LIKE the coronavirus itself, state lockdowns indiscriminately wreaked economic devastation all across the U.S. Almost overnight, well-managed, fiscally sound states found themselves in hot financial water, along with high-tax-and-spend states that were even less prepared for the COVID-19 crisis. The question before Congress now is whether federal taxes paid by taxpayers in the former should be used to bail out the latter.
When Congress passed the $2 trillion emergency relief CARES Act to help unemployed workers and businesses survive the lockdowns, it included $340 billion for COVID-19 response efforts made by state and local governments that were also hard hit by the pandemic. But Democrats in Congress now want to spend another $915 billion to bail out state pension funds, some of which have been underfunded for decades.
Doing so would penalize states that have set money aside to fund their pension obligations, while rewarding states that neglected to do so and spent money on other priorities. This is not only patently unfair, but it also creates incentives for these states to cynically continue to promise their employees pay raises and other benefits for political reasons, while neglecting to set aside sufficient funding to pay for the retirement benefits they’ve already earned.
According to the Pew Charitable Trust, the pension funding gap in 2017 (the latest data available) for all 50 states was more than $1 trillion. Although all state pension funds lost ground during the Great Recession, eight states managed to rebound, and their state employee retirement systems were 95 percent funded by 2017. The top three—Wisconsin (103 percent funded); South Dakota (100 percent funded); and Tennessee (97 percent funded)—even exceeded that.
These eight states didn’t have the largest populations or the highest state revenues. And they all had the usual obligations other states have, including transportation, education, health care, law enforcement, etc. But they made setting aside money for their state employees’ retirement system a priority.
Conversely, the states with the lowest-funded pension plans in 2007 were in even worse shape in 2017. They were just 56 percent funded on average despite the historic bull market of the past decade.
At 77 percent funded (80 percent is considered healthy), the $82 billion Virginia Retirement System is in the top 20 states, according to the Tax Foundation. That’s because in 2014, the General Assembly enacted state pension reforms requiring new public employees to participate in a hybrid retirement plan to make the state’s contributions more predictable. And earlier this year, the state legislature voted to fund VRS’ contribution rates 100 percent and to fully repay the system for the money it borrowed a few years ago.
However, “Kentucky, New Jersey, and Illinois have the worst-funded retirement systems in the nation in part because policymakers did not consistently set aside the amount their own actuaries said was necessary to cover the cost of promised benefits to retirees,” according to PEW. “As a result, the pension funds in those three states had less than half of the assets needed to cover liabilities in 2017.”
Why should taxpayers in Wisconsin, South Dakota, Tennessee—and Virginia—have to bail out the bad policy decisions made by state officials in Kentucky, New Jersey and Illinois, especially when the COVID-19 crisis is creating major economic problems for every state?
Even before the pandemic, state pension fund managers—whose portfolios were heavily invested in risky assets, according to PEW—were already revising their assumed rates of return downward more than a full percentage point. A 2018 stress test of the VRS and other large pension systems found that “lower-than-projected returns will have long-term cost implications.”
Since Virginia taxpayers are already on the hook to make up for any shortfalls in the VRS due to lower-than-projected returns, they shouldn’t be expected to bail out another state’s pension system, too.