The Big Reset in State Budgets

What Ted Kulongoski is doing in Oregon (see yesterday’s links) is interesting for a number of reasons. His newest recommended cuts to public employee pensions are part of the latest proposals of his so-called Reset Cabinet, which Kulongoski created to help ‘reset’ Oregon fiscal policy. …

Bill Calls For Pension Transparency

Newly proposed federal legislation would require states and localities to honestly account for their pension liabilities. If passed, the measure would provide a consistent standard by which to evaluate pension plans across the country. The bill, called the Public Employee Pension Transparency Act, explicitly states that pension obligations are the responsibility of local and state entities and that the federal government will not bail them out, all the latter point should be considered wishful thinking more than an actual restriction.

Here is the overview provided by U.S. Rep. Devin Nunes’ office:

Financial Markets Won’t Fix Pensions

When outgoing California Gov. Arnold Schwarzenegger’s pension adviser, David Crane, comments on a
pension issue, it’s wise to listen to what he has to say. Crane has long
been sounding the alarm about out-of-control public-sector pensions,
and his testimony in the Senate
regarding a failed pension reform effort captures the problem more
succinctly than anything else I have read. Crane emailed me recently
after my column
pointing to Moody’s downgrading of San Francisco’s debt rating after
voters there rejected a pension reform measure. I was encouraged that
the financial markets were responding to the lack of pension reform, as was the city’s Public Defender Jeff Adachi, who sponsored Prop. B. But
Crane does not believe that the markets can significantly rein in the problem. I sat
down with him today at his Capitol office to discuss the issue.

As Crane explained, financial markets are a lagging indicator because
debt is so senior that there’s virtually no chance the state will
default on it. He makes that point most compellingly in the testimony
linked above. Basically, the state first pays Prop. 98 dollars
(mandating that 40 percent of the state’s general fund goes to k-14 education), then debt service and pension obligations. There’s
plenty of money to cover the debt service, in other words. That means
that all the cuts will have to come out of human services, parks and
recreation and other budgets and that even a blip in the markets won’t mean too much since investors know they will be paid.

So while, as I argued, the financial markets might send some warning
signs through downgrading, etc., Crane’s point is a broader one — the
markets aren’t too worried about it, at least not enough to force the kind of substantive reforms needed to solve the problem. Significant cuts are coming down the pike unless pension and
health care costs for public employees are controlled. “Services will be
cut,” he told me, “because this debt will be paid off.”

Links for Monday, December 6, 2010

Here’s our daily roundup of stories and viewpoints on state and local fiscal issues. First, national stories:

Sunday’s New York Times included a long, useful piece about mounting concerns about state debt crises. The concerns aren’t evenly distributed: the states most widely seen as troubled are …

Pension non-reform in the Keystone State

Pennsylvania has become the latest state to enact a “pension reform” that isn’t really deserving of the name. The bill passed yesterday by the state House of Representatives is now headed to the desk of lame-duck Gov. Ed Rendell, who is expected to sign it. The …