Municipal pension and benefit obligations contribute to the trend gap
The fiscal sustainability of state and local governments in the United States has been a subject of growing concern for a number of reasons, two of which are described below.
First, rapid growth in state health care costs has outpaced state government revenue growth in recent decades. The face value of Medicaid spending nationwide grew about 10 percent annually between 1990 and 2004, while overall state revenue grew just 6 percent. Consequently, Medicaid has replaced education as the largest state spending category. Medicaid accounted for nearly 24 percent of all state spending in 2011, according to the National Association of State Budget Officials.
Second, state and local governments face large unfunded pension and other post-employment benefit (OPEB) obligations. The unfunded liabilities nationwide are estimated to be around $ 4 trillion, according to the authors. By creating large income demands, these unfunded retirement benefits are already putting pressure on state and local budgets.
Pension costs and other benefits contribute to the 30-year growth in the trend gap
The authors define fiscal sustainability as the long-term ability of state and local governments to provide public services. They then analyze data from various sources and use the gap measure to assess state and local fiscal sustainability as it has evolved over the past 30 years. The trend gap measure takes into account actuarially required contributions to pensions, as well as other post-employment benefits, and eliminates short-term business cycle fluctuations.
The study found that overall, the trending pension gap per capita nationwide has increased over the past three decades, even without considering pension or OPEB costs. The trending funding gap is even larger after adding OPEB and pension funding requirements.
The national trend per capita funding gap without pensions or OPEB contributions was already above zero for most of the 2000s, indicating that expenditures exceeded municipal revenues.
The total trend gap, including pension obligations and OPEB, reached more than $ 1,000 per capita in 2010. This means that the revenue-raising capacity of state and local governments did not reach the amount necessary to meet the demand for services public and meet long-term obligations. for that amount.
The results of the trend pension funding gap differ from the findings of previous studies conducted by the Government Accountability Office (GAO), which did not show a clear trend in their measure of the operating balance as a percentage of Gross Domestic Product ( GDP) during the last three decades. The trend gap methodology yields a different conclusion: the national trend gap of municipal pension funds as a percentage of GDP increased over time, reaching more than 2 percent of GDP in 2010.
While social security and income maintenance programs have contributed significantly to the growth of the trend funding gap, pension plans and OPEBs have also become increasingly important in driving spending levels.
Bottom line: trend gap can drive more corrective actions
To continue tracking the impact of these programs on state and local fiscal sustainability, the authors recommend that future studies employ the trend funding gap methodology, stating that using the trend pension gap measure provides a picture more accurate than existing measures of fiscal sustainability US state and local governments.
In the meantime, this can serve as another warning to state and local government officials that pension fund and benefit requirements will not go away.
May 2014
Mark Johnson’s ERISA Benefits Consulting, Inc. provides benefits advisory and consulting services and is not engaged in the practice of law.
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