February 11, 2011

It isn't going to get an easier, and pension reform is needed now

Eileen Norcross says now is the time to address the fundamental problems that, if left unaddressed, are certain to worsen states` future prospects for fiscal stability and sustainable economic growth

“Avoiding reforms today ensures that states will have to confront even more difficult and unpopular budgetary choices than they have faced during the past recession,” said Norcross.

State budgets have been in crisis long before the recession began, Norcross explains, noting that state spending grew faster than state own-source revenues in 47 states between 1977 and 2007, with the biggest spending driver being Medicaid. Between 1987 and 2009, Medicaid grew from representing 10 percent of state spending on average to 21 percent.

“While state spending grew faster than state revenues during the period, states mainly showed surpluses,” said Norcross. “The reason is that states, in addition to relying on own-source revenues, also fund expenditures with federal funds and state debt.

Additionally, some states have made a habit of deferring in part or in full their contribution to pension plans, by not funding health care benefits, and by issuing bonds to make pension payments, which is why Norcross says that states must make their accounting transparent and accurate.

“State and local governments must accurately account for what is owed and model future cash flows to determine what will be need to be set aside annually to pay beneficiaries,” said Norcross.