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When the Enron collapse stole the life savings and pensions of thousands of Enron employees, elected officials were justifiably outraged. They flocked to news cameras and held hearings to demand more oversight and accountability for corporations.
Ironically, they didnt demand the same accountability for the public sector. The consequences to retirees, taxpayers and investors could be devastating.
State and local governments issue bonds to finance public projects, such as bridges, roads and sports stadiums. Investors depend on the information provided by public officials to gauge the governments ability to repay that money. Currently there are now almost $2.5 trillion worth of municipal securities outstanding in the United States. Thats more than the gross domestic product of China.
Why should we care? Because its our money on the line.
Christopher Cox, chairman of the Securities and Exchange Commission, says shaky financial management in the public sector puts investors and taxpayers at risk. Hes calling for tougher scrutiny of state and local governments.
To make his case, Cox points to the financial collapse of New York City in the 1970s. A decade later, our state added buckets of red ink to the ledger with the billion dollar default by the Washington Public Power Supply System. In the 1990s, Orange County had the dubious distinction of filing the largest municipal bankruptcy in American history, for which taxpayers are still paying the bill.
More recently, the SEC sanctioned the city of San Diego for committing securities fraud. City officials failed to disclose to municipal bond investors that the citys unfunded pension liability would grow from $284 million in 2002 to $2 billion in 2009.
As the San Diego experience demonstrates, public employee pension funds pose a particularly potent threat to taxpayers and bondholders.
Its often easy for politicians to make promises today when the bill doesnt come due for decades. Thats the case with pensions. Legislators routinely approve richer retirement benefits for public employees, even if they dont have the money to pay for them. Governments are supposed to make regular payments to fund future benefits, but many do not.
Nationally, the liabilities are staggering. Forbes magazine reports that state and local governments owe some $1.5 trillion in unfunded liabilities for employees health care and retirement benefits. If nothing is done, retirees will be shortchanged or taxpayers will be hit with enormous tax increases to pay for the unfunded benefits or both.
Washington performs better than many state and local governments, both in disclosure and performance. Still, we could do better.
Washington owes its public employee pension fund $5.7 billion. Thats a lot of money, but not as bad as many states. California, for example, owes $70 billion. But for the past four years, Washington lawmakers skipped the recommended payments to whittle down that debt.
This year, despite sitting on a $2 billion surplus, state lawmakers decided not to pay those missed payments. And because pension funds are invested, just one missed payment costs taxpayers $564 million in lost investment income.
Some say that the public sector should not have to play by private sector rules because government is a better risk corporations go out of business, while governments do not. What theyre really saying is that taxpayers represent a permanent deep pocket. Investors know that we, the taxpayers, will always be around to pay the bill. Ask the folks who lost out in the WPPS default just how well that worked. (Answer: Investors lost a bundle.)
When public officials miss billions of dollars in pension payments and lose millions more in investment income, theyre piling up a mountain of debt that we and our children will eventually have to pay.
Don C. Brunell is the president of the
Association of Washington Business.