Broadcast Retirement Network’s Jeffrey Snyder discusses how public pension debt is managed with the Reason Foundation’s Rod Crane.

Jeffrey Snyder, Broadcast Retirement Network

Joining me now is Senior Fellow from the Reason Foundation, Rod Crane. Rod, it is always great to see you.

Thanks for joining us this morning.

Rod Crane, JD, Reason Foundation

Well, I’m very glad to be here, Jeff. So, and great to see you as well.

Jeffrey Snyder, Broadcast Retirement Network

And unfortunately, we don’t see each other from the legs down, but I can assure you that I kind of look the same, and I’m sure you do as well. Rod, you wrote an important piece for Reason, and it’s something that I picked up on, talking about the handling of pension debt versus relative to other, you know, scrutiny around other government debt. What was the thesis here behind your piece?

Rod Crane, JD, Reason Foundation

Well, the idea behind the piece is really to make public policy makers understand that public pension unfunded liabilities should be looked at as if it was technically or legally like other governmental debt. And right now, the technical, it’s a liability, but it’s not considered debt in the same sense. But it has functionally the same result and sometimes more difficult implications than other kinds of state, local government debt.

So the piece is really after the public policy makers to stop ignoring it as if it’s not debt when it actually functions like that.

Jeffrey Snyder, Broadcast Retirement Network

And really important, I mean, as a, you know, I’ve been, as you know, in the audience, as I’ve been in the retirement industry for a long time, I’m not savvy, and I think the audience may not know about the difference of how different types of debt are viewed at the government level, but it would seem to me, Rod, as a lay person in this area, that, hey, you’ve got a promise to pay a significant benefit to public employees.

I would think that it would be as important as any budgetary debt.

Rod Crane, JD, Reason Foundation

And you make my point, so.

Jeffrey Snyder, Broadcast Retirement Network

Oh, good, well, the same thing. And by the way, we never conferred about this, but anyway, go ahead, Rod, I’m sorry.

Rod Crane, JD, Reason Foundation

Okay, so I think it’s important to talk a little bit about why there’s a technical distinction, but there’s no functional distinction. So debt is a technical term for the issuance of debt instruments like bonds or making promises that must be paid off sometime in the future. There’s two major types.

The general obligation debt bonds are the ones that are probably the most constrained because they require the state or local government to back the promise with the full faith and credit of their future taxing power. They have to get the money from somewhere, well, it’s gonna come from taxpayers or other revenue sources. So that’s general obligation bonds.

Those kinds of bonds are heavily constrained because they’re so unlimited. Every state has some sort of limit. New York, for example, says you can’t issue general obligation debt bonds or make promises that are unlimited unless the taxpayers approve them through a referendum.

Every state has some sort of limitation like that of a different form. And the reason they’re there is because in like the Great Recession or other major fiscal panics in the past, the states had to say, we can’t pay these, they’re gone. And all sorts of taxpayer implications occur because of that.

Now there’s special obligation bonds, which is what most of the liability is. Debt instruments to pay for roads, toll roads, school districts, maintenance, things like that. Those come from revenue streams specifically dedicated to that project.

So if the revenue stream dries up, people stop using toll roads. Well, guess what? The bondholders don’t get paid, but the rest of the taxpayers aren’t on the hook.

So there’s special limits there too, but then those are all considered debt instruments. But where bonds are issued and promises are made, they’re very legal and technical. Pension obligations have no debt instrument attached to them.

There’s no bond. It’s purely a promise to pay down the road that this public employee is going to get a pension worth X and it’s supposed to be concurrently funded, but many states and local governments have not either made the contributions or they have had bad luck with their investments and that creates a liability. But the liability in many states is unlimited.

It goes to the general taxing authority, the state or local government must pay it. Illinois is probably the biggest example here where it’s an inviolable contract that once you become a public employee, you’re gonna get every year of service, even from now into the future, 50 years from now, 40 years from now, you’re going to have that promise met. That’s very different than the private sector where pensions are protected up until the date you leave.

You know, if you get laid off, well, you’re done. And the public or private employer can change the pension. Public sector often cannot change a pension.

And so the promise goes on for a very long time and there’s no limitations like general obligation debt or special obligations. So it becomes a full faith and credit kind of opportunity. And that’s why the credit rating agencies like Moody’s and Fitch’s look at those pension promises and those unfunded liabilities.

They’re not debt, but they treat them as debt for purposes of credit rating. And states like Illinois have dramatically worse credit ratings because almost half of their debt obligations are because of public pension liabilities.

Jeffrey Snyder, Broadcast Retirement Network

So, Rod, and this is a, you know, we’re only giving eight to 10 minutes to this topic. This is a topic that requires minutes, you know, 60 minutes, hours and hours of conversation. So we’re not doing it enough justice.

But let’s talk about how you change this because every state has its own legislature, its own process, but the taxpayers are probably watching this and saying, okay, well, I understand that there is a liability on the books, it’s unfunded, that creates a big risk. How do you go about, and I’m sure you thought about this when you’re writing the piece, what’s a plan to make this change, to change how the debt is treated?

Rod Crane, JD, Reason Foundation

Yeah, and that’s really the fundamental part of the piece, I think, is to, you know, point out the problem, but then offer solutions. And the biggest one we can offer is really, you know, stop making those promises. We’re not saying at Reason to stop offering pensions, but stop making unlimited pensions for future service.

Oh, you know, create a new tier of benefits for new hires and say, we reserve the right to change this plan going forward. We’re gonna protect everything you earn while you’re working, but we’re not gonna promise that until you leave employment. We’re gonna promise you that you always get what you’ve earned, but we’re gonna give us the flexibility to make changes if circumstances change.

Defined contribution plans are another example because they don’t come with unfunded liabilities. The other recommendation is don’t do what Illinois has done and fail to make contributions, fully fund actuarially, try to keep these unfunded liabilities as low as possible. And then the hardest one is to challenge where you can, because politically it’s often not easy, is to challenge the court-imposed limitations where they’ve said, okay, this is an inviolable contract forever until you leave employment 40 years from now.

Those don’t make any sense because you’re protecting a pension, but there is no constitutional or contract right to even keep your job. So there’s all sorts of reasons why these judicial decisions may be considered overbroad and where it’s politically feasible, challenge those court precedents. Those are the major recommendations that we’re making.

It’s gonna take a while to get out of this situation of not managing these public pension unfunded liabilities.

Jeffrey Snyder, Broadcast Retirement Network

Well, there are 50 states, so there’s a lot of groundwork that has to happen, but I think making it politically profitable, politicians are in a market, that’s the market of votes and making, it’s up to the citizen in their local area, their district, their city, their state to make this change politically profitable. So I guess in some ways it starts there.

Rod Crane, JD, Reason Foundation

I agree 100%, there needs to be the rationale to the taxpayer to say, we need change, we are tired of not having other public needs being met, let’s try to unwind this as best we can using these different tools.

Jeffrey Snyder, Broadcast Retirement Network

Yeah, I mean, it makes a lot of sense. And look, no one wants to hurt a future employee, a current employee, a retiree, it’s a balancing act. And I think we want fiscal responsibility, at least I do, I don’t wanna speak for anybody, you want fiscal responsibility.

So much of what we’re talking about on the individual is about affordability. Well, the government has to rein in, it’s spending as well. Hey, I think I’m making the case, but I’m just giving my personal point of view.

We’re gonna have to leave it there kind of at a time, but look, we’re gonna have to bring it back. So thank you so much for joining us, and we look forward to continuing that conversation in the future.

Rod Crane, JD, Reason Foundation

I appreciate it very much, Jeff.