Your pensions are not the problem E-mail
Written by Jim Brown   

The myth lives on. The media accepts the idea without question. The public, after being bombarded by propaganda supported by those trying to undermine collective bargaining, think it is true as well. But all the evidence points in another direction.     And what is this myth? It’s the story told over and over for close to a decade - the financial crisis and associated threat of bankruptcy of local governments are caused by the high wages and huge pensions going to our firefighters, health care workers, law enforcement officers, teachers, and others working for our town, city, county and state government agencies. The evidence tells a different story.

Shelby Chodos, a lecturer at Harvard University with a special expertise in public finance, has gathered extensive data on local government finances including how much money is going out to pay for pensions.  

His data shows that pension expenditures are not the “fundamental cause” of the budget problems for local governments.  As shown on the chart below, recent local government spending on pensions for retirees amount to just 2.9 per cent of total government expenditures.  

In 1980 pensions were 4 percent of the budget.  That percentage rose to a high of 4.2 per cent in 1985 before declining to a low of 2.0 per cent in 2001.  

How could the costs of something that is such a small per cent of total expenditures and has been declining over the last 30 years be the cause of the fiscal crisis?  The answer is clear.

Pensions are not and have never been the cause of the fiscal problems of local government.

So if pensions aren’t the problem, what is the cause of the budget shortfalls impacting almost every state, county, city and town in the country? Failed policies in Washington and speculative excess on Wall Street resulted in the Great Recession.  In all recessions local government finances are negatively impacted because of declines in revenues and increases in expenditures.  The

Great Recession was more severe so these impacts were more severe.  

For example, state tax revenue fell by more than 10 per cent on average in 2009.  By contrast, revenues fell by only about 6 per cent in the recession in the beginning of the century.  On the expenditure side, the recession required even more safety net expenditures and this was compounded by the rapid increases in health care costs.   

Nationally, per capita health care costs increased 3 per cent in 2009 and 2010. Between 2005 and 2010, health insurance premiums were up more than 25 per cent. 

Even as the economy improves and budget problems ease, local governments will face financial stress in order to pay for health care and other important concerns such as infrastructure.

Local budgets were very hard hit by the recession caused by Wall Street. 

It is interesting to note that the majority of the bailout funds went to banking and other financial organizations as opposed to state and local governments.

Then adding insult to injury, the wages and pensions of public sector employees are blamed as the cause of the local government financial crisis. 

The myth goes on and it has real consequences.  We all have to do our part to help the public understand the truth.

Jim Brown is a former professor at Harvard’s Kennedy School of Government.


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