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Steven Malanga
Why the State and Local Pension Problem Will Get Worse « Back to Story

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SteveJ, Contracts made by governments have been broken in Detroit, California and how can we overlook the Federal Government's GM bailout which gave bondholders a fraction of their principal back. Clearly, breach of contract by government most certainly has occurred. The pensions of pre-union times were so miniscule (as was the cost of living) as not to risk the entire state/city budget, as today. State pensions need to be eliminated, for the sake of the financial health of the state.
The best solution is for all public pensions to simply be one amount - the minimum wage.

Change tax laws to allow higher amounts to be deposited into any form of personal retirement savings -- that way, individual planning is more responsible for retirement years.

And best of all, the entire public isn't strapped supporting aged public retirees -- a huge ball-and-chain that is sinking the general public day-by-day.
Every year state and local governments draw up a budget budget and then a pass it. Taxes are raised and or money is borrowed and bonds are issued. The officials then use the money for the purposes outlined in the budget. Since government pension plans are part of the budget it brings up an interesting question. What happened to all the money that was budgeted for the pension since apparently it was not put in the pension plan? Apparently the brilliant author of this tome has not a clue on what happened to the money so he just plain good on the worker drones. It's all their fault.
This article shows how disastrous it is to elect mostly Democrats. You are seriously holding out Detroit as some kind of success. Talk about a low bar...
Steve Johnson, whether tax-driven or not, the population loss you refer to is happening in Illinois. Including immigrants from foreign countries, the state lost 40,000 population between July 2012 and July 2013 (U.S. Census Bureau). That is four times the next-highest, Michigan. Much of this is employment-driven, since Illinois's unemployment rate is third-highest in the nation at 7.9% (Bureau of Labor Statistics). The latter will be tough to solve. In a recent survey run by CEO Magazine, respondents rated Illinois as the third-worst state in the union in which to do business. No state can raise taxes indefinitely, but wouldn't a state where so many taxpayers GTFO and so many others aren't earning paychecks reach the limit of its taxing ability sooner rather than later? What happens when it does?
Dave J - one huge problem with your reasoning - all of the public pensions preceded public sector collective bargaining and the rise of public employee unionism. The San Jose pension situation decried by Randy is actually enshrined in the City Charter which was approved by a majority of voters. In addition, I don't think the current conservative majority of the US Supreme Court would agree with the idea there is a legal way to breech a contract based on "out-sized political influence." Based on corruption, perhaps; but there is no legal evidence of corruption, just bloviated opinion that characterizes decision with which one disagrees as "corrupt."

Jack Olson - you are absolutely correct. The contracts are with the corpus of the state, not individuals. And my point is that the state has to live with the consequences of the deals it makes which may include population loss.

Randy - time to move out of San Jose if you think you're getting a bad deal. See: Olson, Jack.
The answer is an easy one. Just tax the pensions away. All you have to do is pass a 99% tax on all pension payouts greater than say $40,000 per year. This is easy to do and avoids legal challenges. You can even make these retroactive like Clinton did when he raised the Federal Income tax.
I live in San Jose, CA. I can assure the readers that, based upon the experience in San Jose, unions will fight ANY decrease in pension benefits whether vested or not. This, even if to pay for those pensions current services must be sharply curtailed. The unions claims 1) "Pensions are our right that we bargained for", and 2) Raise taxes as much as required. Well, the "bargaining" occurred between union reps and politicians that took union money to finance their campaigns. And those pensions in many cases result in checks that, within three years of retirement, exceed the amount the employees earned while on the job. In short, this is excessive and many of those same employees go to work for another municipality doing the same job and accruing another pension. The truth is the money can indeed run out. Then, what will unions do?
"We are not producing leaders of broad vision, whose loyalty is to the public good, and who see themselves as fiduciaries of a public trust." Amen to that!
Madeleine Doubek, Chicago Sun-Times: "Divided up amongst all of the state’s current tax-liability-paying residents, if the bill came due today, every Illinois taxpayer would have to cough up $43,400. Remember, that’s per person, not per household." If Doubek's figure is accurate, then anyone who moves to Illinois takes on a $43,400 debt to state retirees, plus whatever municipal pension debt is owing to municipal retirees. Conversely, whoever relocates from Illinois cancels those debts although he must accept the government pension debts of wherever he moves to. If Steve Johnson is correct that "states must live with the contractual commitments they have made even if it means raising tax rates" and that "to do otherwise is...advocacy for commercial lawlessness", that does not apply to the individual taxpayer. He breaks no law and breaches no contract when he moves to a state which offers him more for his money.
"Commercial lawlessness" is a novel concept of contract law. Breaking a contract is on the other hand a well known precept of contract law--it's called breach. It exists for a reason: a party who finds the contract no longer a good deal has a way out. The contract law does not make a party to a contract into a slave to the other party with no escape possible. Marxist societies enslave their citizens; a free society does not. The local pension deals were not truly arms-length deals, with unions exercising out-sized political influence to get far better terms than any private party could, and should be voided and reformed or renegotiated. There's nothing "unconservative" about it.
A very hypocritical commentary from a a so-called conservative. Malanga ignores the basis of the California rulings on pensions and the Illinois Constitutional protections: pensions are considered contracts in both states. The problem Illinois faces is that the politicians are picking and choosing among the contractual obligations they will honor, and those they will impair. In Illinois, haircuts for bondholders are not even in the discussion. Yet in Detroit, bondholders and pensioners are both suffering impairment under the requirements of the bankruptcy code. I think conservatives like Malanga should be very careful with their advocacy for "convenient" contract impairment. Rather, states must live with the contractual commitments they make even if it means raising tax rates to the levels that existed in the mid-1990s. To argue otherwise is not a conservative position, but one that is advocacy for commercial lawlessness.
This is what's scary. So you can say "well, just refuse to negotiate with these crazies that are stealing from the working class while doing virtually NOTHING at these cushy gov't jobs." But you'd be misinformed in believing you can do that. The FEDERAL GOV'T mandates you "negotiate" with these social terrorists. You can't simply fire unreasonable people and hire one of the 93 MILLION Americans that are unemployed and would LOVE one of these jobs WITHOUT a freebie pension paid for by their neighbors. But who created this system? OUR POLITICIANS & OTHER GOV'T WORKERS. And the people allowed it, because they were all busy trying to feed their families and get ahead. Little did they know that they should have been doing NOTHING, engaging in gov't corruption and THEIR LIVES WOULD BE WAY BETTER.
Stefan Stackhouse July 11, 2014 at 11:08 AM
These articles keep coming up, and they all deliberately fail to mention that the problems of some are not the problems of all. There are other public pension plans that were and are well run and fully funded. There is a difference between wanting to fix specific problems in specific troubled pension systems and wanting to just get rid of all public pension systems because you don't like them. One gets the distinct impression that there is a campaign underway, with the former desire as the pretext but the latter desire as the real motive.
At a minimum those plans which heavily credit overtime hours in the final years of service should either be changed or the operation should be overhauled not to reserve large chunks of overtime on seniority basis. One thought is to allow overtime under the existing collective bargaining agreement but to recognize only the "per individual" average each year. Yes, the 19-year veteran police officer can work 250 hours of OT if he/she wants to do it, but if the workers covered by the agreement average 31 hours, his/her pension eligible income includes only 31 hours.
Your PA example illustrates the problem. The reason that pension contributions have spiked is the absurdly low 4% rate in 2009 (and presumably before). People complain about the investment assumptions used by pension systems depressing the annual required contributions. But politicians don't make those contributions even at the lower rates because they want to spend the money on something else. And then there is a crisis and the politicians try to break the contracts they have made.
Judging by the comments posted here, many have bought into the notion that only CEO's and other top executives deserve a pension. It's about like a bunch of fools rusihing onboard the titanic to head for the bottom.
EscondidoSurfer July 11, 2014 at 9:46 AM
The local and state politicos cannot solve this. They are owned by the unions. They will keep doing what they are paid to do.

The Feds must come in and apply the same actuarial discipline that the private sector chafes under. No exceptions. To become solvent, the feds need to lend money as needed to keep the pension funds solvent. Where will this money come from? The beneficiaries. Since the feds have unlimited ability to tax income in any way they want, they should establish an excise tax on benefits derived from these bailed out pension systems to fund the bailout. A self-funded bailout.
Keep the city's problems in the individual state . Keep the state's problems in the state . Do not federalize these debts .Let Cal , NJ , and Ill go broke :they made the mess , they own it .
I would expect Obama and Yellen to work out a scheme to rescue the municipalities. They can "create assets" out of thin air to bail out their friends. And the resulting inflation can socialize the cost by spreading it out throughout the country.
This is all another consequence of the Zero Interest Rate Policy (ZIRP).

Just wait until the world's Central Banks impose NIRP - Negative Interest Rate Policy.
The corrupt unions and corrupt politicians have created this mess and are not going to fix it. The un-informed and miss-informed have continually voted for this an now will be paying the price.

There simply is not enough money the government can steal from the taxpayers to pay these bills.

The only alternative that remains is bankruptcy by the governmental entity that is going broke.

What needs to happen is a complete and forever prohibition on unions in the public sector. The fact that the corrupt unions and politicians can and will scam the system to feather their own nests is human nature and will always be in play.
I think all pensions should be for 60% of final pay and cap out at $50k. If you want more money in retirement, then save for it yourself.
Ironically, Prop 13 in Calif. is still strongly supported. No politician is willing to touch it. Another piece of good news is that when the state has cash problems, the education sector is very easy to cut. You can't cut firemen's and cops' pensions but you can cut budgets for K-12 schools and colleges. Teachers should forget about music, arts, voc-ed, librarians, custodians, and counselors coming back. That's never going to happen.
Since analyzing education is what I do, I can watch the school districts promoting administrators because they agree to jettison academics. Those who get promotions are the anti-academics crowd. Where I live retirement is based on last 3 years before retirement. Those on the Mind Arson track know professional learning, accreditation, and other consulting gigs if not another try for a pension at the state DoEd are available for those who push mind arson.

Many now spend little time in classroom before going into administration. They believe, with cause, that if they are willing to destroy academics they get increasing pay raises over time and then get to retire with six figure incomes for the rest of their lives.

How to Destroy a Great Nation via the Schools. I wish I was exaggerating but there are likely comparable conflicts in other areas of the public sector.
There was a time when the people who gravitated to the civil service were mainly seeking security. The state and the city would always be there, or so went the thinking.

Their relatives and friends who went for the higher salaries, and decent pensions then obtainable from private companies did not begrudge them the decent pensions they obtained for 20 or 30 years service at relatively lower pay.

Now the private companies, if they do offer anything for employees' retirement, typically confine themselves to a 401(k)plan, with all the vagaries of the market as we saw in 2008.

No one begrudged the civil service contingent their pension after all those years of relatively low salaries, back in the day.

But, the world is very different now. The average guy is often holding down two part time jobs and barely staying afloat. The civil service salaries look pretty good now, and there are few jobs offering assured security and continuity in the private sector for a lot of average folks.

Our masters on Wall Street have no sense of solidarity with their fellow citizens who wear blue collars. They are content to get a better deal for themselves in China or India, and of course massive immigration, legal and illegal, that make the task facing public schools,for example, increasingly difficult.

Illegal immigration benefits the few; its costs are socialized.

Unions for civil service employees have enormous power in blue states like New York. Firing a teacher or a non-performing employee is a virtual impossibility.

We are suffering from a crisis in citizens' confidence in government.

Public pension issues are just one of several issues that are never debated openly. They are done in the dark, and very often the financial impact is deferred, the proverbial can being kicked down the road.

We are not producing leaders of broad vision, whose loyalty is to the public good, and who see themselves as fiduciaries of a public trust.