June 12, 2012

Scott Walker, Chris Christie Deal With State Budget Realities

Eileen Norcross

Senior Research Fellow
Summary

State and local budgets across the nation have a basic accounting problem. The cost of employee benefits is rising fast relative to current revenues. And worse yet, the tab to fund pensions is steeper than government accounts recognize.

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This article was originally published in U.S. News and World Report. Read the full text here.

Gov. Scott Walker's victory in the Wisconsin recall is a small triumph for fiscal reality over political convenience. His common sense reforms are an attempt to fix a basic problem confronting many state and local governments: how to maintain current services for taxpayers while paying for employee benefits. Leaders only have a few choices: reduce employee costs, lay off workers, raise taxes or debt, or ask the federal government for another bailout—that is, share the bill for state and local collective bargaining agreements with future U.S. taxpayers.

State and local budgets across the nation have a basic accounting problem. The cost of employee benefits is rising fast relative to current revenues. And worse yet, the tab to fund pensions is steeper than government accounts recognize. States report an unfunded pension liability of $800 billion; financial economists estimate the damage is closer to $4 trillion. Public pensions are in many cases poorly funded and retiree health benefits are largely pay-as-you-go. When a worker retires, his or her healthcare is paid for from the annual budget. The pressure is being felt everywhere from Rhode Island to California, Illinois, and New Jersey.

Instead of succumbing to the temptation to close a $6.3 billion budget gap with more debt or gimmicks, Governor Walker ended a public worker health insurance monopoly, saving millions in state aid. And by limiting what unions could negotiate for at the collective bargaining table, he ended overtime padding, a contributor to bloated pension payouts.

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