Dear Editor,

Support for additional Federal stimulus to combat the economic and personal impact of the pandemic is strong across the political spectrum.  Why is a deal so difficult?

The fight isn’t about individual stimulus checks or the Federal supplement to State unemployment benefits. Compromise on those issues was achievable months ago. Instead, additional stimulus has been held hostage while each party attempts to deliver a windfall to a core constituency. The biggest obstacles are the amount of (additional) funding States should receive and whether businesses should be shielded from Covid-related liability claims. 

Let’s dissect the ‘liability shield’ first. Big business has always been a central stakeholder of the GOP (although Trump’s trade wars and populist rhetoric left him more estranged from the U.S. Chamber of Commerce than any modern Republican). Big corporations are terrified that when the Covid-19 dust settles, they will be overwhelmed by class action lawsuits on behalf of workers. Plaintiff’s lawyers (one of the largest sources of campaign donations to Democrats) are conversely licking their chops at the potential for a litigation windfall. 

The Chamber of Commerce is right to be concerned. Despite well-intentioned efforts by many employers to improve workplace safety, some of the biggest outbreaks occurred at meat packing plants, nursing homes and other companies that found it impossible to operate remotely, supply workers with sold out PPE’s, or fully convert to socially distant workstations. Additionally, commercial landlords are concerned that companies won’t bring their remote workers back into the office unless and until the cloud of potential class action liability is resolved. 

The question of additional funding for States is trickier, because it requires both accounting and political context. It is also more directly relevant to American taxpayers. 

The original CARES Act already provided $150 billion to the State and Local government back in March. The recipe for allocating the dollars was complex, with $8 billion set aside for tribal governments, $3 billion U.S. territories and the District of Columbia, and the remainder divvied up by population. According to the Center on Budget and Policy Priorities the biggest recipients were California ($15.3B) and Texas ($11.2B) while Colorado received $2.2B. 

Nancy Pelosi, Chuck Schumer and Democratic pundits have continually claimed that State and Local governments need much, much more funding to compensate for lost tax revenues and increased operating costs stemming from Covid-19. Democrats started the negotiating by asking for another $700B. That number has been whittled down during negotiations.  One still has to ask, why so much? The answer is: unfunded pensions.

Public-sector unions are also one of the largest constituents of the Democratic Party. They contributed $160 million to candidates for Federal, State or Local office in 2018 (doesn’t include indirect contributions). The overwhelming majority went to Democrats. The five States that saw the largest political contributions from public unions were CA, IL, OR, MN, NY.  

The political alignment of public unions impacts stimulus negotiations because such a huge proportion of government employee compensation is allocated to defined benefit pensions. Private employers stopped providing these pensions back in the Reagan era, when 401K (defined contribution) plans became the norm. Private pensions are regulated by more conservative accounting rules. Private pension liabilities must be fully disclosed and funded when they arise. Public pension rules for both disclosure and funding are incredibly lenient. 

This scam makes government pensions into a kind of hidden currency, allowing politicians to defer public employee compensation for decades. It effectively obscures the real cost of services provided to taxpayers. As a result, governments have increasingly failed to fully fund their burgeoning pension obligations over the past 40 years. Moody’s Investors Service recently estimated that U.S. public pensions are underfunded by $4.4 trillion. That amount is equivalent to the GDP of Germany and more than twice the $1.6 trillion of outstanding student loan debt. 

This liability is not distributed equally. Blue States generally have far greater unfunded pension liabilities than Red States. CA has the largest unfunded obligation at $190 billion. On the other hand, Wisconsin has funded 103% of its pension obligations, a surplus of $2.6 billion. Colorado has funded only 47% of its obligations, leaving a shortfall of $54.6 billion (the 6th largest).

The real fight is about whether States should receive enough Federal funding to bail out some of their unfunded pension liabilities. Presuming that relief funds are again divided by population, more will be allocated to Blue States. Not coincidentally, those States tend to have the largest unfunded pension obligations to public employees. 

Derek Ridgley
Nederland