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Chicago Fed's Moskow Warns of
Public Headaches
By Stephen Wisnefski, the Wall Street Journal
February 28, 2006
The rapid growth of public pension obligations is hurting the ability of governments at all levels to fund programs and poses a particular problem for Midwestern states, the president of the Federal Reserve Bank of Chicago said Tuesday.
Speaking at a forum on pension issues sponsored by the Chicago Fed, Michael Moskow said that states with high growth in population and personal income can count on extra tax revenue to offset pension imbalances. States with younger state and local government employees will also be slower to feel the effects of the pension obligations, he added.
Mr. Moskow noted, however, that population growth and demographics aren't favorable for most of the Midwest.
"As a result, state and local pensions in the Midwest are much like the legacy costs that domestic automakers face," he said, according to the prepared text of his speech. "They are a financial burden that may hurt the competitiveness of these states and cities in the future."
General Motors Corp. and Ford Motor Co. -- the two largest U.S. auto makers, both based in Michigan -- are struggling to restore profitability in their North American automotive operations owing in part to unmanageable labor and pension obligations. The two companies, which are carrying out massive restructurings of their North American businesses, have in recent months sought concessions from their unions on health and pension benefits.
To address the public pension problems, Mr. Moskow said that more uniform accounting standards are needed to evaluate the true health of public sector pensions. He also said pension plans may need to be structurally changed, with the identification of new funding sources and restructuring of pension payouts.
He said this promises to be a difficult task given the legal impediments in many states to restructuring current pension plans.
"For states with relatively weak balance sheets and large pension obligations, such as Illinois and Michigan in our district, restructuring could be particularly painful if it requires higher taxes or reductions in other government services to cover shortfalls," Mr. Moskow said during his speech.
Mr. Moskow said that pensions should be recognized as part of any employees total compensation program. He noted that pensions in the private sector are structured to meet goals of retaining key staff and increasing workforce productivity.
"For private firms, the move to defined contribution and 401(k) programs recognizes the increased mobility of today's workforce," he said. "Pension programs need to reflect the needs of organizations in meeting their human capital requirements."
Mr. Moskow noted during his speech that only 11% of private firms continue to offer defined-benefit programs, as most private employers now offer defined contribution and 401(k) plans. In contrast, 90% of public pensions are still defined-benefit plans.
Mr. Moskow, who isn't a voting member of the monetary policy-defining Federal Open Market Committee, didn't comment on the economy during his presentation.
Write to Stephen Wisnefski at stephen.wisnefski@dowjones.com
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