Underfunded pensions make GOP leaders reluctant to send federal aid to states like California
Top Washington Republicans determined not to send federal money to states say their biggest fear is Democrats will use it to help reeling public employee pensions funds.
The GOP leaders insist they won’t enable what they call years of mismanagement. Their stance is proving to be an obstacle to federal help for the decimated budgets of California and states and cities all over the country.
“Why should residents of Wisconsin or Tennessee have to pay for the pension benefits of workers in Illinois and California?” asked Rachel Greszler, research fellow in economics at the Heritage Foundation,a Washington-based conservative group.
Those and other state and local governments are eager for federal help to address the economic effect of the coronavirus shutdown.
In California, Gov. Gavin Newsom unveiled a dramatically revised $203 billion state budget Thursday, but says he’ll cancel $14 billion in state budget cuts if he gets enough federal aid. One part of his plan would redirect a $2.4 billion prepayment of long-term pension debt to instead pay for more immediate school needs.
The Democratic governor did not, however, propose using federal money to help the California Public Employees’ Retirement System or the California State Teachers’ Retirement System.
Like most pension funds, CalPERS relies on investments, and volatility in the stock market represents a continuing risk. As of Friday, the system’s total value stood at about $371 billion, which is about what its value was at the end of the last fiscal year.
Following the Great Recession, California lawmakers overhauled the pension systems to make them more resilient. All California public employees hired after Jan. 1, 2013 chip in money toward their retirement and have to work longer to receive full benefits, for instance.
The systems have taken their own actions since then to strengthen them further, such as requiring local governments and schools to pay more money for their employees’ pensions.
“There’s no need to panic. Market volatility is not unprecedented,” CalPERS Chief Investment Officer Ben Meng wrote in a message about the outbreak posted on the CalPERS website. “Because of the plan we carefully put in place and our ability to access the cash we need, we’ve been able to take advantage of investment opportunities that this downturn has created. We’re executing on our plan, sticking to it, and staying focused.”
Pensions concerns, though, are triggering conservative anger as Democrats and some Republicans seek federal help for state and local governments.
“Why should the people and taxpayers of America be bailing out poorly run states (like Illinois, as example) and cities, in all cases Democrat run and managed, when most of the other states are not looking for bailout help? I am open to discussing anything, but just asking?” President Donald Trump asked in a tweet.
Senate Majority Leader Mitch McConnell’s office last month sent out a press release featuring the senator’s comments on Hugh Hewitt’s radio show. Under the heading, “On Stopping Blue State Bailouts,” the Kentucky Republican says “there’s not going to be any desire on the Republican side to bail out state pensions by borrowing money from future generations.”
McConnell’s state, which for the four years ending in December had a Republican governor, has had one of the most poorly funded state pension programs, according to a study by the nonpartisan Pew Charitable Trusts.
“Kentucky, New Jersey, and Illinois have the worst-funded retirement systems in the nation in part because policymakers did not consistently set aside the amount their own actuaries said was necessary to cover the cost of promised benefits to retirees,” the Pew report said last year.
Plenty of others need help, and are turning to Washington.
Illinois created a particular stir among Republicans when Senate President Don Harmon spelled out how his state needed $41 billion in aid, including $10 billion to help its underfunded pension funds.
Conservatives were outraged. In its March 27 coronavirus relief bill, which contained a $150 billion state and local aid package, it was clear the money should not be used to help pension funds.
The Treasury Department issued guidance for implementing the legislation, saying the funds cannot be used for “payroll or benefits expenses for employees whose work duties are not substantially dedicated to mitigating or responding to the COVID-19 public health emergency.”
The House plan to provide $875 billion in state and local aid places no such restrictions on the money. But as the Republican-led Senate considers a package, chances are states will have a rough time getting help for their pensions.
“We’re going to push the pause button here,” McConnell told Hewitt, “because I think this whole business of additional assistance for state and local governments needs to be thoroughly evaluated.”
This story was originally published May 18, 2020 at 5:00 AM with the headline "Underfunded pensions make GOP leaders reluctant to send federal aid to states like California."
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