Infrastructure Investments Won’t Matter Until We Lower Retiree Costs

Congress should use new money to prod states and cities into addressing the growing expenses of public employees.
January 2019
NYC subway conductor looking out the window.
(David Kidd)
By Nicole Gelinas  |  Columnist
A senior fellow at the Manhattan Institute

With Democrats taking back control of the House, infrastructure boosters are taking comfort. Democrats may push President Trump harder than congressional Republicans have to fulfill one of his campaign promises. But more federal investment is only part of what our urban centers need to fix up their aged and strained transit systems, bridges and roads. States and cities also need to rein in the employee costs that restrict their ability to maintain their physical assets.

Nowhere are these issues more acute than in the Northeast. New York City and its surrounding tristate region have massive needs -- needs that will only be exacerbated by the arrival of 25,000 new Amazon employees. Amtrak must replace a 110-year-old tunnel under the Hudson River, at a cost of $20 billion, or New York will be cut off from its New Jersey commuter base. New York’s subways need tens of billions to modernize signals, replace train cars and continue expansions such as the Second Avenue subway.

Connecticut and New Jersey have their own woes. New Jersey Transit’s railroads, upon which nearly 100,000 commuters depend, are plagued with breakdowns and delays. Connecticut’s highways are in such disrepair that the state’s notoriously anti-toll voters were not put off by a proposal to toll trucks from the Democratic gubernatorial candidate who won the election, Ned Lamont.

These states have little flexibility to ask their taxpayers for more money. They are taxed to the max. But more federal money alone won’t solve the problem. Consider the Metropolitan Transportation Authority, New York City’s state-run subway and bus entity. The MTA already expects $7.6 billion in federal funds for its current five-year, $32.5 billion capital assets program, a number that is expected to balloon to at least $60 billion for the next five-year plan, which starts in 2020. Even doubling the federal contribution to $15 billion or so would leave the MTA with a massive funding gap, one traditionally filled with borrowing. But with its debt already at $41 billion -- 16 percent of its annual costs -- the MTA will have a hard time returning to the borrowing well.

And no matter where its funding comes from, the MTA will remain overwhelmed by its mushrooming operating costs. Its pension and retiree health-care expenses, for example, have more than doubled in just over a decade, now constituting a full 21 percent of its budget.

Connecticut and New Jersey are worse off. While New York largely funds its pension plans, Connecticut owes nearly 19 percent of its residents’ annual income in pension liabilities, totaling $48.5 billion. New Jersey owes nearly 20 percent, or $115 billion. Each state also owes roughly $36 billion for retiree health care. Without cost reform, any tax, toll or fare hikes will largely go toward these costs, not better infrastructure.

As the debate over infrastructure unfolds in Congress, both parties should focus on using new money to prod states and cities to pare back these costs.

How? As a start, states and cities should receive bonuses in any infrastructure plan for requiring current workers to take responsibility for their own health care if they retire before the Medicare age of 65. After 65, public-sector retirees, like those in the private sector, should pay their own Medicare premiums. Pension costs are harder to reform, but newer public-sector workers should expect to stay on the job until at least 65 rather than being allowed to retire and begin drawing benefits earlier.

Without cost reform, it’s hard to see how some of the country’s richest and most productive regions can continue to remain as rich and productive -- and contributing nicely to the nation’s economy.