December 27, 2005

The Upcoming Public Sector Financial Implosion

Ed Achorn of the ProJo discusses the looming transparency of public sector financial obligations to be required under the new accounting rules:

Taxpayers in Rhode Island -- and nationwide -- will soon be learning some very unpleasant facts of life about debts the politicians have been running up in their name for many years, in courting favor with public-employee unions. And some union leaders are understandably getting twitchy about the day when the spotlight gets switched on.

The federal Government Accounting Standards Board has ordered states and communities to start reporting, in less than two years, how much they owe government retirees for (often free or low-priced) health coverage.

The true costs -- which have been kept hidden from the public until now, since governments have conveniently failed to keep track of the mounting pricetag -- are staggering, experts say. Nationwide, the unfunded liability could be $1 trillion.

"This is a huge liability," Jan Lazar, an independent benefits consultant in Lansing, Mich., told The New York Times ("The next retirement time bomb," Dec. 11). "If anybody understands it, they'll freak out."...

Public disclosure of such costs will have repercussions, some of them alarming. Cities and towns may have such huge liabilities that their bond ratings will plummet, making it extraordinarily expensive or impossible to borrow money. Some may be forced into bankruptcy.

Local taxes -- in Rhode Island, already among the nation's highest -- may have to be raised sharply, and services slashed. Citizens are sure to be angry that even more of their money will have to go for even worse government because of deals cut long ago, and never fully explained. Union officials fear the public will pressure politicians to slash benefits...

Of course, those of us in the private sector, struggling to survive in a competitive world, are paying most of the bills for those in the public sector. While we focus on our jobs, paying taxes, and keeping our children clothed, sheltered, educated and healthy, special interests are at work day and night to influence the political system.

In many states, public-employee unions and their operatives have learned to contribute heavily to campaigns, get out the vote, elect friendly politicians, and handsomely pay experienced, full-time advocates to represent their interests at the state house and at city hall.

...Unfortunately, the common good and the public interest sometimes get short shrift, even in the best system, and even when agreements are made "in good faith."

It's human nature. Politicians often don't worry about cutting deals whose costs will be inflicted on later generations of taxpayers, such as offering free health care to government retirees. They won't be around to suffer the wrath of the voters who foot the steep and rising bills. And politicians can get away with selling out to special interests because the public is too busy and apathetic to notice -- or because voters are denied essential information that could help them better understand what is at stake...

Achorn's editorial expands on some of the points made in Andrew's previous posting, which highlighted a recent ProJo article:

As a result of a new public-sector accounting rule, Rhode Island -- along with every other state, city, and town, water, sewer and school district in the nation -- will soon have to disclose to its taxpayers and bondholders the total value of its retiree health-care promises....

While no other specific action is required, the [American Federation of State, County and Municipal Employees] told its members, the new Government Accounting Standards Board rule "will require employers to calculate and publish the cost of these benefits, which will show up as a liability on the employer's financial statements."

"If assets have not been set aside to offset the liability, an 'unfunded liability' will be displayed.

I predict that, when the full effect of this previously hidden information becomes public knowledge, it will make any number of corporate scandals of past years look like a walk in the park.

Outlandish and unfunded public sector pension obligations as well as extraordinary healthcare insurance benefits are all a result of outrageous demands by public sector unions rewarded in a competition-free environment by spineless politicians and bureaucrats.

Why does this happen? Because of the misguided structural incentives that drive public sector actions that nobody wants to confront directly. These issues have been discussed previously on Anchor Rising:

Public Sector Issues
Misguided Incentives Drive Public Sector Taxation
Bankrupt Public Pensions: A Time Bomb That Will Explode
Why Truly Free Markets & Timely, Transparent Information Are Needed to Protect the Freedom of American Citizens
RI Public Pension Problems
The Cocoon in which Entitled State Employees Live
The Union's Solution for the Future: Get More People in Unions
Bankrupt Public Pensions, Part II
How Public Pensions Make People Well-Off at Taxpayers' Expense
Public and Private Unions
Rhode Island Unions Again Resist True Pension Reform
"Shut Up & Teach"

Union Political Activity
Learning More About How Dues Paid To Big Labor Are Spent
Pension Fund Politics: How the AFL-CIO Violates Its Fiduciary Responsibilities
Now Here is a Good Idea
Paycheck Protection: Allowing You to Keep Your Own Hard-Earned Monies

The big picture of why all this happens is explained in this posting: A Call to Action: Responding to Government Being Neither Well-Meaning Nor Focused on the Public Interest.