Dan Stockman has an informative article in the Fort Wayne Journal Gazette on a big problem looming for some of Indiana’s cities involving pension obligations for police and firefighters hired before 1977.
Every unit of local government that hired police or firefighters before 1977 already owes millions of dollars under an old pension plan to their retirees, and the amount they owe will double in less than three years when the state stops paying its share of the expense.
The old pension plan was required by state law, but the state only picked up half the tab, and even that contribution will end in 2009. The State also limits the ability of municipalities to raise taxes, so there looks to be no way to pay for the pensions other than to cut other city services. The City of Fort Wayne’s overall obligation will be about $241 million, the equivalent of about 3 years’ worth of property taxes.
It seems that whether it be a business corporation or a municipal corporation, it can generally be said that pension promises were too frequently made that couldn’t be kept.
This sort of fiscal mismanagement is devastating to both the pensioneer and to either type of corporation, and to me, it’s fraud. The City has an obligation to provide basic services such as fire, police, and rescue, so the State put it in an impossible situation. But, I’m sure somebody in state government picked up votes and was re-elected, which is Job One. Two things:
1. I bet you a dollar to a dime that those are exactly the kinds of services put on the block first so as to scare the populace into accepting a tax increase.
2. Can Fort Wayne sell the lease to I-69 to make up the difference? ;-)
Why not skip the middleman and just privatize police and fire services?
Good heavens, no, Doug. Trying to provoke me? You know I believe that government does some things- a select few, to be sure- better, more efficiently, more equitably than private enterprise. Police and fire are definitely not among them. No Pinkertons, thank you.
Mike Kole,
I regret to inform you that you have failed the Murray N. Rothbard Test of Libertarian Purity.
;-)
(I refer the skeptical to chapters 10 and 11 of Rothbard’s For a New Liberty.)
Nah, that wasn’t intended as an underhanded barb at the libertarians. Just being facetious generally. But it does get you thinking about where one draws the line between essential government services that should be provided to every citizen, regardless of means; and non-essential government services for which a use tax is appropriate.
It comes down to accrual or cash flow accounting. As politicians they took the easy way out before 1977. They created a pension benefit, in some cases would not begin paying out for 45 years, and passed the buck or bill to the next generation.
In reality if you our going to pay a person some amount in the future, it is only right and fair that you set aside the amount of money each year needed so that at when it is time to pay the “promised” benefit it has accrual enough funds to pay the benefit from these funds without any further need from the tax payer.
Social Security was the first government program that used cash flow accounting and guess what, it still does. It is $15 Trillion unfunded.
Medicare is the second government program that used cash flow accounting and guess what, it still does.
Rx drug coverage for seniors’ is a third government program recently enacted and guess what it too uses cash flow accounting.
State and local pensions appear to have stopped this type of accounting in 1977 about the time Social Security went through a major tax increase and benefit formula change in an effort to save it. It looks like the state learned from Social Security the fallacy of cash flow accounting.
These types of programs will cause the United States to crash economically. It will happen because all these bills promised by previous generations will some day exceed the cash flow of the tax revenues. At that time who makes the tough choice?
Cutting pension benefits reduces the amount of spending and ultimately the economy leading to fewer jobs higher unemployment.
Raising taxes takes your money, reducing your ability to support yourself, which impacts our economy and jobs. A slower economy results in higher unemployment.
Anyway you look at it, it is a mess.