With the closing of the 2015 legislative session this year has come a chorus of lamentations about money that didn’t get spent, and how important interests from school children to outdoor recreation and environmental protection will suffer as a result.
We should get used to it. The truth is, discretionary decision-making – consciously choosing priorities and then funding them — is becoming a rarity as more and more “built-in” or “automatic pilot” spending items increasingly crowd out state and local government budgets.
At the State level, many would first think of the Medicaid program, where the crowd-out phenomenon has been in place for many years but recently compounded by the Affordable Care Act. (At the risk of dating myself, we used to refer to Medicaid as the “Pac Man” of the state budget.) Once the federal funds are accepted, the State is committed to certain actions no matter the cost.
One of the most significant “built-in” spending components affecting all state and local governments in Iowa is public pension debt. Our public pension systems guarantee retirees a monthly benefit for life, the size of which depends on how long they worked and at what salary. The system is built upon a financial model that involves a whole series of assumptions. If the assumptions don’t pan out, taxpayers are still on the hook to pay the benefits.
And that’s what’s happened in the 2000’s. Changes in life expectancies, the recession of 2001/2002, the market collapse in 2008/2009 and chronic underfunding have caused shortfalls in the state’s four public pension systems. The combined shortfall (in assets set aside to cover liabilities already incurred) for Iowa’s public pension plans is now approaching $6 billion. So now, in addition to sharing in the annual cost that goes with each year of service, taxpayers must also make an extra payment to the pension systems each year to gradually erase (or amortize) the shortfall. This is what it will take to be able to pay the benefits when due.
The good news is we are now making the payments. Some states aren’t, and they are continuing to lose ground. The bad news? The payments are very expensive. Following a long history of stable funding since the 1970’s, required contributions to the Iowa Public Employees Retirement System (IPERS) have now risen 50 percent, and they’ve doubled in the municipal police and fire plan. For the next 25-30 years, the total debt payment alone comes to $400 million per year. This is 100 percent taxpayer-financed.
To put this payment back in the context of our school funding and outdoor/environmental initiatives, consider these examples. The debate all session centered on whether the K-12 system should receive 1.25 percent or 4 percent state growth. Meanwhile, the $400 million that will be sent to the pension systems by all public employers — merely to cover the debt payment — is the equivalent of 8 percent growth. It does not show up in an appropriations bill, and is not consciously weighed against school funding. But it certainly impacts school funding.
Or consider the 3/8 of a penny increase for conservation, environmental and outdoor recreation that was pushed by a broad coalition of interests. Why does this coalition feel the need for a tax increase to pay for these priorities? Because they have been crowded out of state and local budgets. This major environmental initiative would generate $150 million, less than half of what is being spent every year to pay down pension debt.
Unfortunately, there is nothing that can be done with the pension shortfall that has already been incurred. We owe this and must pay it no matter what. But we should be asking if we want to compound our losses by adding new public employees to a system that is already so far out of control. Without change, we will continue to see our true priorities – be they education, environment, or public safety – shortchanged even more in the future.