This is the first of a two-part series on how the combined impact of the COVID virus and corporate giveaways on state unfunded pension liabilities and how it will only make a serious underfunding problem more critical and possibly insurmountable. This may mean that state pensions are phased out and replaced by riskier 401(k) plans as states attempt to reduce union power.
If you watch TV today, state officials and the media are often falling all over themselves praising first responders, teachers, city sanitation workers, and health workers in public hospitals who are braving the virus to continue working in adverse conditions.
But all of that praise is rhetoric, especially when it comes to funding future pension plans for those same public workers at the state and local levels nationwide.
A new study, Putting State Pension Costs in Context, published by the non-partisan group, Good Jobs First, found that 13 states are not making adequate contributions to state pension plans.
This fact in itself is not new.
What is new is the group’s analysis that found states are diverting mandatory contributions to state pension plans and giving the money in the form of subsidies and tax breaks to corporations.
The impact of the COVID virus, while not covered in the group’s survey, will also reduce state tax revenues and market returns. These additional factors will only complicate and reduce state revenues that could have been used to make pension contributions.
“states are diverting mandatory contributions to state pension plans and giving the money in the form of subsidies and tax breaks to corporations.”
The diversion of state pension contributions to corporations is so bad that the report found that Colorado, Georgia, Louisiana, Missouri, South Carolina, Texas, and Vermont together spend more than $17 billion per year in development subsidies and tax breaks for corporations. This $17 billion a year in payments to corporations is about five times the states’ yearly pension obligations, the study found.
Every state has its own stories of how state taxpayer money is being diverted to corporations and not being used to fund future pensions for its state employees. One of the worst stories comes from Georgia where “a little over one-tenth of Georgia’s $1.1 billion in subsidy spending and revenues lost to tax loopholes would have been sufficient to pay for pensions in FY 2019. Texas is no better. The study found that “14% of its $13.3 billion in corporate giveaways could have covered its pension obligations.”
An earlier version of the study released in January 2020 covered the diversion of taxpayer money to corporations in Arizona, Connecticut, Kansas, Kentucky, Oklahoma, and Wyoming where “huge tax breaks and other subsidies to corporations also exceeded pension obligations in those states.”
In Kentucky, a state with unfunded pension liabilities of $588 million, provided $618 million in tax breaks and subsidies to corporations in 2018. According to the study, these subsidies were distributed via 28 state agencies covering the film, farm, tourism, job training, and tech industries. The study said that “there is hardly any kind of corporate activity that the state has not subsidized” in Kentucky.
Worse, many of these subsidies and tax breaks don’t have to be repaid to Kentucky taxpayers. “Currently, at least for the programs reported under GASB Statement No. 77 on tax abatement disclosures, there are no provisions for recapturing any of the abated taxes, which means that firms that fail to honor the agreements (to produce new jobs or make a new investment, for example) do not have to pay back their awards. Corporate tax dodging via offshore tax havens costs Kentucky an additional $284 million a year.”
Kentucky is just one example of how taxpayer money is being distributed to corporations, in many cases with no financial accountability, but this is happening in many other states, as the study found.
The much bigger question is why state use of taxpayer money is being diverted to corporations and what is its effect on the pension plans and future financial security of state workers, most of whom are lauded in public by state officials and the media, while at the state time they are disrespected and financially abused in private.
Elected Politicians Have Neglected Public Employees for Decades
While the study avoided making any political conclusions about the practice by states to divert pension contributions to corporations, these are definitely political decisions. The main driver is the intentional neglect by elected state and local officials to meet fiduciary responsibilities, and in many cases, are contractual obligations. This intentional neglect involves Republicans and Democrats in what has become accepted policy over decades.
Another political factor is neoliberalism. This political-economic philosophy, espoused primarily by Republicans and libertarians, believes that state-supported financial and social plans contradict market forces.
As a result, neoliberalism favors privatizing state- and federal-sponsored social and financial services, including Medicare, Social Security the US Postal Service, Medicaid, and public utilities ranging from water and electric and toll roads to public education.
This diversion of taxpayer money from public pensions to privately sponsored 401(k) plans have been underway for decades. The modus operandi for the transition from public service providers to private ones goes through three phases. The first is to trash the existing system and then say it is unworkable and beyond repair. Phase two is to push for privatizing it. The goal is to break union membership and its bargaining power, accompanied by privatization.
In the state and municipal pension world, pensions are governed by a politically-appointed board assisted by investment consultants, attorneys, and actuaries. Decision making transparency varies by state, and it is often difficult to find out how managers are chosen and their review process. Replacing a manager is difficult and often done without much fanfare. Fees are often difficult to discover.
What the states are doing replicates what corporations have been doing for decades: converting more secure pension plans to riskier 401(k)s. In effect, this shifts all the risk to state workers, most of whom are ill-equipped to make investment decisions that should deliver secure retirements decades in the future. Pension plans are also more expensive to administer than 401(k)s, thus saving states money.
A State-by-State Breakdown
A State-By-State Breakdown of Pension Obligations Compared to Corporate Subsidies and Tax Breaks. (Data as of 2018 and 2019, Source: Putting State Pension Funds in Context)
Arizona Public Employee Pension Obligations $283,827,000 2018
Cost of Arizona Subsidies and Corporate Tax Breaks $603,253,985
Connecticut Public Employee Pension Obligations: $449,822,008
Cost of Connecticut Subsidies and Corporate Tax Breaks: $564,084,528
Kansas Public Employee Pension Obligations $263,599,343
Cost of Kansas Subsidies and Corporate Tax Breaks $442,996,329
Kentucky Public Employee Pension Obligations $588,166,776
Cost of Kentucky Subsidies and Corporate Tax Breaks $618,309,219
Oklahoma Public Employee Pension Obligations $ 293,461,555
Cost of Oklahoma Subsidies and Corporate Tax Breaks $ 704,599,890
Wyoming Public Employee Pension Obligations $ 63,895,374
Cost of Wyoming Subsidies and Corporate Tax Breaks $ 77,605,382
Colorado Public Employee Pension Obligations $378,203,901
Cost of Colorado Subsidies and Corporate Tax Breaks $757,983,403
Georgia Public Employee Pension Obligations $126,707,888 2019 Cost of Georgia Subsidies and Corporate Tax Breaks $1,178,564,200
Louisiana Public Employee Pension Obligations $232,813,697
Cost of Louisiana Subsidies and Corporate Tax Breaks $314,105,320
Missouri Public Employee Pension Obligations $150,219,017
Cost of Missouri Subsidies and Corporate Tax Breaks $538,485,876
South Carolina (2019)
South Carolina Public Employee Pension Obligations $213,876,520
Cost of South Carolina Subsidies and Corporate Tax Breaks $475,045,219
Texas Public Employee Pension Obligations $2,171,094,511
Cost of Texas Subsidies and Corporate Tax Breaks $4,477,912,030
Vermont Public Employee Pension Obligations $27,692,876
Cost of Vermont Subsidies and Corporate Tax Breaks $193,374,753