The State of Indiana is Dead Broke
Posted by Jeff Pruitt - 3/15/10 @ 10:33 pm - Filed Under Featured, State Politics
I know many of us (including Governor Daniels) like to point at the budget troubles in California and snicker; laughing at the clueless fools who seem to have spent themselves into oblivion. But as the saying goes, those who live in glass houses shouldn’t throw stones. And when it comes to state finances, Indiana is certainly living in a glass house.
You may not know this because nobody talks about it much, and the Governor and state legislators certainly aren’t going to bring it up, but the state of Indiana is flat broke. Yea, you’ve probably heard about the $1.6 Billion we borrowed from the feds for unemployment benefits - of course the state legislature just kicked the can down the road by delaying the unemployment contribution increases for another year. But the problem is MUCH, MUCH worse than that.
Public sector pensions are draining the state coffers to the point that they may never recover. The Pew Center recently released a comprehensive report on the public pension systems of all 50 states and the results are startling. The report title,
“The Trillion Dollar Gap”, tells you everything you need to know.
Indiana was one of 19 states that the report said has “Serious Concerns” regarding their future pension obligations (just for the record California isn’t one of them). Indiana has only 72% of the their future obligations funded and their unfunded pension liability is $9.8 BILLION - that’s more than the entire payroll of every employee covered by a state pension plan! And to make matters worse, over the last 5 years we haven’t even made payments that were actuarially required to fully fund the pension moving forward. That means the problem is getting worse.
And the number listed above doesn’t include $442 Million in unfunded health care and other non-pension benefits. The state isn’t taking these seriously whatsoever. Most recently they were actuarially required to pay $46 million but only contributed $10.2 million - again the problem is getting worse.
These numbers also do not include the 21% loss the fools running the Indiana Employees’ Retirement Fund took in 2008. I think people also need to realize that the actuarial contribution that is required assumes investment returns of 7.5% per year. It is simply not practical to get that kind of return in a market where there is 0% borrowing. The only way to achieve that level of return is to take a tremendous amount of risk - something a pension plan should NOT be doing lest we dig ourselves an even deeper hole.
Public sector pensions are going to bankrupt this country and this state unless we stop the madness NOW. Some states have begun to reduce future benefits and require larger employee contributions but Indiana has done neither. Politically it’s quite easy to promise future benefits to people when you won’t be around to take the flak for bankrupting the state but that doesn’t make it right.
All levels of government, starting with Governor Daniels, need to make this problem their #1 priority moving forward. Failing to do so will inevitably lead to the fiscal ruin of this state.
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8 Responses to “The State of Indiana is Dead Broke”
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[...] From Jeff Pruitt over at the Fort Wayne Politics blog: [...]
Jeff:
I wouldn’t say we’re “dead” broke (yet)…let’s just say we ARE on life support, and the CRASH CART happens to be at the other end of the ICU wing.
Bob G.,
I would agree with Jeff Pruitt. Indiana is broke. The truth of the matter is that most Government agencies are broke becuase they handle their accounting on a cash basis rather than an accrual basis.
Government is broke because of all of the unfunded liabilities thay have!
Mike
Things are tough, but we don’t need Chicken Little. Lets put this “Indian is Broke” proposition under the microscope of reason.
Starting with the Unemployment Tax conundrum, Indian has three choices: (1) borrow funds from the Feds; (2) raise taxes on the employers and risk more unemployment; or(3) knuckle under to the Obama pressure to lower UC eligibility requirements and raise benefit levels in order to get $148 million over two years under the Stimulus bill. Choice#(1) appears to be more sane than the other choices.
Then there is the pension obligations, which will not all come due tomorrow. Indiana has kowtowed to the public unions just as all governments have done. We can solve this problem only by shutting down the guaranteed pensions and put government employees on the same 401K packages that we have to live with. Hey … these people work for us.
Hmmm … I wonder how much we can reduce the FWCS budget by doing this into the future.
As for the 21% investment loss incurred by the state’s pension funds in 2008, I can only say: “I wish that I had been so fortunate.”
Gadfly,
Wow… We will have to disagree on this.
Indiana is 1.6 billion dollars in the hole and this debt is rapidly increasing. There is no end in sight to inflated unemployment levels nationally or in Indiana. The Indiana Legislature just changed the elgibility rules by making it so people on unemployment no longer have to aplly for jobs each week. The Indiana unemployment fund is bankrupt and the only sane answer would be to tighten eligibility requirements while increasing taxes on EMPLOYEES.
I agree the pension obligations will not come due for some time; however, we need to stop kicking the can down the road. We need to start making the required pension payment immediately and we need to immediately restruture public employee pensions so that no new hires get defined pension benefits.
Mike
Pension liabilities will not come due for some time. Mike and I agree, we keep kicking this can further down the road all the time the liabilities are not only compounding for those hired prior to 1977 of which the state took over this responsibility, but also all those after 1977. In simple terms, those after 1977 are being funded, but those prior to 1997 not. I would bet that if we began to fund those pensions prior to 1977 today that the amount would exceed that of those after 1977.
The governor liked to say how we were running surpluses. He was lying big time. Indiana was not running a actuarial surplus, but a cash flow surplus and even then I would disagree with.
Why do you think China is buying so much gold?
We are so hosed. How many remember the drills in the early 60’s “duck and cover.”
Gadfly,
I think your comment is off the mark and illustrates why this issue isn’t getting its due attention.
By any realistic accounting of state funds we are broke. To be honest I believe that the tone of your comment is along the same line of thinking that got us into this mess - we’ll call it “extend and pretend” (a term also being used for the bank’s refusal to write down bad mortgage debts).
NONE of those are good choices. And how in the world does #1 solve anything other than put us into more debt? We can’t borrow our way into prosperity. Unemployment is going to be high in this state for years to come and already the average length of unemployment per worker is at all-time highs. That means more borrowing and larger debts.
But they WILL come due and they are nowhere near fully-funded - again “extend and pretend” is not a solution. Your stated solution of moving from defined benefit plans is a good idea but by law can only be done for future workers. This, and forcing employees to fund more of their own pension, are steps being taken by several states - Indiana isn’t one of them. Obviously we both agree it needs to be but that won’t solve the current unfunded pension obligations - it will only stop the bleeding.
Fortunately that’s why you’re not a pension fund manager. There is absolutely no reason for pension funds to be chasing risk in a way that would lead to 21% losses in a given year. Indiana’s performance was one of the worst in the country. What that should tell everyone is that they are grossly underfunded and the pension manager thinks the only way to get in the black is to chase risk in order to generate larger returns. That is an awful idea.
Gadfly,
How much of the great budget are you willing to pay for? Are you willing to pay raise the sales tax from 7% tyo 10%? How about the state income tax from 3.4% to 5%? Maybe the local 1% tax should be 2%? Maybe all of these things will be needed to pay the unfunded pensions, debt and to maintain infrastructure that was newly built.
For every $1 billion in new infrastructure, be prepaired to set aside an additional $50 million a year to maintain it. You may have the cash to built it, but if you do not have the cash flow to maintain it, it becomes junk. Look at FWCS.