A Retiring Approach

Most of us – particularly if we live in cities and towns – interface with local government as a part of our daily lives – constantly, from driving on city streets, depending on fire and police protection or taking our kids to school. We read about federal policies and decisions, but other than paying our taxes and either getting annoyed by decisions in Washington or hoping a loved one in the armed forces is okay, direct one-on-one contact with the feds is not that frequent. The feds can print money (really by raising money supply, buying their own debt instruments, etc.) and state issues are nasty, but they don’t tend to hit the average American urban dweller nearly as hard as potholes, terrible schools, and dangerous neighborhoods – all local issues.

But cities are also the least likely to be able to generate the kinds of revenues they need to sustain their old and often spendthrift policies. As consumers spend less, a city’s share of sales tax revenue drops. As homes go into foreclosure and property values plunge, the property tax base erodes. With fewer new homes being built, fees from permits fall. The majority of American cities are in fiscal hell, building deficits, watching their credit ratings erode (increasing the interest rates they have to pay on all forms of debt) and being forced to cut services and face both angry residents and angrier and often powerful unions. The federal government doesn’t have enough money to bail out all of these deficit cities and most certainly isn’t going to keep funding unrealistic pension practices that are dragging these urban centers down.<>

Conventional and pre-financial-meltdown wisdom has always held that people worked for the government at lower rates than the private sector knowing that they would have fixed-benefit retirement benefits (with cost of living increases built in), limited work hours, earlier retirement and full benefits. This was the deal when these workers signed up, the contract they made through their civil service status or union collective bargaining agreement. I am reminded of “Depression Babies” with college degrees opting to be mail carriers because they could depend on the job, the pay and the benefits regardless of the economy. Today, it is just as likely that a government employee is actually making more than his or her private sector counterpart… and he/she often has a tenured job.

Unfortunately, the money to support these economic promises – made in very different times – simply does not exist… and is not likely to exist anytime in the foreseeable future. I live in a city facing a currently-estimated massive $485,000,000 shortfall next year – Los Angeles, California. Former conservative mayor, now 80-year-old Richard Riordan (he left office in 2001), thinks that unless all of the above practices and assumptions are changed radically and immediately, Los Angeles and cities like Los Angeles will have no other choice but to file bankruptcy under federal municipal bankruptcy law (a so-called Chapter 9 filing).

He strongly believes that local government has to raise the retirement age, and the required years in service, to 65 instead of frequently permitted retirement at 50 or 55. He challenges the practice of the above defined benefit retirement plan – where a retiree gets a set amount per month (with cost of living increases) regardless of the underlying pension funding account – and wants government to fund such retirement benefits by creating a series of individual private 401(k) investment accounts (where the contribution is defined, but the benefits are not). Basically, the retiree would get no more in the way of retirement benefits than what that account would support. As an aside, police and fire retirees in Los Angeles can retire with 90% of their pay, at age 50, benefits passed during Riordan’s tenure as mayor (the number had previously been 70%). And he challenged the practice of getting rid of employees by allowing early retirement – this may reduce the payments required from the operating budget (so it looks better), but it simply increases the deficit in an under-funded pension account. The city wanted to transfer city workers from the main city budget to the Department of Water and Power, which has a separate budget but creates only the most elusive cosmetic “savings” for the city.

Every one of the above policies and practices can be found in most municipal and local governments. If the economy were not (i) going through a paradigm-shift of getting rid of underperforming industries, (ii) permanently redesigning the workforce and (iii) figuring out how to repay or otherwise deal with massive governmental deficits that cannot be repaid for decades at best, then all we have to do is wait for the economy to “recover” to its previous level, and we can adjust slightly for the “bad years” we have faced. Unfortunately, every significant economic study I have seen is projecting more than a decade for the housing market to be restored to 2007 level, high levels of unemployment to continue for years beyond any recession we have faced and a decline in the relative economic strength of the United States when compared to ris ing nations like China and India.

So what do we do? Break our promises to government workers? They may have elected to work for the government, giving the upside in a private sector job, precisely for the benefits we are threatening to reduce or remove. What if civil servants sue at any reduction in their benefits, claiming either a contract breach or an unlawful “taking” of vested property rights? What if unions “just say no”? The alternative of Chapter 9 bankruptcy is the appointment of a federal trustee who has the power to terminate all contractual benefits, eliminate jobs by the thousands, take away programs and services that residents have come to rely upon and decimate all pension obligations. Everyone in this mix has a powerful reason to sit down at the bargaining table to get real. It won’t be fun, there will be anger… forget that… rage… at the broke n promises and the disrupted lives, but it is necessary. If any group of employees that is large enough resists, that one faction could force the entire city into Chapter 9…and they will lose anyway. The time to act is now.

I’m Peter Dekom, and we all have to face some tough economic choices these days.