Misunderstandings Over Pensions Create 'Unnecessary Alarm'

(January 21, 2011) — The Center on Budget and Policy Priorities (CBPP) has offered a report concluding that misunderstandings regarding state debt, pensions, and retiree health costs has caused “unnecessary alarm.”

The report stated that predictions of an “imminent fiscal meltdown” among US states and municipalities are exaggerated, with misperceptions also diverting attention from needed structural reforms.

While US states will reportedly confront deficits totaling $140 billion in the next fiscal year, the Center has concluded that the operating deficits most states are forecasting for fiscal 2012 are largely the result of the weak post-recessionary economy. “Overheated claims about state and local budget problems not only are inaccurate, but also could lead policymakers to take unwise steps such as allowing states to declare bankruptcy or forcing them to change the way they report their pension liabilities as a condition for issuing tax-exempt bonds,” Iris J. Lav, senior adviser at the research group, stated in a news release.

Industry observers claim that states and localities have $3 trillion in unfunded pension liabilities and that pension obligations are unmanageable, which may cause localities to declare bankruptcy, the report explained. Yet, “such claims overstate the fiscal problem,” the report said, adding that the warnings fail to acknowledge that severe problems are concentrated in a small number of states, and often promote extreme actions rather than more appropriate solutions.

The CBPP said that instead of bankruptcy, state and local governments should instead divert their attention to overhauling their budget and revenue systems, proactively addressing structural deficits that have built up. The group added that the pension liability problem also may not be as large as some have predicted.