Power to the people?

When John Kennedy proposed that we should think not of what government can do for us but what we could do for the government, I don’t think he had in mind what we could do for government workers and public union employees.

The requirement that state and local governments must perform actuarial assessments of their pension and health care promises to their employees is resulting in shockingly huge financial obligations upon their taxpayers.

The new rule, issued by the Government Accounting Standards Board (GASB) in 2004, goes into effect on December 15th. It will require public-sector employers to treat their health-care promises to workers the same way they already handle their pension obligations: by reporting on the total size of their future commitment, instead of just this year's cost….

The states are having a hard enough time meeting their pension promises…. By 2004, assets in the average state's pension fund were enough to cover only 84% of its accrued pension liabilities, according to Standard & Poor's (S&P), a rating agency.

For the 50 states as a group, S&P reckons, the 16% shortfall is equal to $284 billion, almost as large again as their combined general-spending debt. Many American cities are in a similar bind. Of the 20 biggest, Philadelphia has the largest shortfall, with funding for only 53% of its pension liabilities.

As hard as it will be for state and local governments to meet public employees' pension costs, paying for their retirees' health care is an even bigger challenge thanks to rapidly rising costs. California, for example, faces $49 billion in unfunded pension liabilities, but believes that its health-care shortfall is another $70 billion. Maryland estimates that its unfunded health-care costs top $20 billion. That is $300,000 per public worker, nearly eight times its pension shortfall.

Chris Edwards and Jagadeesh Gokhale of the Cato Institute, a libertarian think-tank, reckon that America's state and local governments face a total shortfall in their health-care plans of $1.4 trillion. They arrive at that staggering sum by extrapolating from 16 states and 11 local government employers that have tried to gauge their health-care liabilities, which amount to roughly $135,000 per state or local employee. Even if Messrs Edwards and Gokhale have overstated the problem, many experts agree that the health-care shortfall is much bigger than the pension gap.

Fortunately for public employers, they probably have more leeway than with pensions to tackle the problem. Courts in many states have issued rulings that make it hard for those governments to break a pension promise to their employees. Health-care plans are less sacrosanct. The sooner public employers start breaking those vows the better. The new accounting rule, though dreaded by some officials, should help—by shedding some much needed light on the problem.

Revealing the cost of these tremendously expensive promises made by our politicians comes at a time when more states are confronting “Massachusetts plan” type approaches to health care coverage for the uninsured. For example, in Illinois, the Chicago Tribune's editorial points out:

As in the Massachusetts plan, every Illinois resident would be required to have insurance, through an employer or otherwise. Those who can afford it would be required to buy it. Those of limited means would be subsidized. Those who refused would be penalized….

The glaring vulnerability in the Illinois proposal is this: It would cost state government $3.6 billion and private employers $1.5 billion more a year.

The report came just a day after a prominent business group warned that Illinois is headed toward "financial implosion." The state has $106 billion in debt and unfunded liabilities, about $8,800 for each resident, the Civic Committee of the Commercial Club of Chicago said. Unless something changes dramatically, that massive gap will continue to grow quickly. Piling on an expensive new health-care initiative would make a horrendous situation worse.

In California, such proposals are estimated to cost up to $10-billion a year, for a state that already has serious budget deficits. Yet, the Governor has been stymied by the Democrat legislature and tens of millions of dollars of public union funds to defeat his reform initiatives, so he’s just going along with the slide into insolvency.

A problem that has emerged since last year – a debt of $40 billion to $70 billion for providing retiree health care in the future – does not have to be formally acknowledged until June 2008 under new accounting rules.

The Republican governor, who wants to continue bipartisan relations with the Legislature, could reopen hostilities with Democrats if he proposes sweeping pension changes opposed by their public-employee union allies….

What could be considered imprudent, however, is the state's promise to provide health care for retired workers and their dependents without creating a pensionlike investment fund to help pay for retiree health costs.

As a result, the Legislative Analyst said in February, future generations will be asked to pay for the health costs of current state workers when they retire.

A recent study of the correlations between taxation levels and the reduction of poverty among the states shows that lower taxes are associated with lower rates of poverty.

Using data from the U.S. Census Bureau, the pages that follow demonstrate that low-tax and -spending states enjoyed sizable decreases in poverty rates during the 1990s. High-tax and -spending states, meanwhile, suffered increases in poverty rates. Th is study grades each state with regard to reducing both general and childhood poverty rates during the 1990s.

Will the people opt for higher taxes to support government employees, especially at benefit levels largely unavailable or disappearing under their cost burdens in the private sector, which also reduces the opportunities for our poorest to advance? Power to the people!