Government Dependency

Will the Pension Time Bomb Set Off a Crime Explosion?

August 11, 2010

Taipan Publishing Group - When state and local budgets fall short, services are cut. That means critical services like police and fire and transport... and with the pension crisis looming, the unkindest cuts of all still lay ahead.

Diane Cunningham of Colorado Springs, Colo., no longer has a flat-screen television. She decided to sell it... so she could buy a shotgun.

Colorado Springsshut off a third of its streetlights this past winter, The New York Times reports, in order to save $12 million on electricity. Shortly thereafter, a chain of events convinced Ms. Cunningham she needed to be armed.

"Her tires were slashed, she said. Her car was broken into. Strange men showed up on her porch. Her neighborhood had grown deserted at night..."

Meanwhile, in East St. Louis, Mo., Reverend Joseph Tracy is convinced guns are the problem. (Guns in the hands of criminals, that is.)

"It's open field day now," Tracy says. "The criminals are going to run wild."

That dire prediction came from a decision by city council members, as reported on stltoday.com, to reduce the ranks of the East St. Louis police force by 30%. Alvin Parks, the mayor of East St. Louis, says the city had no choice but to lay off 37 employees, including 19 police officers and 11 firefighters. There was simply not enough money to pay them, and attempts to negotiate with the police and fire unions came to naught.

Officer Michael Hubbard will reportedly be "the lone patrolman for East St. Louis' midnight shift" as a result of the cuts. One lone beat cop, to cover a crime and poverty-stricken region, at the most dangerous time of night. One.

Meanwhile, in Philadelphia, Pa., the "rolling brownout" policy imposed on city fire stations is being questioned in light of a child's death. When the call came to respond to a house fire in which a 12-year old autistic boy died, the nearest station was closed.

When the Money Runs Out

What do the above tales of woe have to do with public pensions? It's simple: Most states and municipalities have balanced budget laws. Unlike the federal government, they are not allowed to run deficits. And so, when the money runs out, services are cut. Budget areas critical to residential safety -- like police, fire and street lighting -- are not spared the axe.

And when the pension time bomb truly explodes, cash-strapped states and cities will find themselves even shorter on cash... with huge payout requirements they can't legally dodge... and the Hobson's choice of slashing services to the bone or going belly up.

As police and fire services are scaled back, some residents arm themselves against the night. Others simply pack up and leave. In Clayton County, a suburb of Atlanta, Ga., evidence of the downward spiral is clear. The county was forced to shut down its public transportation system earlier this year, the NYT reports, for lack of funds to support it. An estimated 8,400 riders were left stranded, two-thirds of them with no car for backup.

When the exodus from a cash-strapped city or county begins, it is typically those with the financial means to leave who hit the exits first. This reduces gross tax revenues, which hurts the budget situation even more.

And all this is happening as public pension recipients gear up for a fight...

The Right to Be Stimulated?

In Milwaukee, Wis., they are not fighting for reinstated police coverage or fully operational fire stations. They are fighting over erectile dysfunction pills.

"With the district in a financial crisis and hundreds of its members facing layoffs," the AP reports, "the Milwaukee teachers union is taking a peculiar stand: fighting to get its taxpayer-funded Viagra back."

The union says the little blue pills are necessary for "an exclusively gender-related condition." The school board retorts that Viagra, Cialis, Levitra and the like are of recreational use and not genuinely necessary.

The insanity of the Viagra fight is elevated (no pun intended) by the fact that Milwaukee educators are losing their jobs. The teachers' union is shortsighted enough to ignore the well-being of Wisconsin children and its own dues-paying members in pursuit of a Quixotic demand.

Sadly, the attitude in Milwaukee is reflective of what's ahead nationwide as underfunded pension budgets collide with reality. For years and years, pensions have been funded on the assumption of completely unrealistic annual returns.

By punching higher than realistic rates of return into their spreadsheets -- and getting useless financial consultants to rubber stamp the calculations -- states and local municipalities have gotten away with shortchanging the pot year after year. But now, as tens of millions of graying baby boomers reach the age where those pension promises come due, the size of the "hole" is becoming starkly apparent.

According to a study by the Pew Research Center released in February of this year, the fiscal gap between what states have promised and what they can actually pay is on the order of $1 trillion. And according to Northwestern University economist Joshua Rauh, the Pew figures could actually be far too conservative, with the true multiple at least three times that.

Public Versus Private

The animosity could truly get intense when private and public interests clash.

On one side of the divide there will be John Q. Taxpayer, fuming at the deep cuts in services and local tax hikes he has bitterly endured, and at the same time loudly wondering why he should have to pay for fat public pensions -- lush promises made in far richer times -- while he has no such safety cushion at all.

On the other side of the divide will be public servants -- the teachers, cops, firemen and the like whom we have come to regard as salt of the earth -- arguing that a deal is a deal, and that decades of honorable service to the community should not go shortchanged.

It will be a brutal clash, and likely one with no true winners.

Personal Implications

How all of this will affect you will depend on where you live -- keeping in mind the pension problem is also severe outside the United States. (Says the U.K. Telegraph: "The size of public sector pension liabilities [in Britain] has been estimated at £770bn by the Treasury and £1.18 trillion by actuaries Towers Watson," with inadequate funding compared to "an unstable Ponzi scheme.")

At minimum, you should probably lower your expectations for timely law enforcement help in the event of a crime. In urban areas, police response time could be noticeably extended as fewer cars patrol the streets. And in more rural areas, one might have no realistic hope of a police response at all... or at least, not until the next day.

At the very least, such realities argue for serious consideration of a firearm (if you do not already own one and know how to use it)...

In terms of investing realities, the pension "time bomb" is in some ways less like a bomb and more like a slow-moving glacier. As a fiscal issue, it is massive and chilling and 10 skyscrapers tall... and there is absolutely nothing anyone can do to stop it.

Before all is said and done, pension shortfalls could cause multiple U.S. states to fall into the fiscal black hole of de facto bankruptcy, without legal recourse to true bankruptcy. This is a recipe for utter mayhem, with financially aggrieved parties screaming at each other until they are beet red in the face.

It is also a recipe for eventual U.S. state bailouts by Uncle Sam -- which takes us to a whole new level of frightening, considering that Social Security, too, is poised to go into the red this year for the first time since 1983.

Dozen State-employee Pensions Slashed to Cut Costs

June 17, 2010

Sacramento Bee - In an effort to reduce the burden on their budgets, at least a dozen states have passed laws this year overhauling their retirement systems. Some have created less-generous pensions for newly hired workers. Others have increased the amount of money employees must pay into their pensions. Some have done both.

The trend is being driven by big budget deficits and the 2008 stock-market crash, which left many pension plans underfunded. Meanwhile, sympathy for public employees' pensions has waned as anxious voters in the private sector struggle with turbulent 401(k) plan results and frozen pensions.

Arizona, Mississippi and Virginia are among those that instituted lower retirement benefits for newly hired workers. Even union-friendly states like Michigan and Illinois, their budgets depleted by the recession, reduced pensions for new hires.

"You have an almost unprecedented revenue crisis for state governments and an almost unprecedented loss in investment value," said Ron Snell, a pension expert with the National Conference of State Legislatures. "A lot of these issues came together -- it has become a flood tide of action."

But the waters haven't yet reached California, where the two big public pension funds are looking to state government for more money -- and California Gov. Arnold Schwarzenegger's attempts to reduce retirement expenses are running into resistance.

The California Public Employees' Retirement System (CalPERS) was on the verge last month of billing the state an additional $600 million for the upcoming fiscal year, an 18 percent increase. At the last minute, the board postponed the decision, saying it wants to see if increases can be put off for another year to ease the strain on a state budget that's $19 billion in the red. But this week, the board decided to bill the state the additional amount.

The California State Teachers' Retirement System (CalSTRS) is at least a year away from raising rates. The teachers' fund, unlike CalPERS, needs the Legislature's approval to set contribution rates, and the fund doesn't plan to approach lawmakers until 2011.

CalPERS and CalSTRS officials say they need additional state and local government dollars to help them recover from the 2008 market crash, which cost them a combined $100 billion.

Despite the two funds' money problems, Schwarzenegger's plan for a two-tier pension system, with lower benefits for new hires, is making little headway in the Democratic-controlled Legislature.

A small union representing California state scientists has opened the door a crack to a two-tier system. But the largest unions remain opposed, including the powerful Local 1000 of the Service Employees International Union.

Regardless of what happens elsewhere, "we need to work on California based on California's numbers," said Jim Zamora, spokesman for Local 1000. "Every state and every jurisdiction is different."

The trends in other states "give a talking point to advocates of reform, but I don't think it's very persuasive to the union leaders (in California), at least not yet," said political analyst Jack Pitney of Claremont McKenna College.

The average CalPERS pension pays $25,212 a year. The average CalSTRS pension is significantly higher -- $34,668 -- but officials with the fund note that their members don't collect Social Security.

Private-sector pensions average $11,282 a year, according to the Employee Benefit Research Institute. Public employee unions say their relatively hefty pensions represent a fair trade-off because their members earn smaller salaries during their careers than their private-sector counterparts.

Still, public employee pensions around the country have come under scrutiny as state legislatures cope with sagging revenue and the fallout from the market crash.

"Certainly in the wake of the investment losses of 2008, a lot of plans took a look at their numbers and found that they needed to make some changes ... in order to preserve or restore the plans' sustainability," said Keith Brainard, research director at the National Association of State Retirement Administrators. "The level of attention being given to public employee compensation is heightened."

The issue reached a flash point in Illinois. The leading Wall Street debt-rating agencies were threatening to downgrade the state's credit rating because of Illinois' budget woes, including troubles in the pension funds. A downgrade would have jeopardized financing for billions of dollars' worth of public-works construction projects.

So lawmakers in April passed a series of pension changes. The law will reduce benefits for newly hired state and municipal employees -- and will force them to work longer before they can retire with full pensions. The plan will save billions.

Civil Servants Find Themselves Cast in Unlikely Role -- Fat Cats

Teachers, Cops and Firefighters Confront Growing Backlash Over Benefits

August 12, 2010

ABC News - Move over Wall Street traders -- seems there's a new vampire squid in town. Civil servants?

Passage Tuesday of a controversial bill sending billions of dollars to states to shore up payrolls for public school teachers further stoked the debate over whether government employees, their unions and their benefits packages are bankrupting the country.

"[The bill] will make the teachers unions happy, but it won't make teaching in schools better," said Rep. John Kline, R-Minn., at a press conference Tuesday during which he and other Republican leaders criticized legislation earmarking $26 billion in aid for school districts and other state agencies.

As the recession grinds on and states struggle to close budget gaps, a spotlight is shining on the salary and benefits collected by public sector professionals, including teachers, police officers and firefighters. They once commonly were viewed as the salt-of-the-earth backbone of America. But now, they are more often than not being portrayed as a boilerplate around taxpayers' necks.

"As a society, we meant well but we overpromised," said Carol Kellerman, president of the Citizens Budget Commission, a New York City nonprofit group that seeks to curb wasteful spending of taxpayer dollars. "These benefits to civil servants are no longer sustainable."

From cash-strapped California, where the public school teachers have been hammered as the highest-paid in the country, to Connecticut, where an assistant police chief in New Haven recently made headlines for retiring at age 48 with a six-figure annual pension, public workers, fairly or not, are increasingly the target of public scrutiny and scorn.

"We're in a difficult economic situation right now where a lot of people in the private sector are losing their jobs and benefits," said Jon Shure, deputy director of the State Fiscal Project at the Center on Budget and Policy Priorities. "Some political forces and commentators play off that fear and uncertainty to foster anger against those fortunate enough to still have economic security, saying, in effect, 'Look at these public sector workers leeching off your hard-earned dollars.'"

Civil Servant Benefits Blamed for Broke States

Shure, along with several advocates of public workers, pointed out several reasons why they say the growing negative perception surrounding public sector wages and benefits is unfounded:

• Contrary to widely reported tales of outrageous pension abuse, the average annual pension collected by U.S. public servants is around $20,000, according to the CBPP and the American Federation of State, County and Municipal Employees (AFSCME).


• Only one-fourth of the money used to fund most civil service pension funds, including firefighters and police, comes from taxpayers; the rest come from employee contributions and investment returns.


• While state pension deficits are said to be in aggregate in excess of $1 trillion, the figure becomes far less staggering when put in the context of when the benefits are slated, on average, to be paid out -- over three decades, said Steven Kreisberg, AFSCME's director of collective bargaining. "Taken over 30 years, it's 2 percent of state budgets," he said.

"Trust me, teachers are hardly retiring with golden parachutes and living out their years floating on yachts," said John Abraham, director of benefits for the American Federation of Teachers.

According to Abraham, the average public school teacher earns $50,000 and retires on an annual pension of around $29,000. Roughly two-thirds of that comes from teacher contributions and investment returns, with the rest coming from tax dollars, he estimated.

Meanwhile, some 25 percent of all public teachers aren't even eligible for Social Security because of opt-out provisions certain states agreed to in the 1980s.

"These pension funds are one of the best ways we can keep good teachers for a long period of time," Abraham said. "For taxpayers, it's a bargain."

In Milwaukee, where public school teachers earn, on average, around $60,000, the states financial assistance bill passed Tuesday by Congress is being welcomed as a much needed lifeline, said Mike Langyel, president of the Milwaukee Teachers Education Association, the teachers' union.

Around 350 city teachers who were laid off earlier this year might be able to come back to work as a result of the bill, Langyel said.

Aid Could Restore Teaching Jobs

Lately, it seems Milwaukee teachers have generated far more headlines for demanding that their health care plan cover the cost of Viagra than for anything ever accomplished in the classroom.

Drawing further scrutiny, the Milwaukee teachers union was singled out in a Wall Street Journal editorial Wednesday lambasting the education stimulus. The Journal said the teachers union caused the layoffs by being unwilling to adjust their rich benefits.

"In Milwaukee, for example, nearly all of the ... teacher layoffs ... could have been avoided if the unions had agreed to change health plans that cost $23,000 per teacher per year" the Journal wrote. "They could have accepted a still-rich $17,000 plan. The unions chose the layoffs betting (correctly) that the Democrats in Washington would come to their rescue."

Langyel strongly disputed the assertion that the union banked on a bailout or opted for layoffs while refusing a reasonable concession.

"That's a complete distortion," he said, adding that there was never actually any formal collective bargaining offer to switch health plans.

Langyel insisted that the school board deliberately floated in the local Milwaukee media a misleading notion that teachers were demanding more expensive health coverage when a cheaper option was available.

In reality, there are two plans offered, one of them indeed more expensive. Older, higher-earning Milwaukee teachers, which make up the bulk of the faculty, tend to choose a more-expensive plan, albeit one with a higher out-of-pocket deductible, while newer, younger, healthier and lower-earning teachers tend to select the less-expensive plan, which carries a lower out-of-pocket deductible.

So even if all teachers were shifted to the less expensive plan with the lower deductible, "it would quickly become more expensive on a per person basis, because the older teachers would require more coverage," Langyel said.

"Since when is decent health care for hard working teachers something to apologize for?" he asked. "I worked as a high school math teacher for more than 30 years. What happened to respect for teachers? This is very disappointing to be painted this way."

A School District Gets Creative

At least one public school district appears determined to keep its fiscal house in order without any stimulus and without attracting taxpayer ire.

Faced with a budget gap of $2.5 million earlier this year, the Portage Public School District in southwestern Michigan offered some 500 teachers the option of a voluntary early retirement, which 56 teachers accepted, while asking the remaining teachers to work one extra hour per day, covering more classes, said Tom Vance, a spokesman for the school district.

One year earlier, Portage teachers agreed to a 2 percent pay cut.

"We try not to rely on any miracles coming out of Washington," Vance said. "Things have been so tough here in Michigan for so long, we've learned to get by our own. We've learned to be creative."