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.
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.
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|