pensions

Preempting State Pension Bailouts

by Ivan Osorio on May 17, 2010 · 1 comment

in Bailout Watch, Economy, Employment, Labor, Regulation

Congress has long used its control of the federal government’s purse strings as a club with which to force states to change laws that fall under state governments’ traditional police powers, such as speed limits and legal drinking ages, by threatening to cut federal highway funds. Given the current trend in government growth, I expect the categories of funds so manipulated to expand.

The two most notorious policies so crammed down states’ throats — the 55-mph speed limit and the 21 legal drinking age — constituted nanny-state social engineering of the worst kind: government forcing behavior on certain citizens for their own good.

However, when it is the money of the nation’s taxpayers, rather than behavior politicians don’t like, that is at stake, pulling such funding may be called for. In his Washington Examiner column today, Hugh Hewitt proposes such a solution to prevent a federal bailout of underfunded state public employee pensions.

Federal spending power was used to oblige states to lower their speed limits to 55 miles per hour a few years back. The same authority could be employed to oblige states to curtail public employee pensions. A new federal statute, stating simply that the Treasury will not be sending assistance to any state awarding any new six-figure pensions under any circumstances, would be approved by overwhelming margins.

The federal government discouraging state government profligacy is very different from its manipulating federal funds to enact state-level policies over which it should have no authority. For that reason, comparing the two is troubling, even when accomplished by similar means. Still, if the federal government is ever to withdraw funding for any reason, it should be to rein in its own, and other governments’, power.

For more on public sector unions, see here and here.

Big Labor Pension Strategy: United States of Argentina?

by Ivan Osorio on April 19, 2010

in Bailout Watch, Economy, Labor, Regulation

Service Employees International Union (SEIU) President Andrew Stern made a big splash last week, when he announced his retirement from leading what is arguably America’s most powerful union. As I noted then, Stern leaves SEIU with the union’s pensions for rank-and-file members seriously underfunded.

Yet he may have a plan to bail out those pensions — at taxpayer expense. Worse, Stern and his labor allies are working with the Obama administration to facilitate a direct government takeover of pensions. (It’s worth noting that the Obama administration includes a lot of organized labor appointees, especially from SEIU, as well as Vice President Joe Biden’s chief economic adviser, Jared Bernstein, who was previously chief economist at the labor-backed Economic Policy Institute.)

As The Washington Examiner‘s Mark Hemingway explains, one vehicle being used to push this agenda is the  White House’s Middle Class Task Force.

The section of the [Task Force's] report devoted to “Protecting Workers and Creating Middle-Class Jobs” reads like organized labor’s policy wish list. It pushes expensive “high road” federal contracting, plans for project labor agreements, enforcing labor standards, a “National Equal Pay Enforcement Task Force” and, most perniciously, “retirement security.”

Social Security is bankrupt and the average union pension plan only covers 62 percent of its liabilities, well below the 65 percent threshold at which the government considers the plan “endangered.” Given these facts, the Economic Policy Institute has teamed up with two of the most powerful unions in the country — the AFL-CIO and Service Employees International Union — to push something called “Retirement USA” (visit Retirement-USA.org).

Retirement USA looks like a scheme to prop up trillions of dollars worth of failing pension plans by seizing your personal savings. It would create a universal retirement plan for all Americans that centralizes all existing retirement plans — including your personal 401(k) savings and private pension plans — into the same retirement system.

Free-market advocates often accuse those on the Left of trying to turn America into France, but would follow a model even more bureaucratic and dysfunctional: Argentina, where the government of President Cristina Fernandez (pictured above) has seized pensions to pay for its profligacy. Kirchner seems to have learned little from her country’s epic economic decline during the 20th century, which was due largely to abysmal policies. For America to consider something even slightly similar today is terrifying.

For more on pensions, see here, here, and here.

Virginia Shows the Way in Taking on the Pensions Crisis

by Ivan Osorio on April 5, 2010

in Deregulate to Stimulate, Economy, Employment, Labor, Regulation

As the federal government continues to expand at an ever-growing pace, the Old Dominion is doing things differently. As The Richmond Times-Dispatch explains, Governor Bob McDonnell is trying to get the state to live within its means (and those of taxpayers), focusing on a key issue.

The most significant piece of McDonnell’s budget — though not widely noted — was the decision to trim the pension costs of future state employees. By shifting the model for those hired after July 1 to one that more closely resembles private-sector retirement plans, McDonnell took an enormous step in ensuring the state’s solvency — which should soon emerge as a distinct competitive advantage for Virginia’s economic development — while keeping faith with past promises made to current state workers.

This essential reform would have been impossible if Virginia politics were dominated by the public-sector unions that seem determined to drive California and New York, to name the most prominent examples, into bankruptcy, crippling tax increases — or perhaps both. McDonnell has set an important precedent here.

Indeed, as the Cato Institute’s Chris Edwards notes, Virginia, by barring collective bargaining by public employees, should serve as a model for other states. Almost as important is to depoliticize pension fund investment decisions, which have led pension funds to under-perform.

For more on public sector unions, see here and here.

Bailout Watch: Union and Public Employee Pensions

by Ivan Osorio on April 1, 2010 · 2 comments

in Economy, Employment, Labor, Regulation

As the strain on state and local government budgets around the country worsens, public employee unions have gone on the defensive, painting themselves as scapegoats for the financial crisis, reports The Wall Street Journal. Union leaders claim that elected officials are taking their financial troubles out on their workers. Yet if public employees are victims of anything, it is of union chiefs’ over-promising of lavish compensation well into the future.

Many on the left (including labor leaders) often call on everyone to pay their “fair share” (usually of taxes). By the logic of their own rhetoric,  public employees should do their “fair share” of cutting back during the recession. That hasn’t been the case.

Many private-company workers have seen their retirement accounts shrivel, while public-sector benefits have been relatively unscathed. Defined-contribution plans such as 401(k)s had $3.33 trillion in assets at the end of 2009, down 4% from $3.48 trillion in 2006, according to the Federal Reserve. Such accounts have lost value even though companies and workers contributed $100 billion over that period.

The rise in public-sector benefits has attracted the ire of citizens like Paul Nelson, a semi-retired investor in Upper Saddle River, N.J. Mr. Nelson, 59 years old, has a son at Northern Highlands Regional High School, where the principal says the school may have to cut teachers and increase class size. “Most public employees have retirement and health-care plans that private-sector employees can only dream of,” says Mr. Nelson.

State and local politicians bear a major share of the blame, not only by extending collective bargaining to the public sector, but also by acceding to union demands time and again. While undesirable, this is understandable. Public officials don’t face the competitive pressures to hold down costs that private businesses face. And while they do face constraints in the size of their budgets and potential negative reaction from taxpayers, those constraints only function in the present.

Thus, many public sector collective bargaining agreements back load benefits, in the form of pensions, well into the future. By the time the bill for those benefits comes due, the politicians who negotiated the union agreements will be out of office, leaving the mess for someone else to sort out. And quite a mess it is.

At the root of governments’ problems today are promises made in past decades. As a group, state and local governments have promised an estimated $3.35 trillion in pension and health-care benefits to be paid over the next three decades, but are estimated to have 70% of the money to cover those payments, according to the Pew Center on the States. Pension and health costs can consume 20% of city and state budgets.

California offers a view of the fallout. The state’s largest pension fund, the California Public Employees’ Retirement System, known as Calpers, is estimated to be only 57% to 65% funded. Having suffered investment losses in recent years, the state has had to dip deeper into its revenues to make up the funding gap. Last year, a budget impasse forced the state to issue IOUs for taxpayer refunds.

It wasn’t long ago that California was going the other way, based on a different set of assumptions. In 1999, the state’s Democratic-controlled legislature and then-governor Gray Davis passed a law expanding benefits for many state employees. A proposal prepared by Calpers—the $200 billion fund that manages money for 1.6 million of the state’s employees, retirees and their beneficiaries—forecast that the boosted benefits would be paid for entirely by investment gains.

In addition to being optimistically generous, public employee pension funds have underperformed because of politicized investment strategies that seek to advance social goals rather than focus exclusively on maximizing returns, as fiduciary duty requires. (It is worth noting that union officials sit on many state employee pension fund boards.)

While some public sector unions have agreed to concessions, it’s been when their employers — state and local governments — are facing financial disaster, as in the case of Toledo, Ohio, which as the Journal reported yesterday, “narrowly averted having the state take over its finances by filling a $48 million budget gap late Tuesday. To tackle that deficit, Mayor Michael Bell had to take on the city’s police and firefighters’ unions and propose other controversial measures.”

As other states and cities work out ways to bring their budgets under control, public employee unions may have to agree to more such concessions, due to dire state of those governments’ finances. But they never should have gotten to that point in the first place.

Worse, many union bosses may decide to wait for a taxpayer bailout rather than make concessions. As columnist Mark Hemingway explains in today’s Washington Examiner, pension underfunding is also a major problem among private sector unions, where a bailout effort is already under way. As he notes, “Rep. Earl Pomeroy, D-N.D., has introduced legislation to explicitly put taxpayers on the hook for failing union plans.”

(Subscription needed for Wall Street Journal links.)

For more on public sector unions, see here and here.

For more on pensions, see here, here, here and here.

Barron’s on the Dire State of Public Employee Pensions

by Ivan Osorio on March 16, 2010

in Bailout Watch, Economy, Labor

The current issue of Barron’s highlights the crushing burden that employee pensions are putting on state and local governments around the nation. The situation is so dire that some dismaying-enough estimates fail to capture the entire scope of the problem. Barron’s writer Jonathan R. Laing cites a Pew Center of on the States study that finds that, “eight states — Connecticut, Illinois, Kansas, Kentucky, Massachusetts, Oklahoma, Rhode Island and West Virginia — lack funding for more than a third of their pension liabilities. Thirteen others are less than 80% funded.” That sounds bad, but it is a relatively optimistic estimate! As Laing notes:

The size of the legacy-pension hole is a matter of debate. The Pew report puts it at $452 billion. But the survey captured only about 85% of the universe and relied mostly on midyear 2008 numbers, missing much of the impact of the vicious bear market of 2008 and early 2009. That lopped about $1 trillion from public pension-fund asset values, driving down their total holdings to around $2.7 trillion.

Other observers think the eventual bill due on state pension funds will be multiples of the Pew number. Hedge-fund manager Orin Kramer, who is also chairman of the badly underfunded New Jersey retirement system, insists the gap is at least $2 trillion, if assets were recorded at market value and other pension-accounting practices common in Corporate America were adopted.

Finance professors Robert Novy-Marx at the University of Chicago and Joshua Rauh of Northwestern University asserted in a recent paper that the funding gap for state pension plans alone might exceed $3 trillion, in part because state funds are using an unrealistic long-term annual investment return of 8% to compute the present value of future payments to retirees, as is permitted in government standards for pension-fund accounting.

This establishes a “false equivalence” between pension liabilities and the likely investment outcomes of state investment portfolios, which are increasingly taking on more risk by beefing up their exposure to stocks, private-equity deals, hedge funds and real estate. Using a much lower expected return — say, one at least partially based on the riskless rate of return on government securities — would both properly and dramatically boost the present value of the pensions’ liabilities while decreasing their likely ability to meet them. The academic pair, using modern portfolio theory, claim that state funds, as currently configured, have only a one-in-20 chance of meeting their obligations 15 years out.

Of course, 15 years out, the politicians who helped to perpetuate this debacle will likely be out of office — which gives them an incentive to back load benefits in the form of pensions. By the time the bill comes due, it’ll be somebody else’s problem. So, while union-friendly office holders can’t give their public employee union supporters everything they ask for today, tomorrow is a different matter.

For more on public sector unions, see here and here.

Ivan Osorio on the United Auto Workers and the Recession

by Richard Morrison on May 21, 2009

in Video, Zeitgeist

[youtube:http://www.youtube.com/watch?v=c8a0Il12824 285 234]

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