The Greek fiscal crisis is going to come to the United States next year via the vulnerable state governments of (at least) California, Michigan and New York. Look for these states to descend once more on Washington DC with their tin cups seeking additional federal subsidies, disguised as stimulus payments. But…with Republicans in control of both Houses (bet on it) they will meet a frosty reception on Capitol Hill. While Obama will try to pass the subsidies, the GOP will turn them down. The American people – from the other 47 states – will ask why they should reward state irresponsibility with federal dollars.
Faced with a cutoff of additional federal aid, these state legislatures will be unable to balance their budgets and bond buyers will back off their paper. Ratings agencies will downgrade their bonds to junk status and bankruptcy will ensue.
From there, the fiscal crunch will extend to states throughout the nation and the reduction of state expenditures will assume critical importance at just the time that a slew of Republican governors and state legislators – who have pledged not to raise taxes – will take office.
One area they will look at closely in their efforts to rein in spending will be education. Look for the school choice and voucher movements to get a massive shot in the arm as governors and legislatures seek to find lower cost ways of improving educational quality.
Another key focus will be on reforming state pension systems. The recent crash of 2008-2009 cost the average state pension system 30% of its assets. Already, this crunch will force legislatures to slash current spending on education, highways, law enforcement, etc. to accommodate the needs of their pension systems.
Unfortunately, even though the market was crashing, the pension systems had to keep sending out checks. The result is a shortfall will take 25 years for the average state to make up for the losses they sustained in the few months of the crash and in the two years since. And, should the market crash again (think: Obama’s economic policies and their impact) then the states will find they have to contribute more and more to their pension systems.
Enter a bold new proposal introduced by Utah State Senator Republican Dan Liljenquist for a massive overhaul of his state’s pension system, a bill which was passed and signed into law in March of this year.
The Utah reform changes the pension system for public employees to a fixed defined state contribution so that the state has no longer to raise or lower its contributions to the retirement fund in response to the market fluctuations in the return these funds earn on their investments. It fixes the state contribution each year at 10% of the employees’ salary whether pension fund investments are doing well or doing poorly.
If the investments are tanking and earning too little to sustain the guaranteed benefits, the state would not be obliged to pay more than 10% and the employee would have to make up the difference out of his or her salary. If the investments were doing well, the state would still invest 10% annually and, if this sum came to more than was required to meet the guaranteed benefits, the state worker will get to invest the difference in a personal 401 (k). The worker would not be permitted to borrow against his 401 (k) and would have to invest the funds according to parameters set by the Utah Retirement System so that the savings are not squandered.
Each state employee would also have the option of opting out of the state system entirely. In that case, the state would just forward its 10% annual contribution to the employee’s 401 (k).
This system will start covering all new state workers after July 1, 2011. Existing workers are grandfathered in under the current system.
The Utah bill will allow the state to begin cutting its contributions to the pension system after seven years. For that do not pass this reform, it will take twenty-five years.
States throughout America – and their taxpayers – need to study the Utah system and work to pass it in their states. Cut payments now or get soaked later…that’s the choice for our states and their citizens.
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