last year’s report, our region’s funding ratios, adjusted “using a risk-free discount rate,” ranged from Utah’s 38.3 percent to New Mexico’s 26.8 percent. Ouch.

The problem of extravagant and expensive retirement goodies for men and women on public payrolls has been known for a long time. (In 2018, staffers with the Legislative Finance Committee admitted that the “combination of [S]ocial [S]ecurity eligibility, a high pension multiplier, a compounding COLA, and generous employer contributions results in New Mexico providing among the richest retirement benefits in the nation.”) But from coast to coast, elected officials have stubbornly avoided solutions that anger government unions. Occasionally, though, progress is achievable. Two weeks ago, “North Dakota Governor Doug Burgum signed a historic pension reform bill into law.” It closed “the state’s existing defined benefit plan,” enrolling “new hires into a defined contribution plan starting January 1, 2025.”

The American Southwest gets policy right in a myriad of ways. (That’s a big reason why so many of our countrymen are moving here.) But even the region’s most pro-taxpayer states can do better — much better — when it comes to aligning employee compensation to what prevails in the real world. The status quo is neither fair nor affordable.

By D. Dowd Muska

Dowd brings nearly 30 years of research and writing experience to the Institute. A veteran of several think tanks, he is an expert on government at the municipal, county, state, and federal levels.

Raised on an apple orchard in the Connecticut River Valley, D. Dowd Muska is a researcher, writer, editor, and commentator. His focus is the nexus of fiscal policy, economic development, and technology.

Mr. Muska is the author of numerous policy studies, and his writing has appeared in newspapers throughout the nation, including the Las Vegas Review-Journal, The Detroit News, the Orlando Sentinel, the Cape Cod Times, the Santa Fe New Mexican, the Hartford Courant, the Waco Tribune-Herald, the Albuquerque Journal, the New Haven Register, and The Oklahoman. A graduate of The George Washington University, he lives in the Albuquerque metro area, but has started (very) early planning for a relocation to the Sierra Blanca in Lincoln County, New Mexico. He recently launched the Substack platform No Dowd About It.

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