Unaffordable

It just might be our undoing, and the bad news is that we have already spent the money. Commitments made in an earlier era, reliant on a tax base that rises and falls with unpredictable irregularity, cherished by powerful unions with a strong voice in supporting candidates who likewise support their benefit plans based upon growth assumptions that have long since perished in a sea of global competition and underfunded and very necessary growth investments in education, infrastructure and research. I’m talking once again about the roughly three trillion dollars of unfunded state and local pension obligations, plaguing non-federal governments across the land.

While the federal government can simply “borrow by increasing the money supply, raising the national debt” (aka “printing money”), state and local governments must rely on their ability to balance their budgets… and upon their creditworthiness as they go into the private markets to borrow money. Bond issuance. Bank loans. Whatever works.

The vast majority of such local pension obligations are based on an archaic pension scheme, virtually gone in the private sector as unsustainable: defined benefit plans. Beyond Social Security, the private sector workers who even have pension benefits are almost entirely based on how much money is in the pension account, based on defined contributions made over the years. If their accounts do not support higher monthly payments, they just don’t get them. Defined benefitplans, on the other hand, make the government body making such commitments responsible for a fixed dollar monthly amount (often with cost of living escalators) based upon some fraction of the retired civil servant’s highest paying years. And it’s “funny” (not “ha ha” funny) how savvy civil servants know how to make that number as high as they can.

So if the actual funding for that defined pension commitment cannot support the promise to pay the required fixed amount, the government body making the commitment still owes the money from wherever they can get it. Oh, and that’s assuming that the relevant local governmental body actually set aside money to pay its pension obligations and, if it did, that it not tap into those funds for one “emergency” or another. Too many state and local government bodies simply failed to make those payments or structure their obligations for the inevitable.

Of course, the even bigger problem is that current needs for active and current state and local services (which definitely include school districts) are often cut and sliced to the bone to pay for past services that do not provide a whit of a benefit for present needs. To the retirees and those represented by unions, and to others who see their government benefits as a sacred commitment, these unsustainable levels of payments are “vested and immutable.” Nothing short of bankruptcy will alter those benefits. Bankruptcies like: Birmingham (Jefferson County), Stockton, San Bernardino, Vallejo, Detroit, Harrisburg, etc., etc. Illinois went through machinations to reconfigure its financial structures to accommodate its pension obligations… maybe, and California made some major shifts as well. Still not there!

While such generous pension commitments seem to track heavily Democratic states, Republicans have given away their share as well when they held power. Los Angeles’ Republican Mayor (1993-2001) Richard Riordan spearheaded an effort to give LA’s uniformed services a massive increase in retirement benefits while cutting the time required for pension eligibility, a commitment that has slammed the city’s finances ever since. New York City? One you would think, overflowing with money from Wall Street’s bursting coffers, would be sitting above this mess. Well, think again.

Not that NYC has been callous and irresponsible, but… “For years, New York City has been dutifully pumping more and more money into its giant pension system for retired city workers… Next year alone, the city will set aside for pensions more than $8 billion, or 11 percent of the budget. That is an increase of more than 12 times from the city’s outlay in 2000, when the payments accounted for less than 2 percent of the budget.

“But instead of getting smaller, the city’s pension hole just keeps getting bigger, forcing progressively more significant cutbacks in municipal programs and services every year… Like pension systems everywhere, New York City’s has been strained by a growing retiree population that is living longer, global market conditions and other factors.

“But a close examination of the system’s problems reveals a more glaring issue: Its investment strategy has failed to keep up with its growing costs, hampered by an antiquated and inefficient governing structure that often permits politics to intrude on decisions. The $160 billion system is spread across five separate funds, each with its own board of trustees, all making decisions with further input from consultants and even lawmakers in Albany…

“[NYC’s Democratic Mayor Bill] de Blasio, who has appeared less engaged with the city’s pension problems than his predecessor, [Republican] Mayor Michael R. Bloomberg, is confronting a legacy of costly and questionable decisions going back at least to the years of [Republican] Mayor Rudolph W. Giuliani, a review by The New York Times found.

“Like many public systems, New York has promised irrevocable pension benefits to city workers on the thinking that fund investments would grow enough to cover the cost — but they have not. Its response so far has been to take advantage of a recovering local economy and inject a lot more city money into the pension system quickly — an option not available to declining cities like Detroit, which filed for bankruptcy last year, or a tax-averse state like New Jersey, which has been underfunding its pension system for years.” New York Times, August 3^rd.

We cannot live like this anymore. The assumption that civil servants take lower pay to get the underlying benefits is no longer true. Private sector jobs reflect dwindling buying power and contracting benefits. We need to bite the bullet and empower state and local communities to restructure those sacred pension plans. On August  4, 2013, I blogged (Detroit 101 - Return to the Elephant in the Room: Governmental Pension Reform) about our need to create a new form of limited bankruptcy, which I call Chapter 9A, that allows non-federal governments, forced to cut necessary current services and unable to generate the necessary revenue growth otherwise, this limited restructuring power.

For what it’s worth, the longer we wait, the more retirees we add to the existing program, the worse is it going to be when we hit that rather solid brick wall of unaffordability. And at some point those expectant pensioners will have a whole lot less than they bargained for. It’s in their own interest to stabilize their future.

I’m Peter Dekom, and digging our collective heads in the sand over such a complex issue will only make it much, much worse.