Some see signs of hope in a revival in state and local government spending, which after years of being dragged down by poor revenue collections, is showing some life. Indeed, an analysis by Lord, Abbett & Co. released Monday makes this case, arguing that a boost in spending and hiring should aid the economy.
While the analysis by economist Milton Ezrati shows that sources of revenue, including even property taxes, have finally reached the pace that historical trends would have put it at were it not for the housing and financial crises, it states an important caveat:
“Of course, some of these new monies will be directed away from new hiring and spending toward pension trust funds, where many states, towns and cities face huge funding gaps.”
That caveat is the subject of another (and totally separate) report by the Manhattan Institute for Public Policy Research, which, while acknowledging that the economy is growing and spending is rising, asserts that the increased revenues will necessarily be absorbed in the black hole of pension and health care costs of retired public employees.
In other words, taxpayers should expect to see no benefits in terms of improved government services from the current upswing in revenues, barring significant reforms.
Titled “Quantifying Crowd-Out,” the report by the libertarian think tank’s senior fellow Stephen Eide shows through tables and charts how local government expenditures on current employees and services have declined as the share reserved for the benefits of former employees has grown.
So while local government revenues have grown 1.7% from 2008 to 2011, pension contributions have grown 8.9% during the same period. What is referred to as OPEB (“other post-employment benefits”) in budget parlance now accounts for 12% of the typical city’s budget.
But that figure actually understates the problem since it reflects what governments are spending on OPEB rather than what they should be spending. Large pension systems have been found to make just 80% of annual required pension contributions.
And even those that fully fund their pensions often make unrealistic investment return assumptions (such that in reality they remain underfunded). Another problem is that local governments may fund, even fully fund, their pensions with pension obligation bonds that become another budget line item for annual debt service.
Eide looks at the crowd-out phenomenon in five different cities, drawing some lessons from their experiences.