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State and local pension funds face unfunded liabilities ranging from $3 trillion to $5 trillion, according to various reports. This is well-known problem and many states are trying to address it. But did you know that many of these desperately underfunded public pension plans have been providing pensions to private citizens who do not perform any work as public employees?
A recent Associated Press investigation found that 20 states provided public pensions to private-sector individuals who work as lawyers, trade association executives and athletic event sponsors, who supposedly advance some state interest. Worse, most of the private employees receiving this inappropriate public aid are lobbyists who are at odds with taxpayer interests. Many of them use their political influence to advocate for increased state spending and weakening taxpayer protections.
States that hand out this special interest perk include Alabama, Arizona, California, Colorado, Idaho, Illinois, Kansas, Kentucky, Maine, Missouri, Nevada, New York, New Jersey, North Carolina, Pennsylvania, South Carolina, South Dakota, Tennessee, Utah and Washington. In some cases, states have doled out this benefit for decades.
Specifically, AP reports, “In Colorado, the list includes the Colorado High School Activities Associations, which runs state sports tournaments. Alabama gives it to the state affiliate of the National Education Association. Washington state includes the Washington Apple Commission, which operates like a trade group. North Carolina’s state Athletic Coaches Association is included.”
Citizens ought to find this massive government waste of our hard-earned money abhorrent. But such waste has occurred many times in U.S. history — and state officials actually did something about it.
For example, in the 19th century many states went on a spending binge by investing heavily in private railroads, canals and other infrastructure projects that ultimately went bankrupt and left taxpayers stuck with the bill. States defaulted on their debt obligations 17 times. Municipalities were also in the same spending game.
Finally, state lawmakers sought options to protect taxpayers from the temptation of legislators to give away taxpayer funds to private interests. Their solution, in at least 45 states, was to enact a constitutional provision known as the “Gift Clause,” which forbids public subsidies to private entities. Many state constitutions still contain the prohibitions against spending public funds if there is not a public purpose — though, unfortunately, in many states the courts have expanded the definition of “public purpose” to include almost anything the legislature wants to fund.
However, in Arizona, there has been a resurgence of enforcing the historic limits imposed by the state’s Gift Clause, which states that no state or local government agency “shall make any donation or grant, by subsidy or otherwise, to any individual, association or corporation.”
Twice, Arizona courts have struck down collective bargaining provisions where the state provided subsidies to government employee unions as illegal public aid under the Gift Clause. The subsidy, known as union release time, involved government employees getting paid their regular salary to perform union work. This is nearly identical giving public pension benefits to private sector lobbyists in that neither compensates the state in return for its aid.
To determine whether public funds aiding private interests violate the Arizona Gift Clause, Arizona courts have come up with a two-part analysis that must be satisfied: (1) The expenditures of public funds must promote a public purpose. (2) The public entity must receive proportionate, quantifiable and direct benefit for the aid given.
Clearly, giving public pensions to private lobbyists does not meet the Gift Clause test. Not only is there no public purpose involved, but the gifts are going to people who are working for their own interests with no benefit to the state or to the taxpayer. These gift bans were intended to protect taxpayer interests by ensuring that government expenditures further public purposes and provide tangible benefits to states or municipalities, not simply hand out favors to special interests.
The good news is that nearly all 20 states that offer public pensions to private entities have a Gift Clause in their constitution. It is time to put them to use for the protection of the taxpayer.