Word To The Wise: The Pension Crisis From A National Perspective


pension-reform-stockBy E. Roberts Musser –

Normally I stick to local issues, but I spotted an interesting article entitled “The pension time bomb” in the Nov. 19, 2010 issue of “The Week”. It discussed the pension issue from a national perspective, and of course the state of CA was mentioned. The insightful piece was very instructive and chilling.

First, it discussed why pensions are a problem. It gives two basic reasons:

  • Local and state governments have guaranteed employees they can retire on comfortable and sometimes lavish pensions.
  • Officials assumed taxes, investments and other revenues would rise over time, covering the cost – an assumption that was dead wrong.

As a result, taxpayers are on the hook to pay the pensions of approximately 80% of the nation’s 2.7 million state and local gov’t workers and retirees. “The combined shortfall in funding those pensions could be as much as $3.4 trillion – more than double this year’s federal trade deficit.” At least seven states are on track to exhaust their pension funds by the year 2020. “More than half of state pension funds will run dry by 2027.” One columnist for the New York Times, Alexander Rubalcava, noted that in many cities pension obligations will consume 25% or more of the annual budget.

The question is how did governments miscalculate so badly? Soaring stock prices during the 1990’s swelled the value of pension funds. This enabled states and municipalities to reduce their own contributions and that of employees. But state and local gov’ts also acceded to public union demands for increased benefits, without thinking about the possible long term repercussions. There was a supposition they could indefinitely count on rising markets and high investments. Instead stock prices plummeted in the wake of the 2008 financial crisis, declining 56% from their 2007 peak. Tax revenues also plunged, exacerbating the already severe loss in equity. Pension portfolios were devastated.

And how generous are benefits? According to the Center for Retirement Research at Boston College, the average annual benefit in 2008 was $22,780, which includes part-time workers. But more than 9,000 beneficiaries of CalPERS, the nation’s largest retirement plan, receive annual six-figure pensions: “…according to…CalPERS, about 1 percent of its over 490,000 retirees and beneficiaries now receiving pension checks receive an annual total of $100,000 or more”). “In Yonkers, N.Y., taxpayers were outraged to learn that some police officers who had retired in their 40’s were collecting six-figure pensions for life…”.

What about the cost of current workers? Median family income declined over the last decade, but salaries for public workers continued to rise. Blue-collar public workers with a high school education average about $53,880 a year, whereas their private counterparts average $50,596. But white-collar public workers with professional degrees average $121,192 a year, whereas their private counterparts average $192,977. But with state budgets in crisis and unemployment stuck at 9.6%, salaries of public workers are coming under scrutiny.

“Taxpayer groups in CA, which has a projected $19 billion budget deficit, want to cut salaries and take an ax to the most generous public pensions. But most state constitutions explicitly guarantee benefits that have accrued from work already completed. Even when municipalities have declared bankruptcy, their employee pension benefits have been paid.”

But I think this assessment by “The Week” needs fuller explanation. According to Steven Greenhut’s March 26, 2010 article “Vallejo’s Painful Lessons in Municipal Bankruptcy” appearing in the online Wall Street Journal: “To permanently bring its spending in line with its tax base, however, at some point Vallejo will have to do something about its pensions. U.S. bankruptcy judge Michael McManus, as the National law Journal reported last March, “held the city of Vallejo, Calif., has the authority to void its existing union contracts in its effort to reorganize.”

But when it came to voiding those contracts on pensions—a major driver of public expenses—the city blinked. The “workout plan” the city approved in December calls for cuts in services, staff and even some benefits, such as health benefits for retirees. However, it does not touch public-employee pensions. Indeed, it increases the pension contributions the city pays.

This week, the city did approve a new firefighter contract that trims pension benefits for new hires and requires existing firefighters to pay more into their pensions. But that contract doesn’t touch existing pensions. Nor does it affect police officers or other city workers. It also leaves the city with a $1.2 million shortfall. “The majority [of council members] did not have the political will to touch the pink elephant in the room—public safety influence, benefits and pay,” Vice Mayor Stephanie Gomes told me.

Vallejo’s unwillingness to go after existing pensions and wage other fights necessary to put the city on stable financial footing sets a bad example. Other cities will now find it harder to use the threat of bankruptcy (or bankruptcy itself) to get unions to agree to rein in pension costs.

That’s unfortunate. For years, Vallejo and cities throughout the state have fattened pension benefits for public employees, worrying more about the next election cycle than about the ability of their municipalities to make good on lush promises. Now that the bills are coming due, officials are scrambling to find ways to upend gold-plated pension benefits or at least create cheaper benefits for new employees…

…bankruptcy …[is] probably the most effective tool in the drawer for lowering pension obligations. But if officials are unwilling to demand pension concessions in bankruptcy, there will be few choices left to balance their budgets other than support from the state that itself is facing steep budget deficits, or local tax hikes that could undermine local economies and thereby drive down tax revenues over the long term. That’s a sobering thought in what is an already struggling economy, and an argument for government officials to be much more stingy in granting pension increases in the first place.”

To what extent can benefits be scaled back short of bankruptcy? In CA, voters in nine municipalities approved ballot measures to limit benefits for future public employees. According to “The Week”, governments are beginning to take a harder line in the local collective bargaining process (which does not seem to be happening to any great degree here in Davis). Georgia requires that any changes to retiree benefits be studied for long-term impacts prior to being enacted.

And what if reform efforts fail? The bottom line is if states run out of pension reserves, they will be forced to dip into operating budgets to pay benefits. This would siphon money from schools, health care, municipal and other vital services. The only options are to increase taxes and/or cut government services. But unfortunately cutting government services puts even more people out of work who cannot pay taxes. Cutting services and increasing taxes results in a continuing downward spiral that may be irreversible. “This is not a conservative-versus-liberal issue,” as noted by Dan Liljenquist, a Utah state senator and pension reform advocate, “this is a reality issue.”

Lesson to be learned: Long term planning is essential. Increasing taxes and/or cutting benefits will not solve the underlying pension problem. Some sort of pension reform is critical. Like it or not, bankruptcy may be the only alternative left, if municipalities refuse to grapple with the intractable issue of pension costs spiraling out of control.

Elaine Roberts Musser is an attorney who concentrates her efforts on elder law and aging issues, especially in regard to consumer affairs. If you have a comment or particular question or topic you would like to see addressed in this column, please make your observations at the end of this article in the comment section.


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8 thoughts on “Word To The Wise: The Pension Crisis From A National Perspective”

  1. biddlin

    A word to the wise-You get what you pay for. My wife and I worked for a combined 60 years for public entities, taking a smaller salary than our counterparts in the private sector, with the promise of better benefits and retirement. In the early 1990s, while exempt management in the state and municipal governments got huge increases in salary and feathered their nests with real estate options on properties they knew would be developed, since they controlled zoning and water rights, we were asked to “pitch in” by forgoing colas, which were to be made up in subsequent contracts.( The private sector’s excesses in compensation and severance packages for executives during this same period is equally and deservedly scandalous.) Municipalities then reneged on those promises until the NLRB and the courts stepped in to force them to pay up. Now, since civil servants have been such suckers in the past, public employees are the natural target. This should cause one to ask,”Why don’t we attack the pathogen, instead of the patient?” The folks who clean your streets and parks aren’t retiring on six figure incomes. Many of them can’t afford to live in the places that they work! The real waste is at the top and top management has repeatedly told us, “We don’t care!” Reform is necessary, but let’s make sure we don’t put the real slackers in charge of the reform.

  2. rusty49

    California Will Default On Its Debt, Says Chris Whalen
    Posted Nov 16, 2010 01:10pm EST by Henry Blodget in Investing, Recession

    EmailPrint.Municipal bonds have plummeted in recent days, as investors have suddenly focused on huge state and city budget deficits that there’s no easy way to fix.

    Nowhere has this collapse been more visible than California, which faces a massive $25 billion shortfall and red ink for as far as the eye can see.

    After years in which every looming financial crisis has been met with a government bailout, you might think that the same solution awaits California, as well as all the other states that have huge obligations that they can’t afford to meet.

    But this time that may not happen, says Chris Whalen, a financial industry analyst and Managing Director of Institutional Risk Analytics.

    In fact, Whalen thinks that California will default on its debt–hammering all the pension funds and other investors who have loaded up on apparently safe state bonds.

    The state won’t immediately default, Whalen says. It will start by issuing the same sort of IOUs that it issued to by itself time during its budget crisis last year. But, eventually, the debts will have to be restructured, and this will result in those who own California’s bonds receiving less than 100 cents on the dollar.

    Why won’t California just get a bailout?

    Because the Republicans now control Congress, Whalen says. And also because, if California gets bailed out, dozens of other states will immediately line up with their hands out. The public is fed up with bailouts, Whalen says–and eventually, the country will be forced to face up to its bad debts and write them off.

    Of course, if Whalen is right, the country could have a major crisis on its hands. California is hardly the only state in trouble (click here to see the worst ones), and pension funds and other “safe” investments that Americans depend on will get hammered if states begin to default.

    Fixing state and local obligations will also require the renegotiation of pensions and salaries that government workers have long since taken for granted. And they certainly won’t give those up without a fight.

  3. rusty49

    Biddlin: “My wife and I worked for a combined 60 years for public entities, taking a smaller salary than our counterparts in the private sector, with the promise of better benefits and retirement.”

    It’s the same for people in the private sector who put more in their 401k’s instead of buying new cars or taking lavish vacations. Now they’re saying Social Security will be means tested, therefore those that saved will get less.

  4. E Roberts Musser

    biddlin: “The real waste is at the top and top management has repeatedly told us, “We don’t care!” Reform is necessary, but let’s make sure we don’t put the real slackers in charge of the reform.”

    An important statistic to note is “according to…CalPERS, about 1 percent of its over 490,000 retirees and beneficiaries now receiving pension checks receive an annual total of $100,000 or more”. So even if you gave those who receive pension checks zero dollars, it would only address 1% of the problem. Pension reform, as painful as it will be, has to come. I see no other solution except bankruptcy…

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