Government Pension Liability

In the July 11 New York Times there was an article on the serious issue of state and local government pension liability, and the debate about the extent to which the Government Accounting Standards Board should require governments to reflect pension and retiree health liabilities on their income statements.

I was pleased to see this issue get coverage because it is one of the biggest issues of our time. We are an aging society, and like every other developed country, we are facing the dual challenge of meeting our commitments to the elderly, while at the same time being able to meet commitments to the rest of our population. Before we can address the dual challenge, we need honesty and transparency as to what the commitments to our elderly populations are going to cost us.

We particularly need to understand the cost of government benefits because most states have either spending caps (like Connecticut) or balanced budget requirements imposed by statute or even constitutional amendments. Unfortunately, many of these retirement benefit commitments, very much like stock options granted to executives of public companies, were made when there was no financial consequence for the commitment in public sector financial accounting. While the private sector has been accounting for pension benefits since the late 1980’s and for retiree medical obligations since the early 1990’s, the public sector had no obligation to size the commitment, even on its balance sheet until fiscal years ending after December, 2006.

There is still a lot of confusion and inconsistency in how governments comply with this December, 2006, Government Accounting Standards Board pronouncement, so it will be some time before it gets sorted out in many states and localities.

In the next decade, citizens of every state will have to come to grips with the fact that basic government services may not be able to be delivered as they have been delivered in the past because these retirement benefit commitments are unchangeable. Very creative thinking will need to be done about how we maintain a good quality of life in our country when governments can no longer afford to deliver the services to which we have become accustomed. Solutions are out there, and I believe we have the potential to do breakthrough thinking, particularly in involving the private sector more actively in public benefit activities.

But make no mistake about it: this is a crisis in slow motion, but a crisis nonetheless.