State unfunded liabilities dwarf projected $1.6 billion fiscal shortfall

You have probably heard about Louisiana’s budget deficit and undoubtedly will be hearing more as we approach the legislative session. But while the $1.6 billion shortfall is a legitimate concern, a greater danger lurks beneath the surface and eventually could dwarf our current challenges.

The coming crisis is the result of unfunded government pensions and benefits. While estimates of the state’s unfunded accrued liabilities vary, a widely accepted figure is about $18 billion. Louisiana’s taxpayers are on the hook for that staggering sum, and no budgetary magic can make it go away.

To make matters worse, the state owes other post-employment benefits, such as health care, that total about $11 billion. While these benefits are easier to address, they still loom over the state’s fiscal horizon.

How did we get here?

A combination of mistakes is to blame, including overly generous benefits, questionable accounting methods and the failure to properly fund pensions. Years of growth in the number of government employees and longer life expectancies also have increased long-term obligations.

Underfunded pensions require more and more money just to cover yesterday’s promises. If this reminds you of a Ponzi scheme, it should. And just like any other Ponzi scheme, the bill eventually will come due and the consequences will be grave.

As the state struggles to pay for its pension obligations, money will be taken from the general fund. That means more cuts to higher education, health care and other essential services. A growing portion of our tax dollars will be dedicated to funding pensions and benefits rather than the services we need.

Growing pension requirements also strain our vital institutions. I serve on the board of a local charter school and nearly 25 percent of payroll now goes to the retirement fund. That comes to about $1 million and is money that could otherwise be spent addressing the needs of our students. Other institutions are facing the same problem, and it is only going to get worse.

Unfortunately, there is no quick or painless solution to the problem. Because benefits for vested employees are protected, many sensible changes – such as raising employee contributions, increasing retirement ages and reducing benefits – have limited short-term impact. This crisis has been decades in the making and will require long-term solutions.

One important step we can take to ensure future generations are not saddled with debt is to do away with the “defined benefit” system and move to a “defined contribution” system, similar to a 401(k). Government employees would be responsible for saving for retirement, which is the norm for most private sector employees.

Taxpayers should not bear the burden of funding generous pensions, particularly when salaries in the public sector are comparable to or higher than those in the private sector.

Changing this system is a challenge our governor and legislators should take up immediately. While managing the current shortfall is important, the implications of the pension crisis are too severe to ignore.

This article first appeared in City Business New Orleans.

Kevin Kane is president of the Pelican Institute for Public Policy.