Municipal Tensions

Tonight I want to point you to something that might make you uncomfortable.  Don’t worry, it is for a good purpose.

Depending on where you live in the US, various states and municipalities are more or less prepare for the onslaught of cash flow that they will have to pay baby boomer employees after they retire.  Here’s a very good summary of which states are prepared, and which are not, from the Pew Charitable Trusts.  As for pension benefits, they are relatively well funded, with 85% of the accrued benefits funded.  Other Retiree benefits (mainly health care) are only 3% funded.

Only ten states are more than 96% funded on pensions: Oregon, Utah, South Dakota, Wisconsin, Tennessee, Georgia, Florida, North Carolina, Delaware and New York.  Ten states are less than 70% funded on pensions: Hawaii, Kansas, Oklahoma, Louisiana, Illinois, Indiana, West Virginia, Connecticut, Rhode Island, and New Hampshire.

But as for other retiree benefits, 32 states have funded nothing at all (0%).  See the graph on page 42.  They will either pay it out of cash flow (from increased taxes), or decrease the benefits, because they are not guaranteed as pension benefits are.   Only one state is in good shape, Wisconsin (my home state), which has its other retiree benefits 99% funded.  Next best are Arizona (72%), Alaska (65%), and North Dakota (41%).   In a word — ugly.  Either promises will have to be rescinded, or taxes raised.

It’s worth looking at this report because these matters will be upward drivers of taxes starting about five years from now, and lasting for two decades beyond that.  It will be a big political fight.  Taxpayers will do their best to reduce benefits to state and local government workers who worked at lower salaried jobs, knowing that they would make it up on better benefits.  Alas, but the benefits may be less than expected.

Now as far as the US goes, Federal DB plans are unfunded, including Federal Employees, Social Security and Medicare.  Holding US Government bonds doesn’t count, those are just indicators of future taxation.  Higher future taxation from the US government will be a fact of life.  I don’t argue with it.  They’re bigger than me.

States and municipalities may be another matter, though.  Many municipalities are even worse funded than the states, and their taxation capabilities are more limited.  People can leave to go to other places in the US.

My advice: review the pension and other benefit funding levels of your state, and any other places that you get taxed (county, city, assessment district).  Figure out now whether your taxes are likely to rise or not, and ask yourself whether you can live with it or not.  This is somewhat cold-blooded, but you need to act on this in the next 2-3 years.  Five years out, and this will factor into land values and a wide number of other economic variables, making any move less economic.