Budget Busting Pensions Must Be Reined In 16 comments
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On a daily basis, we are seeing alarming news about the pension crisis in towns and cities across the state of California and the nation. What the heck is going on? In a nutshell, while you were out living your life, your local and state politicians were making pension promises that extend many years into the future. And, in many cases, the required funding simply is not in place. To make things worse, these promises were made to our firefighters, police and other employees of the government. These are the people who make everything in a given town work.
42 Years Driving for Dolly Madison Cakes
Columns such as these two below have been attacked by unions as an attack on municipal workers. I view it differently. I come from a union family. My father drove a Dolly Madison Cakes delivery truck for 42 years and he was a member of the Teamsters Union. My mother still receives a very modest monthly check from the Teamsters.
My view of this issue is that if a city or county makes a promise to its employees, it should keep it. But, if the city goes bankrupt, then of what value is the promise? Both sides — taxpayers and employees — should be on guard to make sure that promised benefits are reasonable and sustainable because if they are not, then everyone loses.
This is no longer a boring and arcane topic of interest only to local politicians, municipal employees, union officials and pension plan actuaries. We posted on this several months ago when pension obligations threatened the city of Vallejo, CA (see California City On Verge Of Bankruptcy).
Now, of course, the potential bankruptcy has become reality. And, almost certainly, severe budget cutbacks or higher taxes or both lie ahead for the city.
The $3 Billion Pension Deal
The Sacramento Bee makes an important — and politically explosive — point in the following piece. About 10 years ago, the State of California got taken to the cleaners on employee pensions [emphasis added]:
Pension hike of a decade ago backfires (Sacramento Bee, June 22, 2009, Dan Walters)
A milestone on California’s meandering journey toward fiscal insolvency occurred exactly a decade ago when the Legislature enacted a massive increase in state employee pensions on the expedient assumption that it would cost taxpayers nothing.
Although the new pensions would generate almost countless billions of dollars in extra income for retirees in the years ahead, the CalPERS board, dominated by union representatives, told legislators that taxpayers wouldn’t have to bear the load because investment income, which was flowing into the pension trust fund from high-tech stocks, would continue indefinitely.
As it has done in so many ways, California took the good times for granted and assumed lavish investment returns would buoy public pension plans forever. Unfortunately, reality has hit home, not once, but twice. First, the tech bubble blew and now the real estate bubble and tumbling stocks have done the same.
“They (CalPERS) anticipate that the state’s contribution to CalPERS will remain below the 1998-99 fiscal year for at least the next decade,” said a final Senate analysis of the 1999 legislation that expanded state pensions, allowing Highway Patrol officers, prison guards and other “safety” workers in some cases to get more than 100 percent of their salaries.
…Within a few years, dot-com bubble had burst, CalPERS had suffered major losses and the state’s burden for pensions had pushed into the multibillion-dollar range, not counting the heavy impact on local governments that had cavalierly followed the state’s lead on boosting pension benefits (see Oakland ‘Mulls’ Bankruptcy).
The situation was ripe for a backlash, such as an initiative measure that would rein in public pensions, but union-controlled CalPERS lowered the political heat by offering employers a “smoothing” policy that would protect them against immediate jolts, spreading out the increases over a number of years.
By and by, the economy improved, albeit through an unsustainable explosion in real estate development, and the pension issue dropped from the political radar screen. But now we’re mired in the worst recession since the Great Depression, CalPERS’ investments have dropped by nearly a third and the state is paying more than $3 billion a year into the pension fund, nearly 10 times what it paid a decade ago when CalPERS made its bogus assertion to lawmakers…
I would say that’s a bit of a miss. California is being forced to pay $3 billion a year (10 times what it paid a decade ago and far more than estimated) and we are now hearing that another billion or so is needed. Eventually, a billion here and a billion there adds up to real money.
Some other states are starting to wake up and take notice of the mess we have in California [emphasis added]:
Pension Costs Can Ruin Cities and States (Grand Forks Herald, June 18, 2009)
…As a result, California is “less than 50 days away from a meltdown of state government,” the state controller said last week.
It’s hard to know whether to stare in horror or avert your eyes.
Our advice: Stare. Because in California’s example, there are lessons for Minnesotans and North Dakotans to learn.
One such lesson has to do with public-employee pensions and a state’s fiscal health. California faces unfunded public employee retirement benefits of somewhere between $300 billion and $1 trillion, a panel discussion at the Milken Institute’s State of the State Conference concluded in May.
Joel Kotkin, presidential fellow at Chapman University in Orange County, Calif., and a popular writer on public policy, agrees. “The item that is most killing the state budget is the huge pensions for public employees,” he said in a recent CNBC interview.
“We have to figure out what we’re spending, how we’re spending, and to begin to make the public employees live by something close to the rules that the rest of society does.”
Basically, California governments let many workers retire early and collect generous pension and benefits for life. In Vallejo, Calif., for example, “base pay for firefighters is more than $80,000 per year, and employees can retire at age 50 with a pension equal to 90 percent of their salary,” Governing magazine reported last year.
Vallejo declared bankruptcy in 2008, citing pension benefits it no longer could afford.
The Milken Institute estimates that California has an unfunded pension liability of between $300 billion and $1 trillion. Unless changes are made, that monstrous shortfall is going to haunt our workers, bankrupt our state and cause even more difficulties than we currently have.
And, just to put a human face to this, consider these stories. The Grand Forks Herald continues:
“According to the data compiled to date, the highest paid public employee retiree in the state is Bruce Malkenhorst, the former city administrator, clerk, finance director and treasurer of the city of Vernon, Calif.,” the Sacramento Bee noted in an editorial.
“Vernon is a tiny industrial enclave near Los Angeles. He earns $499,674.84 a year or $41,639 a month in pensions.
“The local governmental agency with the most retirees earning $100,000 or more is the Sacramento Metropolitan Fire District. Fifty former employees of the Sacramento Fire Department receive pensions of more than $100,000.”
A pension of almost $500,000 per year for a small town treasurer? Hopefully, there is some mistake here. Assuming he lives 30 years past retirement, that would be $15,000,000 and probably much more with cost-of-living increases (see the SacBee’s State Worker Blog for more).
Just to put the last point in perspective, according to this statistic, the City of Sacramento is paying out $5 million per year to just 50 retired firefighters. Now, I admire firemen and I have friends and relatives who do that work, which is dangerous and hard. I don’t begrudge them a thing, but does anyone think this is sustainable. $5 million per year for just 50 retirees from one modest-sized city?
Other newspapers also have weighed in. As the Modesto (Calif.) Bee editorialized, “the generous — and unsustainable — level of public employee pensions in California is finally getting some long-overdue attention.”
In the matter of overly generous pensions, among other financial matters, Minnesota and North Dakota should learn from California what not to do.
Federal, state and local pension plans (not to mention Social Security and Medicare) are woefully underfunded and they represent a ticking time bomb, not just in California, but nationwide.
Either governments rein in the soaring costs of public pensions or they face an increasing likelihood of bankruptcy. Stopgap measures will not work for very long and the longer we wait to address this, the worse it will get. Even raising taxes won’t help for very long because California’s tax rates are among the highest in the nation.
As it has often done, California is leading the nation. And, unfortunately, many other states have followed California’s lead on this issue:
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This article has 16 comments:
Adults in unions were promised fairyland benefits as far as the eye could see and Detroit is only the first shoe to drop. I've gotten the idea that Obama is only interested in "not letting a good crisis go to waste" (his boss, Ron Emanuel) so the idea is to not fight against the banksters and to bubble up a phony recovery with false promises and bailouts until the government owns so much and the real private economy is so crippled we end up with a complete fascist/socialist state.
Unfunded liability is the difference between the assets of the plan and the present value of future benefits. The latter number can be made almost anything by fiddling with assumptions on future interest rates, investment results, and employee turnover. Companies and governments do not like to make contributions since it cuts into earnings or money they could spend immediately. Thus, every pension scheme from social security to, well, everything is unfunded.
It's a mess. My opinion is the only fair thing to do is to dissolve the plans and return (actuarially pro-rated) the assets to the present and future beneficiaries. That way, people at least know where they really stand and will prevent bankrupt institutions from multiplying and creating social turmoil.
I worked for a small pension consulting firm thirty years ago when I was in college. (I am an engineer today.) I was horrified when I saw how many managers would have their salaries multiplied 3 to 5 times the last five years of their employment so they could receive bloated pensions. This is probably what the treasurer from Vernon did.
This mess brought to you from the aspirin companies of America.
Thank you Kurt Brouwer for the great article.
On Jun 24 10:56 AM walleke wrote:
Thank you Kurt Brouwer for the great article.
I also agree that...It's a mess. My opinion is the only fair thing to do is to dissolve the plans and return (actuarially pro-rated) the assets to the present and future beneficiaries. That way, people at least know where they really stand and will prevent bankrupt institutions from multiplying and creating social turmoil.
This could actually have a secondary benefit in allowing individuals, even if they are (ex) government union members, the opportunity to invest on their own rather than calpers continuing to strongarm future public and private investments with their notion of "socially / politically correct" engineering, i.e. to promote their own (special interest) agenda. But wait, if the US can't allow GM / Chrysler to fail for the same reason, ...
It's really not so much different than the GM bond holders that were forced to take a major hair cut. It's just that pension claimants are in denial of this.
One possible action would be to convert all municipal pension systems into defined contribution, distribute the current assets into someform of retirement account for public employees.
The employee's can continue to contribute tax free, and tax payers should provide another point or 2, as occurs in private 401K plans.
But defined benefit plans must end today, liquidate the assets into public employee retirement plans, much like 401K's, that puts the employees incharge of their own retirements, just like the rest of us in the private sector.
nice article.
Then look at their combined pensions, my guess is that NONE of us have even a clue, how massive this cash cow (salary) and debt (pensions) really is.
I was told growing up that my generation would have it worse than all proceeding generations. I just didn't understand that that meant my kids education would be a lower priority than my parent’s pensions. Voters need to understand these tradeoffs or the next generation of kids are really going to suffer.
On Jun 24 02:39 PM jack kreg wrote:
> Some high powered economic institution, like Chapman U, should do
> a quick study, lumping all municipal employees in CA together, it
> would be impressive just to see how many municipal employees get
> paid with hard earner tax dollars.
> Then look at their combined pensions, my guess is that NONE of us
> have even a clue, how massive this cash cow (salary) and debt (pensions)
> really is.
It is always interesting when people look down at the bottom of the heap in a desire to cut money -- instead of at the billionaires and millionaires who have cheated like crazy to make their killings, often at the expense of the public.
"Both sides — taxpayers and employees — should be on guard to make sure that promised benefits are reasonable and sustainable because if they are not, then everyone loses"
-Except everyone doesn't lose because of moral hazard. If an entity goes bankrupt, in most cases the pensions are protected.
-Another example of shortsightted finances. promise them anything because chances are you won't be around to catch the heat.
-I agree that both sides should be on guard, but is the receiving side ever going to balk.
-How is it that this is confined to govt pensions? You mentioned the Teamsters aren't paying your mother a windfall. I know plenty of retired civil servants collecting 70-90% pensions. Where's the backlash?
-Is it socially desirable to have such huge incentives for people to go into govt jobs?