Tonight I was invited to a public affairs forum at the Federal Reserve Bank of Atlanta to listen to Dr. Joshua Ruah, Associate Professor of Finance at Kellogg School of Management, Northwestern University. The subject? The Economics of State and Local Government Finance: Public Pension Promises. My good friends Jack Guynn, former President of the Bank and former Oglethorpe Board Chair, and Chuck Knapp, former UGA president and former Oglethorpe Trustee, were among the 100 or so guests. I didn’t take notes and some of the finance discussion passed me by, but I think I got the general message: we are screwed, all of us, unless we are willing to accept the facts (there are those pesky facts again) and adopt reasonable, multi-faceted solutions to this problem. First, the problem.
By Dr. Ruah’s meticulous calculations, we are collectively four trillion dollars in the hole in terms of funding the current state and local pension obligations we have incurred. Let’s stop there for a moment. Four trillion is a lot of money. And he is talking only about CURRENT obligations, not those we continue to run up each and every day. Dr. Ruah explained in great detail how auditors mistakenly assert that the shortfall is only one trillion, but trust me on this one, I’d bet the house on Ruah’s numbers. Georgia and Atlanta fare pretty well in the scheme of things. We are only a couple hundred million short while states like Pennsylvania and Illinois are on the edge of going Greek on us.
Can we do anything about all this? Actually, yes. There’s a whole lot that can and must be done and most of the suggestions Ruah put forward made perfect sense to me. There wasn’t any political agenda that I could see in his recommendations. Some involved labor giving up certain things they have been used to; other ideas required increasing state revenue to match obligations. One thing I sure know from running a university is that complex budget issues are never resolved by focusing on only expenses or revenue. It takes some give on both sides of the equation to get to a sustainable solution. The retirement age needs to move up. That helps a little. COLA increases need to be managed. That helps a little. Defined benefit plans divorced from real returns of the market are big trouble. 30% of the public sector workers are not covered by Social Security. If pension payouts are to decrease (and they will), people need to have the additional protection of SS.
I do believe that when we commit to something, we have to be willing to pay for it. Whether that’s a war or a pension. That’s not a conservative or liberal position. Now, the left and the right will surely disagree about what we ought to be paying for, but once we have committed ourselves, what choice do we have? In the case of public pensions, we have committed ourselves to the tune of four trillion more dollars than we have been willing to fund. That’s not left or right. That’s just wrong.