Public Sectors Unions Bankrupt America's Cities

Only 9% of all private sector workers are now represented by a union, less than half the percentage of two decades ago. Meanwhile, the proportion of state and local workers with union representation has held steady over the same time, at about 43%... Government pensions are generally much richer than those offered by corporations. The average public sector employee now collects an annual pension benefit of 60% after 30 years on the job or 75% if he is one of the one-fifth or so of workers who are not eligible to collect Social Security benefits. Of the corporate employers that still offer traditional pensions, the average benefit is equal to 45% of salary after 30 years... Just as important, about 80% of government retirees receive pensions that are increased each year to keep pace with the cost of living, a feature which protects pensions against the effects of inflation and that can increase the value of a typical pension by hundreds of thousands of dollars over a person's retirement. But such inflation protection is nonexistent in corporate plans. - Bankrupt Public Pensions: A Time Bomb That Will Explode, AnchorRising.com, May 16, 2005

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.

The Unions Go to Town ... and Bankrupt America's Cities

March 24, 2008

The Weekly Standard - It didn't get much attention on the East Coast, but in late February the town of Vallejo, California, came within an eyelash of becoming the first city since Bridgeport, Connecticut, back in 1991 to declare bankruptcy. This San Francisco Bay suburb of 120,000 residents was threatening to take this radical step because it can no longer afford to pay the extravagant salary and retirement benefits of its public employees. Just a few hours before the city council was to file for bankruptcy, the unions caved in and granted wage concessions to keep the city operational.

There are several other cities in California that are contemplating the bankruptcy option thanks to multi-billion-dollar public employee pension and health care obligations that have become effectively unpayable.

"Vallejo's fiscal problems aren't unique. They're just the tip of the debt iceberg here in California," says Keith Richman, a former state legislator and now president of the California Foundation for Fiscal Responsibility (CFFR).

The California Public Employees' Retirement System has $26 billion of unfunded liabilities. The teachers' retirement system is $20 billion in the red--health benefits add another $48 billion to its shortfall.

Welcome to the next great financial bubble in America--a fiscal time bomb that could cause your local and state tax bills to double or even triple in years to come.

Vallejo's story of financial woe raises eyebrows because it is not a desperately poor or dilapidated city like Newark or Detroit. It is quintessential middle-class America, with an average family income of about $57,000. When the city announced it wouldn't be able to meet $6 million of unpaid bills starting in April, no one was as surprised as the residents themselves. Part of the problem is that the real estate crisis is especially pronounced in California and, as housing values fall, so do city property tax collections. The city projects a $20 million budget shortfall this year and next, which is a big bucket of red ink out of an annual budget of $80 million. City officials saw bankruptcy as the only legal option to void its unsustainable wage and retirement labor contracts and their $135 million of unfunded liabilities.

These contracts are so exorbitant that some of the richest residents of Vallejo are the police and firemen. Ten firemen earned more than $200,000 last year with overtime--a salary nearly four times higher than what the average family in Vallejo earns. Incredibly, 80 percent of the city's budget is consumed by labor and pension costs.

"No city or private person wants to declare bankruptcy," says Councilwoman Stephanie Gomes, "but if you're facing insolvency, you have no choice but to seek protection."

Soaring public employee pension costs are crunching municipal budgets and causing service cuts or tax hikes across the state. In the Los Angeles County school system, health, pension, and workers compensation liabilities are so mountainous that an estimated one of every three dollars budgeted for the L.A. schools goes to teacher retirement costs.

"The three Rs in the L.A. County school system are now reading, writing, and retirement," moans Richman.

There are other horror stories. The CFFR found that many cities have a 3 percent rule which allows a worker to accrue a pension benefit of 3 percent of his final salary for each year worked. So an employee who started on the job at age 22 can retire at age 52 with a lifetime pension benefit of 90 percent of the final salary. Most California towns also allow city employees to "spike" their pensions. This is a popular scam that allows workers to pad their final salary--and so their pension--by as much as 50 percent through bonuses, overtime, accrued vacation, and other add-ons. These pensions also come with an annual cost of living adjustment and lifetime health care.

"Pensions are the second biggest line item in most municipal budgets today behind law enforcement," says Steven Frates, a professor at Claremont McKenna College and an expert on California's pensions system. He adds that "the annuity value for many public employee pensions in this state is $1.5 million."

Some of the highest paid state workers are walking away with lifetime annual pension and health benefits of $300,000 a year. With hundreds of thousands of public employees in California, you have the potential for catastrophic long-term financial distress.

Plenty of cities outside California are facing a similar tsunami of debt thanks to years of super-generous labor agreements. The ten largest Chicago-area cities face a combined $18.7 billion in unfunded pension liabilities, according to a new report by the Chicago Civic Federation. The city of Chicago has less than 50 percent of the money it needs to pay the benefits promised to Chicago police and firemen. Philadelphia was forced to issue a $4.5 billion bond in February to cover unfunded pension liabilities for 33,000 retirees. The total cost to states for paying for all teacher retirement health and pension obligations is now estimated at $3 trillion, and growing each year.

As California taxpayers wake up to the enormous future tax increases they and their children face to pay for expansive promises to city, county, and state workers, they're wondering, says Frates, "how did they get these sweet deals?" There lies the real scandal. For years, even decades, the only people who've cared much about public employee salaries are the public employee unions. The politicians who sit across the table and negotiate with the union bosses have little if any incentive to drive a tough bargain. The costs won't be visible until the politicians who negotiated them are long gone.

Donna Arduin, a former California budget director, explains another reason deals that border on swindles keep getting done:

"The public employee unions are far and away the most powerful special interest in the state. They run the state and virtually no politician will stand up to them." She remembers being physically threatened one year when the state was broke and she tried to trim a $400 million bonus in the pensions for corrections officers: "I had to fear for my life."

Nationally, public employees now receive $39.50 an hour in wages and benefits. That's a 50 percent premium over the $26.09 average salary and benefits for private sector workers, according to 2007 Bureau of Labor Statistics data. The gap keeps widening each year. It's true that public employees are more likely to be in white-collar occupations, which receive higher pay, but it's also true that government workers receive a benefit that almost no one in the private sector gets: near 100 percent lifetime job security thanks to arrangements like teacher tenure and government no-fire rules.

In California, taxpayer watchdog groups like the Howard Jarvis Foundation are starting to fight back against the public employee unions. These groups are mobilizing to put an initiative on the ballot called "Proposition 13 for Pensions." It would simply require public employees to work until the age of 65 before they can receive retirement benefits. That's standard fare in the private sector, and the reform would save the state of California and its localities an estimated $500 billion through 2030. No surprise that the unions have pledged to spend millions of dollars to defeat the measure.

The more sensible long-term solution is for cities to immediately abolish these anachronistic guaranteed "defined benefit" pension systems and convert public employees to portable and cost-constrained 401(k)-type pensions.

"In the private sector, defined benefit pension structures are rapidly becoming extinct," says financial analyst Dan Clifton of Strategas, a Wall Street advisory firm. "Pretty much only the government still offers them."

But the unions have plenty of political firepower to preserve their pension empire. This year public employee unions are expected to spend $50 to $100 million on political campaigns--as they've been doing for years. No wonder that many politicians behave like fully owned subsidiaries of the unions. So the luxurious benefits of public employees grow more unaffordable each year while the states and cities keep edging closer to the fiscal cliff. Bankruptcy may be their only recourse. Just ask the folks in Vallejo, California.