2011 March 01 Tuesday
Government Pensions Unaffordable In California

An LA Times editorial points to a new report on how it will be impossible for governments to deliver on pension benefit promises made to all the government employees in California.

But a new report from the Little Hoover Commission in Sacramento makes a more troubling point: Many state and local government employees have been promised pensions that the public couldn't have afforded even had there been no crash.

The public employee unions managed to bribe politicians to get these pensions. The mistake is up there with the Iraq war in terms of great US national policy mistakes. Still not in the same league as the massive mistakes made in the last 45 years of immigration policy. But state and local governments are increasingly going to serve their retirees more than their citizens.

The Democratic Party basically made a pact with the devil: In exchange for getting mandatory union member membership fees funneled into Demo campaign funds the Demo politicians voted to put the interests of state employees far ahead of the interests of the larger public.

But the report argues that political factors have been at least as important in driving up costs, starting with the Legislature's move in 1999 to reduce the retirement age for public workers, base pensions on a higher percentage of a worker's salary and increase benefits retroactively. The increases authorized by Sacramento soon spread across the 85 public pension plans in California.

Compounding the problem, the state has increased its workforce almost 40% since the pension formula was changed and boosted the average state worker's wages by 50%. Local governments, meanwhile, raised their average salaries by 60%. Much of the growth came in the ranks of police and firefighters, who increased significantly in number and in pay.

Fat city. But now we are well into the phase of costly consequences. Government debts have gotten too big to keep kicking the ball down the road.

The daunting tower of national, state and local debt in the United States will reach a level this year unmatched just after World War II and already exceeds the size of the entire economy, according to government estimates.

The Tea Party-led rebellion against government employee unions is an absolutely necessary (but insufficient) corrective. Wisconsin Governor Scott Walker has to massively cut down the power of the unions as a defensive measure for the public.

Nationally, Walker's efforts to break the power of public service unions - being replicated to some degree in several other Republican-led states - have thrown public employee unions into an existential crisis.

Crashing some of the public employee unions is a deserved outcome for the damage they've caused. Gutting their power to bribe the Democrats would result in much more fiscally responsible and frugal government. We'd get higher quality services at lower cost and bloat would be easier to cut.

FDR understood that government workers should not have unions.

This is "an assault on unions," said President Barack Obama of Gov. Walker's plan.

That's true. But Franklin Delano Roosevelt, the president most favorable to industrial trade unions, would have stood with Mr. Walker.

"Meticulous attention should be paid to the special relations and obligations of public servants to the public itself," FDR said in 1937. "The process of collective bargaining, as usually understood, cannot be transplanted into the public service."

When you hear official estimates of underfunded pension funds keep in mind their books are somewhat cooked. So their real problems are much bigger than they officially claim. The states use unrealistic future stock market returns to avoid admitting the size of their unfunded liabilities.

The Pew Center on the States finds that the US states have $1 trillion in unfunded pension and health care liabilities. The states are in worse shape than they officially state because they assume ludicrous rates of return on their investments. The lowest assumed annual return rate is 7.25% for North Carolina and South Carolina. The highest at 8.5% is used by 5 states (CO, CT, IL, MN, NH). This is delusional. Click thru on that link to figure out whether you need to plan to move to another state.

The interview with Chanos is worth reading for his comments about proper uses of credit default swaps.

States do not want to get realistic on rates of return because they can't afford higher pension fund contributions that would come from more realistic assumptions.

Northwestern U biz prof Joshua Rauh thinks the state pensions are underfunded to the tune of $3 trillion.

2/16/2011 - Associate Professor Joshua Rauh testified before members of the U.S. House Judiciary Committee Feb. 14 on the role of public employee pensions and the risk of state bankruptcy from these underfunded liabilities.

Based on his research, Rauh predicts that without basic reform to the current pension system, many large state pension funds will run dry, even if they achieve predicted 8 percent annual returns. Rauh estimates taxpayers will bear a large share of the financial burden of the $3 trillion in unfunded legacy liabilities associated with state pension plans.

Even a very successful gutting of union power by Republican governors and legislatures would still leave at least $1 trillion in unfunded liabilities. Throw in Peak Oil and I expect the problem to be much worse. We face something worse than a zero sum struggle for money over the next 10-15 years. Economic growth has in the past allowed politicians to pay back bribes and votes from assorted groups. But we are now in an era where elected officials will have to cut cut cut. The cutting we are witnessing at the state and local level will eventually happen at the federal level too. Though the US federal government and other governments with their own central banks will probably opt for some inflation to cut down at least a portion of their liabilities.

Our problem is that collective expectations and promises far exceed future wealth. Expect lots of wails and conflicts as expectations and reality continue to collide.

Share |      By Randall Parker at 2011 March 01 08:54 PM  Economics Sovereign Crises

Stephen said at March 1, 2011 10:46 PM:

So who decided not to fund pension liabilities on an accrual basis? That's not within the power of a union to do, rather its entirely a political decision repeated over multiple red/blue administrations.

Its funny that the workers will get the shaft even though the fault is 100% with the politicians who decided not to fund pensions on an accrual basis.

I have a proposal, now that sanctity of contract is an unimportant concept, the obvious thing to do is to 100% renege on every serving or retired politician's pension plan. Anyone care to hold their breath until that happens?

Mike said at March 2, 2011 6:13 PM:

That's a good point about public sector workers not being in the same position as private sector workers. Most public sector jobs are monopoly positions, either because private companies aren't permitted to do the work (such as tax collecting) or because a sizeable proportion of the voting public can't afford to use alternative private providers. For example, public education is for people who can't afford private education, hence if public sector teachers ask for relatively high wages, the government can't stop them since the public are unwilling or unable to do away with public services and take their custom elsewhere.

SF said at March 3, 2011 9:12 AM:

Jerry Brown is actually asking for more give-backs than Scott Walker, but isn't going after the collective bargaining process. I wish him luck. As Deng Xiao Ping said, it doesn't matter if the cat is black or white if it catches mice.
The big problem is how we legally define collective bargaining. Before 1975 in California, the employees association could appear before the school board or city council and present the reasons why they should be given a substantial raise. They might or might not be associated with a national union--more likely not, since it wouldn't have bought them much. They could demonstrate as the Wisconsin employees are doing. They could mount a letter-writing campaign. But it was clear that the governing body made the final decision. Now, collective bargaining is such a tightly defined process that it is almost impossible for a governing body to reach a point at which they can say the process is over, and we will now implement our last best offer.

California kid said at March 4, 2011 4:09 PM:

It's just so simple to do the math. I'm amazed that liberals and unions haven't figured it out. In L.A. at least, every Latino family has 4-5 kids. L.A. City schools charges about $10 grand per student per year. That's charged to the taxpayers in the state. If all their kids are in school at one time, that's a bill for 40 to 50K per year. Does anyone believe that Latino families pay anywhere close to that in state taxes ? They may pay only 4-5K by various means. And the 40-50K is only for education.

Some may say that their kids will grow up and become taxpayers. But they will ALSO have 4-5 kids per family. Their earnings will never be very high because of HBD and other issues. It's terminal. California is kaput.

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