State pension obligations can be crushing. But corporate welfare costs more.
When Louise Jordan walked through the doors of Abraham Lincoln High School in North Philadelphia 34 years ago, after landing her dream job as a special education teacher right out of college, she didn't worry about her tiny salary -- just $10,770 per year back then. It wasn't a lot to live on, but if she kept contributing 7.5 percent of every paycheck into Pennsylvania's pension fund, the state would support her when the time came to retire.
"The expectation was crystal clear," Jordan says. "You kind of took for granted that the state would fulfill its obligation." For a teacher with a long career of service, the funding formula would have allowed her to essentially keep receiving the equivalent of a middle-class income through retirement.
So she bought a house in nearby Jamison, Pa., which she's still paying off, while putting a kid through college. Now 56 years old, she's risen to become Lincoln High's special ed program coordinator, making $82,000 a year. But that retirement promise? Potentially dashed, with Pennsylvania Gov. Tom Corbett on a mission to roll all new public employees into 401(k) plans, and tweak the formula such that the current defined-benefit pensions pay out less.
"We're so afraid," Jamison says. "We're not getting people to fill our vacancies now, because of the uncertainty. We have so many young people, and they're worried, is this a place where they should work?"
Here's what happened in between: When the pension system's investment portfolio grew bloated in the go-go 1990s, the state increased benefit levels, without increasing the amount either employees or the government paid into the fund. After those investments collapsed, the accounts were drained, increasing the contribution necessary every year just to keep the fund solvent.
If you just look at the steeply climbing trajectory of Pennsylvania's pension costs, it does appear that some sort of drastic action is necessary -- and with all other budgets squeezed to the bone, perhaps public employees should be asked to pay for the miscalculations of politicians past.
Eek! (Pennsylvania Office of the Budget)
But is there another way?
It's easy to cast about for other big pots of money to raid when these kinds of shortfalls arise, and no politician wants to raise taxes. There is, however, another big expense that tends to get overlooked: The tax breaks states already hand out to corporations, on the theory that they won't stick around without them. In Pennsylvania, they amount to about $3.9 billion per year -- several times the $1.4 billion that the state needs to contribute in order to make good on its pension obligations.
That means companies all around Lincoln High avoid taxes through offshore bank accounts, stashing income money in other states because of a failure to adopt "combined reporting," locating in low-tax "opportunity zones," and taking advantage of credits for research and development -- while kids go without prom and after-school programs because the money isn't there to fund them.
And it's not just Pennsylvania. A new report out today from the research group Good Jobs First, which receives some funding from labor unions, finds that the annual cost of tax breaks and corporate subsidies often exceeds even the most out-of-control pension loads. In an examination of 10 states with some of the hottest battles over retirement plans for public employees, it calculated that they spend an average of 51 percent more to help out corporations than they do keeping up with contributions to pension systems.
All the pensions, all the tax breaks. (Good Jobs First)
According to the report, the worst is Louisiana, which has a reputation for handing out gigantic tax breaks in the name of economic development -- for example, $1.7 billion for a natural gas liquefaction plant in 2010, for example, $227 million every year to attract motion picture filming, and $473 million in preferential treatment for S corporations. Good Jobs First calculated the total at $1.8 billion annually. At the same time, Gov. Bobby Jindal is also trying to push new state employees into cash-balance plans, in an effort to lighten the annual pension load of just $350 million.
Good Jobs First -- which has a history of going after corporate subsidies and a financial incentive to advocate for retirees -- doesn't say that all tax breaks are bad, or should eliminated in order to make good on pension obligations. And these days, governments often feel as if they have no choice but to compete for business when companies, film studios, and even non-profits and universities essentially hold nationwide auctions for the best incentive packages. It's a collective action problem: If you don't play the game, you're toast.
Also, there's another wrinkle in Good Jobs First's accounting of pension costs. Stanford School of Business finance professor Joshua Rauh, a pension expert who reviewed the study, says they probably lowballed the calculation by using a too-high discount rate. On average, since pension investment funds have performed so poorly, he's found that states need to be paying 2.5 times what they are now in order to fully them. That would make Good Jobs First's comparison with corporate welfare a little less striking.
Generally speaking, though, it is true that governments tend to overvalue the benefit of tax breaks, which economists say aren't usually the determining factor for where a company locates. And certainly, it's sometimes difficult to understand foregone tax revenue as the same kind of expense as the money paid out to retirees.
"Once you put these things next to each other, it changes the dynamic of the conversation," says Good Jobs First's Phil Mattera, who helped prepare the report. "If you're going to get upset about pension costs, you should be getting upset about these subsidies and tax breaks at the same time, because they're often a bigger cost for the estate. They shouldn't be sacred cows."
For Louise Jordan, a tax break for a corporation that may or may not do business in the state because of it doesn't compare to the comfortable retirement she was promised.
"The worst case scenario is that I'll be working until I'm 85, instead of being able to live decently, like I expected to live," she says. "I agree, we have to lure companies to employ our people. But at the same time, aren't they responsible to a promise that they made to fund the pensions of other members of their state?"
All the states that have reduced planned cost-of-living adjustments for public retirees, as of May 2013 (University of Illinois Institute of Government and Public Affairs)
Lydia DePillis is a reporter focusing on business policy, including lobbying, government contracting, and international trade, with a bit of urban affairs and infrastructure on the side. She was previously a staff writer at The New Republic and the Washington City Paper. Email her here and follow her on Twitter here.
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