WASHINGTON — Participants at the Brookings Municipal Finance Conference on Tuesday disagreed on the need for a program to be put in place to deal with insolvent public pension plans.
During a session on pensions, municipal bankruptcy expert James Spiotto, managing director of Chapman Strategic Advisors LLC, called for a four-pronged approach that includes congressional legislation to create a new federal bankruptcy court that would handle only insolvent public pension systems.
Spiotto’s plan assumes that a state or municipality has raised its taxes to the limit and all efforts at a consensual agreement with labor unions have been exhausted.
He also warns that communities face potential population loss if they raise taxes too high and are not able to maintain public service levels.
Spiotto warned that pension underfunding needs to be dealt with before another recession arrives in the next two to five years.
“I am not convinced that the scope is terrifying at this point,” Carol O’Cleireacain, former deputy mayor of Detroit for economic policy and planning, said, critiquing Spiotto’s latest paper presenting the proposal.
O’Cleireacain said budgeting tools and economic development options that can improve a municipality or state’s fiscal picture.
“Since 2009 every state has made meaningful changes to their pension plan benefit structures, financing arrangements or both,” she said. “The costs are now reported on balance sheets and continue to be lowered.”
Spiotto agreed that widespread efforts at pension reform have been undertaken, but he pointed out that some state courts have blocked reform efforts. And sovereignty issues prevent states from filing for federal bankruptcy protection, he said.
Deficits in state pension plans grew by $295 billion in fiscal 2016 to $1.4 trillion, Pew Charitable Trusts reported in April.
Five state retirement systems — in Colorado, Connecticut, Illinois, Kentucky and New Jersey — were under 50% funded, Pew reported.
On the other hand, states generally are in better fiscal condition than a year ago, the National Association of State Budget Officers recently reported in its spring edition of the Fiscal Survey of the States.
Both Spiotto and O’Cleireacain make good observations, said Kim Rueben, director of the state and local finance initiative at the Urban Institute.
The fiscal picture has improved, Rueben agreed, but she expressed concern that some states have not put their financial houses in order this far along in the economic expansion.
“I think right now with the stock market booming it feels less urgent, but we want to get our fiscal houses in order broadly,” Rueben said.
In 1990 average public sector pension plans were 80% funded based on Governmental Accounting Standards Board standards, compared with about 70% now, according to Laura Quinby, a research economist at the Center for Retirement Research at Boston College.