Protests Likely to Spread in the U.S. as States Raise Taxes and Cut Spending Rather Than Address Public Pension Reform

State-worker Pension Reform Should Join Tax Increases on the June Ballot

February 3, 2011

Orange County Register - While Gov. Jerry Brown believes Californians are now ready to vote themselves new taxes to close a portion of the state's $25 billion budget deficit, he ought to give voters the opportunity to also vote on reforming the pension systems for state workers. State Sen. Mimi Walters, R-Laguna Hills, agrees. She is calling for the newly elected governor to add a pension-reform ballot measure to the special election ballot in June.

Sen. Walters is preparing a new set of pension reform bills that she wants addressed by the Legislature before any new taxes are proposed, including a reform that would require all newly hired public employees to enrolled in 401(k) retirement plans rather than the traditional pensions that guarantee a certain benefit. While Ms. Walters and her colleagues in the Republican minority are unlikely to support the tax increases, they might be willing to support them being placed on the ballot if accompanied by pension reform.

Raising taxes on the already struggling citizens and businesses in California in a down economy is, in our view, unwise. But the idea to allow a popular vote on tax increases if they are coupled with pension reform is interesting. If we correctly judge voter sentiment, they will once again reject tax increases, as they did in 2009, and, quite possibly, support pension reform. That would be a win-win for taxpayers, who then could send a simple and clear message back to the governor and Legislature: Live within your means.

For Gov. Brown, the move would lend him some credibility with voters on pension issues, though it would admittedly put him at odds with public employee unions, which supported his candidacy and are being counted on to fund much of the upcoming campaign to win passage of the tax extensions. Adding pension reform to the mix would likely allow the governor to gain needed support from Republicans for the special election, though the GOP would take a hard line against the tax hikes.

Pension reform is too important for the state to be put on the back burner. If Gov. Brown is serious about addressing pensions and truly wants to empower voters, he ought to put pension reform on the special election ballot.

Pension Reform and Why You Should Care

December 2, 2010

New York Observer - ...Many state like California, New Jersey and New York already have significantly high tax rates, and sensible politicians are reluctant to raise taxes to bridge budget gaps, as this could potentially drive businesses and job-creating individuals out of their states. For many facing large budget deficits, the only method of survival will be to cut spending in a meaningful way. This, unfortunately, means inevitable tough battles against public-sector unions, which have been granted unsustainable collective bargaining arrangements and pensions systems that are driving municipalities into balance sheet insolvency.

Recently, the first of approximately 80 million baby boomers have begun to retire. This fact is placing a magnifying glass on the increasingly apparent fact that the United States is up against a pension crisis of unprecedented magnitude. Almost all state and local government pension plans are significantly underfunded; many large corporate pension plans have collapsed or are near insolvency; the Social Security system is a time bomb waiting to explode; and nearly half of all Americans have managed to save just about zero upon which to live during their golden years.

In order to make it through this potentially devastating problem, we must realize that we need to change almost everything we know about retirement. It is simply impossible to keep all of the financial promises that we have made to an entire generation of Americans, as we have promised to provide more than can be delivered to future retirees. This is particularly true when it comes to public-sector unions, which have negotiated packages that are oblivious to economic reality.

So at this point, you may be asking why a real estate guy cares so much about pension obligations. In this case, the dots are fairly easy to connect. To the extent pension obligations cannot be reformed and controlled, property taxes will increase. If property taxes increase disproportionately to other expenses, property value falls. If property values fall, history has shown us that transaction volume will fall. Any market participant that relies on transaction volume within the real estate industry for their livelihood clearly understands the relationship between transaction volume and their relative level of professional happiness.

The pension issue is one that must be dealt with and must be dealt with soon. On Capitol Hill, you know questions will be asked as to whether the federal government will bail out states and municipalities facing budget problems caused particularly by their overly generous and significantly underfunded pension plans.

The options for the government, include

1. Doing nothing, which will likely create emergency cost-cutting and increases in taxes, which will drive away businesses and jobs;
2. Yielding to pressure from politicians and organized labor for condition-free funding; or
3. Motivating states to straighten out their own affairs by providing resources that have restrictive conditions attached to them.

The catch with these scenarios is that even the possibility of a federal bailout will stop politicians from making the tough decisions that need to be made in dealing with these very real problems.

Reforming pension systems is not an easy task and requires tremendous political will. Public-sector-union pension funds require fundamental reform, which is unlikely to come if potential bailouts are on the horizon. The current administration could take great strides in resolving this problem by simply stating that they will not provide the assistance that so many municipalities are praying for.

One of the most significant methods of reforming these pension systems is to switch from the current "defined-benefit" plans to "defined-contribution" plans such as 401(k)s for new employees. The current defined-benefit scenario is tantamount to a Ponzi-style system, where contributions from workers today are funneled to benefit retired recipients.

Recent published reports have indicated that in New York, we are doing relatively well compared with the rest of the country, as our pension obligations are "funded" at 107 percent, an amount that sounds more than adequate. However, this number, and all funding obligation percentages, are derived using hocus-pocus accounting. One of the major contributors to this fantasy is the assumption of a 7.5 percent annual compounded rate of return within the funds. This expected return percentage was recently lowered in New York from 8 percent, which is the national average.

Notwithstanding this lowered expectation, does anyone really believe that a 7.5 percent return is achievable given market conditions?

These lofty expectations persist despite the fact that the stock market is approximately where it was a decade ago; the 10-year treasury note is yielding approximately 2.75 percent; and inflation has been running at less than 1 percent on an annualized basis. As Bernard Madoff is unavailable to consult with the state and produce these types of returns, perhaps a more reasonable expected yield should be utilized.

In another baffling smoke-and-mirrors mechanism, New York's pension-fund protocol allows local governments to borrow against future pension-fund gains to defer a portion of their contributions for up to five years. This is like a homeowner who can't afford to make mortgage payments increasing their already underwater mortgage balance in order to make the monthly payments. Some studies that use honest accounting indicate that New York's state pension funds are underfunded by anywhere from $30 billion to as much as $80 billion. This is significant compared to an approximate aggregate balance of $150 billion.

Addressing public-sector pensions, and associated health benefits, is likely to be among the most daunting tasks for Governor-elect Cuomo. During his campaign, he proclaimed pledges of "no new taxes" (which he subsequently clarified as not including any increases on old taxes) as well as a 2 percent annual cap on property taxes. If he expects to keep those promises, he must go head-to-head with the public-sector unions and their unsustainable collective bargaining agreements. For too long, these special interests have had the loudest voice in Albany and have therefore, singularly, placed themselves in a position to bankrupt the state.

In order to succeed, Mr. Cuomo will need cooperation and assistance from the business community as well as private-sector unions (the heads of which he specifically acknowledged and thanked for their support during his election-night speech). Although the help of private-sector unions may seem initially counterintuitive, it is important to remember a tangible difference between public-sector unions and private-sector unions: Private-sector union members pay taxes; public-sector union members are paid with taxes.

Surely, when a first shot is fired over the bow of the teachers' union and the health care workers' union, we will see millions of dollars in TV ads complaining of the devastating impact that spending cuts and tangible reform will have on the state. Therefore, it is important that an equally vociferous campaign is implemented to support these essential reforms.

Simply stated, we can't credibly expect tax caps, whether they are real estate taxes or personal taxes, without significant reforms to the collective bargaining provisions that now make it so difficult for local governments and school districts to control their labor costs. Public-sector pension obligations are about to skyrocket to levels never before seen in New York, and these increases are sure to crowd out programs of great importance to our residents.

New York's huge unfunded pension and health care promises, granted by past governments and exacerbated by deceptive pension-fund accounting that understates liabilities and overstates future investment returns, is a disaster looming over our economic future.

Reforming public-sector employee compensation and benefits won't close next year's $9 billion budget deficit. It will, however, protect the next generation of New Yorkers from suffocating financial burdens. In the short term, seeing tangible reform will provide a comfort level for the idea that massive tax increases will not be the mechanism utilized to bridge these gaps.

It appears Mr. Cuomo is well aware of this. To the extent he has the support, determination and political will to do what needs to be done, our economy and our real estate market will be much the better for it.

Tell Legislators: No Tax Increase Without Pension Reform!

January 4, 2011

Chicago Now - Some scary things are happening in Springfield.

The governor is considering borrowing $15 billion. Lawmakers are talking about borrowing $3.7 billion for pensions. And everyone is talking about increasing the personal income tax from 3 to 5 percent.

Responsible legislators in both parties should just say "no" to the tax-increase and bond proposals. They should vote against - and speak out against - any solution that fails to first reform pension and retiree health care programs and Medicaid, and fails to cut the State's budget by billions each year. Instead, they should seize this opportunity to put the State back on the path to financial health.

Virtually every political figure in Illinois now concedes that our State Government is in a terrible fiscal mess. Our annual embedded budget deficit is about $15 billion. In addition, the unfunded liabilities of the State's five pension plans have snowballed to about $85 billion - with additional billions at the municipal level. Unfunded obligations for retiree health care costs of public employees add another $40 billion. Toss in a few more billions of pension bonds and notes. The total debt is already staggering - almost incomprehensible.

Clearly the proposed tax increase and massive new bond issue would not address the State's underlying fiscal imbalance The huge unfunded pension obligations would not be reduced by a nickel, but would continue to grow - putting the funds at great risk of bankruptcy.

We can't allow our lawmakers to continue borrowing money and taxing Illinois citizens unless they first address the pension crisis that nearly every community throughout Illinois is facing.

Tell Springfield to solve the real problem - $130 billion in unfunded obligations for pensions and retiree health care. Reforms and cost-cutting should be an absolute precondition to any tax increase. Current public employees should be given choices in their pension programs going forward, and they should make higher contributions if they choose more costly programs. State retirees should contribute toward their health care premiums.

Illinois Must Reform Pensions, Make Cuts Before Tax Talk

February 23, 2010

RRStar.com - Illinois’ budget hole — almost $13 billion — is the result of years of the state spending beyond its means, years of neglecting pension reforms and years of mismanagement.

The solutions will be painful, but doing nothing would be worse.

One potential solution, proposed by the Civic Federation, calls for $2.5 billion in cuts, an income tax increase and pension reforms.

The Civic Federation is a 116-year-old nonpartisan government research group in Chicago that lists Jane Addams among its founders. Its 100-page report should come as no surprise. Many of its recommendations have been made by other civic and business groups. Some recommendations have even seen their way into legislation, but lawmakers have not had the courage to act, exacerbating the state’s fiscal misery.

The federation’s call for raising the income tax from 3 percent to 5 percent has received a lot of attention. It’s a bigger increase than the one Gov. Pat Quinn proposed last year. Quinn wanted to raise the income tax to 4.5 percent, but his proposal went nowhere.

A key sentence in the federation’s report has not received as much attention as the income tax increase:

“The Civic Federation opposes any revenue increases until pension reforms are undertaken and at least $2.1 billion in budget cuts and savings have been made.”

Amen.

The problem with any tax increase, no matter how needed, is that our lawmakers in Springfield have not shown taxpayers they can manage the money they have. There is no track record that would make us believe that they would spend extra money wisely.

We could easily imagine lawmakers raising taxes and then using the new money for pet projects they hope will boost their re-election efforts.

That’s why cuts — and especially pension reform — need to be done first.

The Legislature has been averse to altering the pension structure. We’ve long advocated for a two-tier system that puts new employees on a 401(k)-style plan and provides them lesser benefits. The Civic Federation’s report agrees.

Illinois has the worst unfunded pension liability in the U.S. If pensions are not dealt with, they will eat so much of the state’s budget that there won’t be any money left over for education, social services or any of the other programs we expect the state to finance.

Instead of fixing pensions, lawmakers have skipped payments and made the situation worse. Time is running out. Pensions must be dealt with before lawmakers adjourn this spring.

We doubt they will act on a tax increase during this session, but we hope they see the wisdom in cutting spending and reforming pensions. Then in the fall, if a tax increase is approved, the money should be used to reduce debt rather than increase spending on existing programs or start new ones.

Stabilizing finances is the only way the state can honor its commitments. It owes $3.7 billion to social service and medical providers, and an additional $2.3 billion in loans coming due.