September 03, 2010
Fiscal Sustainability: The Public Pension Sinkhole
Sustainability is a buzzword for the Gen X and Millennial generations. Does it mean managing the risk of “non-sustainable” practices in energy use, environmental policy and the balance of urban and rural growth? Sure, and states have stepped into those issues with various goals and mandates. But at what cost? Notably, Chet Culver created the goal of an energy-independent Iowa, and committed hundreds of millions of dollars, in grants, tax credits, mandates and regulations to get us there. With that price tag, it is worth remembering that sustainability also applies to the cost of public finance. By the middle of August 2010, public pension funds were facing a hole in their funding of $1 to 3 trillion
That’s the gap between assets and the promises made to retirees. (A hole? More like a sinkhole swallowing up anything built on it!) It is irresponsible to not take care of the world around us. It is similarly irresponsible to think that we can drive ourselves into bankruptcy in an attempt to do it. Sustainability requires that we say, “How are we going to afford this in the long-term?”
Bottom-line, long-term policy must be matched to long-term financing. In Iowa, the practice of looking at budgets one year at a time, and the recent habit of ignoring the long-term cost of expensive projects is non-sustainable. We need to look at budgets in multi-year cycles. We need to factor in the cost of operating and replacing big capital expenditures. We need to acknowledge the transaction cost of regulation, opportunity cost of tax credits and funding cost of promises made to future generations. We need public leadership who are willing, and able, to make fiscal sustainability a priority in serving today’s and tomorrow’s citizens.
