Local governments are spending less on public services because public employee retirement costs are eating up an ever-greater chunk of their budgets, according to a new study by the Manhattan Institute.
“As governments pay more and more for these benefits… policymakers find that governments have less and less to spend on the services that citizens need and expect,” the study’s author, Daniel DiSalvo, wrote. “Call it the “crowding-out” effect: skyrocketing spending on public employees reduces government’s ability to do anything else.”
In Washington, public pensions cost more than half the state budget. Chicago is closing 11 percent of its elementary schools. And New York City Mayor Michael Bloomberg said in March 2012 that every penny collected this year in personal income tax will go toward the city’s pension bill.
Los Angeles spends 91 percent of its general fund revenues on salaries and benefits, according to the Manhattan Institute. The city’s pension costs have jumped in the last decade from 3 percent of the entire budget to 18 percent, and the city’s oversight agency predicts that could rise to 37 percent by 2015.
The most common response to soaring pension costs is to cut public services, the report said. In Des Moines, Iowa, the library is closed once a week and streets are swept less often even though income taxes have risen, because retiree costs have risen even more. Fire and police pension costs alone have risen 20 percent, according to the Manhattan Institute.
“Unable to alter commitments that are locked in by law or contract, lawmakers—who know that revenue is scarce and taxes are hard to raise—must take money from other government functions,” DiSalvo wrote.
Between 2000 and 2010, the number of people in the country receiving government-sponsored pensions shot up by 38 percent, to 8.25 million, according to the Manhattan Institute. At the same time, the number of workers paying into public pension funds rose only 5 percent. Nonfederal public pension costs have doubled, from $100 billion to $200 billion.
In most cases, pension and health care for current retirees aren’t negotiable. Cities made generous promises when the economy was thriving, and are paying for it now as more employees cash in on those promises.
“Put bluntly, those involved in setting these policies knew that they would not be on hand if and when problems emerged,” said DiSalvo.
There are two ways to fix the problem of “crowding out” public services, according to the Manhattan Institute. Lawmakers can keep costs the same and find ways to pay them, whether by raising taxes, taking on debt, or continuing to spend less on public services. Or they can reform their government’s pension systems to reduce their long-term liabilities.
“Until crowding out is effectively addressed, Americans will increasingly live in a paradoxical world of government that spends more and more to do less and less,” DiSalvo wrote. “If we are to keep our schools, libraries, bridges, and parks—to say nothing of our national faith in democratic self-government—this paradox cannot continue.”