Public Pension Perversion

Attack of the Public Employee Pensions

May 28, 2010

The Atlantic - Almost a decade ago, I discovered the fiscal time bomb of public employee pensions, and the threat they pose to municipal governments. It was 2002 when the fire union in Rancho Cucamonga, California began gearing up for contract negotiations. Enough time has passed that I can't recall the particular figures involved, but I do remember the political dynamic: Firefighters are always popular, the guys in that city were a likable bunch, and the September 11, 2001 terrorist attacks, fresh in the memories of every resident, made anyone in that uniform into an instant hero.

Imagine that you're a City Councilman in a place like Rancho Cucamonga, intent on keeping your seat, maybe even running for the Board of Supervisors or the California Assembly. The head of the fire union drops by your house one night. He lays out the salary increases, overtime policies, and pension setup he'd like to see -- even says maybe there should be one more firefighter on every engine during calls.

"I've got dozens of firefighters who'll be happy to spend their off hours knocking on the doors of registered voters, asking them if there's anyway the fire department can better assure the quality of their neighborhood, and suggesting that if they value the safety of their kids, they'd do well to vote for your opponent in the next election," the head of the fire union could say, without bluffing. "But I know you'll treat us fairly in the upcoming contract negotiations, and I don't see any reason it couldn't be you standing next to all the smiling guys in uniform when we send out a glossy endorsement mailer in advance of the vote."

That pressure is on one side of the scales, and counterbalancing it is the average politician's capacity for forward thinking, willingness to prioritize long term consequences, and innate fiscal conservatism. In other words, it is little surprise that Rancho Cucamonga firefighters are quite well-compensated, and can retire at age 50 while receiving 90 percent of their maximum salary for the rest of their lives.

To be fair, Rancho Cucamonga has an unusual interest in attracting the best firefighters -- the city is in the foothills, and its northern border is a tangled mess of sage scrub that ignites every so often in a mammoth firestorm that threatens lives and property. But it is hardly alone among cities that give lavish pensions to retired employees, often due to a political dynamic where public employee unions exerted extreme influence, and few had any incentive to push back against them, unlike in the private sector, where owners are pitted against union leaders to determine employee compensation from a fixed pie.

In the lede of a recent story on public employee pensions The New York Times offered this anecdote:

In Yonkers, more than 100 retired police officers and firefighters are collecting pensions greater than their pay when they were working. One of the youngest, Hugo Tassone, retired at 44 with a base pay of about $74,000 a year. His pension is now $101,333 a year.

It's what the system promised, said Mr. Tassone, now 47, adding that he did nothing wrong by adding lots of overtime to his base pay shortly before retiring.

"I don't understand how the working guy that held up their end of the bargain became the problem," he said.

Despite a pension investigation by the New York attorney general, an audit concluding that some police officers in the city broke overtime rules to increase their payouts and the mayor's statements that future pensions should be based on regular pay, not overtime, these practices persist in Yonkers.

The city has even arranged for its police to put in overtime as flagmen on Consolidated Edison construction sites. Though a company is paying the bill, the city is actually reporting the work as city overtime to the New York State pension fund, padding future payouts -- an arrangement at odds with the spirit of public employment, if not the law.

There are people who argue that it would be unfair to renege on the promise to pay Mr. Tassone six figures per year for the rest of his life. Granting their point, I'd ask a question in reply:

"Is it more or less unfair to pay this early retiree from the pockets of taxpayers working full time to earn a fraction of what he makes, all because he successfully exploited an ill-conceived law whose spirit he didn't honor, and the implications of which legislators scarcely understood?"

On the relevant New York legal questions, I plead ignorance, and wonder whether readers can enlighten me about whether his pension could be reduced under any circumstances. If so, I am unsure as to the wisdom of that course. Either you undermine the sanctity of contracts or else you lavish riches on retirees while countless residents suffer as a result.

That Mr. Tassone voluntarily takes the money every year is shameful, and he ought to be embarrassed in a way that few are anymore. That the system technically promises something does not make it his due, and whether or not he knows deep down that he is behaving indefensibly, that is the case.

Zooming out, let's return to The New York Times to examine the scope of the problem in that state:

According to pension data collected by The New York Times from the city and state, about 3,700 retired public workers in New York are now getting pensions of more than $100,000 a year, exempt from state and local taxes. The data belie official reports that the average state pension is a modest $18,000, or $38,000 for retired police officers and firefighters. (The average is low, in part, because it includes people who worked in government only part time, or just a few years, as well as surviving spouses getting partial benefits.)

Roughly one of every 250 retired public workers in New York is collecting a six-figure pension, and that group is expected to grow rapidly in coming years, based on the number of highly paid people in the pipeline.

This is arguably the biggest threat in America today to local governments with sufficient revenue to function efficiently. It should thus be of great concern to liberals and conservatives alike.

Perhaps the City of Vallejo, California is a sign of things to come elsewhere. It declared bankruptcy in a still-being-litigated effort to escape public employee obligations -- and as Reuters reports, other municipalities throughout the Golden State are tempted by the prospect of doing the same.

Meanwhile, here's the latest from the state's fund for retirees: it wants $600 million from a Golden State treasury that is already empty.

CalPERS, the nation's largest public pension fund, lost $55.2 billion, or a quarter of its value, during the 2008-09 fiscal year.

"The biggest reason why we need increases is the investment losses," said Alan Milligan, interim chief actuary for CalPERS. "Quite frankly, there's more to come."

If you live in a big city, odds are better than not that you're facing a public employee pension shortfall too. And that government employees are being afforded fringe benefits unavailable to the average citizen.

Public Pensions Bankrupting Los Angeles

May 5, 2010

ParaPundit.com - Richard Riordan, former mayor of Los Angeles, and Alexander Rubalcava, president of an investment advisory firm write in a Wall Street Journal Op-Ed that the city of Los Angeles is headed for bankruptcy. Read the whole thing.

Los Angeles is facing a terminal fiscal crisis: Between now and 2014 the city will likely declare bankruptcy. Yet Mayor Antonio Villaraigosa and the City Council have been either unable or unwilling to face this fact.

According to the city's own forecasts, in the next four years annual pension and post-retirement health-care costs will increase by about $2.5 billion if no action is taken by the city government. Even if Mr. Villaraigosa were to enact drastic pension reform today—which he shows no signs of doing—the city would only save a few hundred million per year.

Los Angeles shows us America's future. The rest of the country will catch up eventually.

The city assumes a ridiculous 8% annual return from its pension funds. The current mayor and city council are tools of the public worker unions. The city is going to keep squandering the taxpayers' money on overpaying public workers. That is part of a much bigger pattern of more rapid compensation increases in the government sector than in the private economy. That pattern is headed for a collision with a solvency crisis for many cities and states.

See Inevitable Bankruptcy Seen For Los Angeles and US States In Deeper Financial Trouble. I expect the sovereign debt problem in the US to hit in full force during the next recession.

Public Pension Reform: What Next for New Jersey?

May 25, 2010

BankruptingAmerica.org - Last week, we explored the problems facing the state of New Jersey and the steps that Governor Chris Christie has been taking to shore up the state’s finances. Governor Chris Christie has made an admirable effort to reduce the state’s deficit and to cut back the size of government. Yet much more work needs to be done.

It’s important for New Jersey citizens to realize that its over-sized state government isn’t just a problem because it has lead to out-of-control deficits. Too big government is in itself a problem: it crowds out the private sector and slows economic growth, making citizens less prosperous in the process. New Jersey needs to continue to scale back government spending.

New Jersey will also need to go much further in terms of pension reform. Governor Christie has advanced some modest changes to the pension system, but a lot more needs to be done. Also, Christie’s 2011 budget forgoes more than $3 billion in contribution to the state pension retirement system. This helps the immediate budget crisis, but exacerbates the long-term problem of unfunded pension liabilities.

New Jersey could look to Illinois for guidance for reforming pensions, since Illinois just passed its own set of pension reforms. Under the new Illinois pension laws, new-hires will have to wait until 67 to retire (some current state workers can retire at age 55). Illinois also capped salaries, which can be used as a basis for calculating pensions and limiting cost-of-living increases. These reforms are good in preventing the build up of future liabilities, but do little to address the considerable liabilities that have already been incurred.

New Jersey will have to go further and make sensible changes to payouts for current and near retirees, while revamping the system for younger workers so that the pension system becomes financially sound. It’s unfair to the private sector that provides the resources to the government for the public pension system to act as an anchor on the state’s economic growth and consume so much taxpayer resources ...

Trillion-Dollar Pension Crisis Looms Large Over America
America's future? U.S. cities going bust
Facing the Nemesis: Will the Pension Crisis Bankrupt the United States?
The Coming Armageddon; Bankrupt States, Public Pensions, and “Sovereign Immunity”
Why Is Congress Intent on Helping Unions Bankrupt Our Country?