State and local government hiring will never recover

April 10, 2012

Throughout the recovery, public-sector employment figures have been dismal. Even though recent data suggests that government job losses might have peaked, there is an ugly accounting change looming that could prove a permanent deterrent to a large rebound in government hiring.

The accounting change is being driven by the Government Accounting Standards Board (GASB) and relates to pension liabilities. Governments will soon be required to report their pension liabilities alongside their other liabilities, like long-term debt, on their financial statements. Currently governments are allowed to bury their unfunded pension liabilities in the footnotes of their financial statements. When they calculate their financial ratios, they are also not required to include future liabilities owed to retirees.

With pension costs expected to take up larger and larger amounts of tax revenues, politicians will have no excuse to ignore their ballooning pension problems. What has long been an unpleasant fact for budget officers will soon become a very visible sign to government officials, the public and investors that pension burdens are very heavy and that adding employees means long-term fiscal burdens that many governments don’t have the fiscal space to take on.

Bloomberg has a good overview of the state and local government employment picture:

After four years of shuttering fire houses, cutting school budgets and firing teachers and police, these governments are starting to steady as tax revenues rebound. Public employment at all levels declined by just 7,000 in the first two months of this year, well down from the 22,000 monthly average in 2011, according to Labor Department data.

“We’re at a point where we’re nearing the bottom,” said Christopher Hoene, director of research with the National League of Cities in Washington. While some cities still are shrinking staffs, others are “not that far off from some of them hiring again. In the sense of the business cycle for local governments, the curve is starting to change.”

There certainly will be hiring to augment police forces and teaching staffs in places that can afford it, but the resources needed to make new hires will increasingly be crowded out by the costs for retired public workers. Retirements will likely increase as employees who first joined state and local government workforces in the early 1980s meet their 30-year service requirement.

With a handful of exceptions, public pension plans across the country are underfunded. In some instances, they are projected to exhaust the assets in their plans as soon as 2020. Forty states and many cities have enacted changes to get their pension plans on more solid footing, but it will take decades in some cases to restore them to full health. The states with the biggest unfunded pension liabilities, such as Illinois, are just now grappling with the legal and legislative changes necessary to prevent their pension commitments from swallowing larger and larger amounts of their annual budgets.

A report conducted by Senator Orrin Hatch, the top Republican on the Senate Finance Committee, outlined many of the steps governments have taken to get their pension systems on sounder footing. The study details previous congressional efforts, in 1981 and 1984, to address the underfunding issue for public pensions. These efforts died quietly in committee in the past, and it’s unlikely that Senator Hatch will be able to round up support at the federal level to impose national standards on state and local fiduciary entities.

However, Congress did indirectly address the problem by granting additional authority to and funding regulators in Dodd-Frank. In February, the SEC approved a rule proposed by FINRA to assess a GASB accounting support fee from municipal bond dealers to support the development of government accounting standards. The new fee will fund the development of standards to expose pension shortfalls.

Meredith Whitney infamously predicted hundreds of billions of dollars in municipal defaults, which turned out to be an enormous overstatement. Later, she revised her outlook and predicted that pension shortfalls will crowd out other essential public services. Her new call is turning out to be correct. The unstated and often unfunded pension liabilities of state and local governments will be a drag on government hiring and growth. Governments will need to embrace other strategies to provide services more efficiently. The cost of the long surge of government hiring that began in the 1980s is coming due. It’s time to pay the piper.

One comment

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Current post-employment benefit system for public employees is unsustainable and the pubic is just waking up to the fact that reform is needed. San Diego and San Jose proved that voters are eager to put these benefits back in line with those offered in the private sector. Expect more votes like this across the country as state/municipal finances continue to strain under the weight of promises made to retirees. 401k retirement plans for new public employees will be the new normal, and in many cases where pensions are severely underfunded expect pension obligations to be restructured.

Posted by RNelson | Report as abusive