New Report: Pension Costs Destabilize Local Government

Escalating public-pension costs crowd out public-sector staffing

NEW YORK, NY — While private-sector employment has long recovered from the 2008 financial crisis, a new Manhattan Institute report shows how growing pension costs have kept state and local governments from doing the same. Senior Fellow Stephen Eide finds that one reason for the sluggish growth of government payrolls is the escalating cost of public-sector pensions.

From 2002 to 2013, state and local employers’ pension bill grew by 175.6 percent, while general revenues increased by only 59.7 percent. As pension costs have eaten up an increasingly large portion of revenues, states and cities have had to make do with fewer resources. Taxpayers, then, are paying more for less.

The “correct” level of public sector employment can only be determined on a case-by-case basis, but most taxpayers can agree that city and state governments should be responsive to local needs. Pension debt makes that all but impossible. Decreased government payrolls may suggest a leaner government, but this report sheds light on how public services are in fact being crowded out by public pensions.

Key findings in the report include:

• Private payrolls began growing in March 2010 and surpassed their prerecession peak in February 2014. They’ve grown since by 5 million. State and local payrolls, on the other hand, only stopped declining in 2013 and now include over 500,000 fewer workers than they did in 2008.
• If governments’ pension costs had stayed flat, relative to general revenues, since 2008, the state and local workforce would now likely total 19.5 million. If pension costs had remained at their 2002 level, America’s state and local workforce would now total at least 19.8 million, the prerecession peak.
• Public pension costs are rising due to the trillions in existing benefit promises that are not backed by assets on hand, coupled with an aggressive financial strategy that requires the economy to have a great year, not simply a good one. Even when public pension funds grow in value, failure to meet their annual 7-8 percent benchmark requires governments to divert more revenues from services in order to pay back pension debt.
• Because pension benefits enjoy substantial legal protections, “pension reform” is mainly a question of how to restructure benefits not yet earned. But in the near term, the challenge for states and cities involves funding benefits that have already been promised.

Click here to read the full report.