The Monster Eating Our States and Cities
To feed the pension beast, state and local governments are starving education and infrastructure. But yes, something can be done.
BY RICHARD VAGUE
Today's selection -- from Democracy: A Journal of Ideas, "The Monster Eating Our States and Cities" by Richard Vague.
Our economic research group recently departed from its normal work on global debt levels to take a closer look at state and local budgets and the growing challenge in education and infrastructure spending. Our work appears in the current issue of the Democracy Journal (click here). An excerpt from the article appears below:
"With a GDP of $19 trillion, America is the richest country in the world. However, the IMD World Competitiveness Center recently ranked our education system as 24th out of 61 countries, and the American Society of Civil Engineers recently rated our infrastructure -- the roads, bridges, and water systems that were once the envy of the world -- as a D+.
"These failings are so often cited that we have become numb to them. If our education and infrastructure systems, which are largely managed and paid for by state and local governments, were improving, these poor ratings would be easier to tolerate. But the opposite is true.
"We all know that the federal budget is under tremendous pressure, but the budgets of states, cities, and other local governments (SLGs) are under even greater pressure. This pressure will not ease for a generation, if then. The inescapable consequence is that the funding of education and infrastructure will continue to be under immense pressure for as far into the future as we can realistically see.
"The issue is this -- for years SLGs' expenses have been relatively constant as a percent of GDP, yet their pension and Medicaid costs have been skyrocketing, crowding out investment in education and infrastructure. It will take a radical, perhaps even heretical, new approach to these expenses to restore our ability to properly invest in these two areas.
"[The first such heresy is this:] Why do we need to fully pre-fund our future SLG pension obligations? I ask this question only in light of the $1.9 trillion size of the pension funding deficit and the acuteness of the need in education and infrastructure. ... The answer is this: the reason to pre-fund retirement obligations in the form of a pension fund is to guarantee that the funds will be there when the pensioner retires. It's a credit guarantee. But it isn't a given that we have to have the credit guarantee for state pensions that a fully funded pension provides. After all, states (which are 82 percent of all SLG pension dollars) can't declare bankruptcy, and the full taxing authority of the states serves as a guarantee that pensions will be paid. ...
"[A different approach] would reduce the current annual aggregate SLG employer contribution requirement by over $100 billion each year over the next twenty years from the level truly required to become fully funded [freeing those funds for investment in education and infrastructure].
"[The second heresy regards the necessity of increasing research to reduce health care costs] Americans are getting older and the percent living at or under the poverty line remains stubbornly high. An estimated 80 percent of health-care costs are associated with just four disease categories -- cancer, heart disease, diabetes and Alzheimer's -- and as we age, the frequency of these diseases inevitably increases.
"We will not be able to make radical, breakthrough reductions in health-care costs until we make substantial progress toward cures in those four areas. It is within our grasp to do so, but only through concerted, well-funded academic medical research. Yet, astonishingly, we have been reducing federal support for this research in real dollars. If we look over any long time horizon, there will be a direct link between federal spending on research for cures and our ability to curb the rising trend in Medicaid and health-care costs."
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"The Monster Eating Our States and Cities"
Author: Richard Vague
Fall, No. 46.
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