A Pension for Failure

Most folks don’t think about this, particularly as they watch the parade of military hardware or drive across the massive highway system that connects us, but government is exceptionally heavily labor-intensive. Organizations with labor also face the costs associated with long-term employees: retirement. While most of us that have retirement savings today have our own pension plan or a company or union plan that provides a contribution structure, which pays out whatever those aggregate savings can justify at retirement (“defined contribution plans”), government employees have a vastly more attractive pension structure. For those in traditional civil service programs – state, federal and local – retirement benefits often come with cost-of-living escalators and so-called “defined benefit” pension benefits: depending on your years in service and your highest level of compensation, you get a fixed monthly payment which is not at all contingent on the success of any underlying pension investments.

So as tax revenue falls and underlying pension investments get crushed in the economy, the sad fact is that governmental units are facing severely under-funded pension obligations without the slightest ability to meet those payments. Further, having borrowed under the “municipal bond” debt-creating programs to fund long-term capital improvements, these same governmental units are facing the double-whammy of accrued debt obligations from bond payments and pension obligations that they simply cannot afford. Estimates place the aggregate of under-funded local government pension obligations in the U.S. at a whopping one trillion dollars.

The feds failed to come to the aid of U.S. cities with any significant help in these arenas, leaving local defaults to the states, most of which face their own deficit issues. The October 5^th New York Times: “Across the country, a growing number of towns, cities and other local governments are seeking refuge in similar havens that many states provide as alternatives to federal bankruptcy court. Pennsylvania will have 20 cities and smaller communities in its distressed-cities program if Harrisburg [which faces bond and pension defaults] receives approval. Michigan has 37 in its program; New Jersey has seven; Illinois, Rhode Island and California each have at least one. This is on top of troubled housing, power and hospital authorities.”

Look at it this way: a faithful civil servant chose what was then a lower-paying career of public service, knowing that at least they could count on a solid healthcare program and even better retirement benefits. The planned and budgeted their lives based on these expectations, figuring that they at least didn’t face the insolvency problems in the private sector, but today those municipalities just cannot afford those programs. Politicians (on both sides of the aisle), courting local governmental union support, often argued for even more attractive benefits for the dangerous professions: police and firemen. In Los Angeles, for example, Republican Mayor Richard Riordan (1993-2001) boosted pensions to these critical unions to 90% of exit-pay (from the former 70%) and lowered the retirement age to as early as 50 (from 55). This same ex-mayor argued this past spring the city’s unsustainable pension commitments will probably have to be discharged in some form of municipal bankruptcy.

The situation gets worse when some administrators lie with statistics, applying pre-recession projections showing adequate reserves or even surpluses, numbers which should have been corrected as the economy fell, to justify continuing in their pension practices. That most of the municipalities that accept state money (even as a loan to the city) haven’t begun to deal with their own pension structures or imposed the kind of austerity programs that are painfully required suggests that the piper will need to get paid, sooner or later. But the elephant – perhaps brontosaurus – in the room is the conundrum of how to reduce those pension obligations, against vested contractual or union benefits, without betraying the government workers who justifiably relied on them. One way or another, it has to happen.

I’m Peter Dekom, and like many Americans, I’ve watched my own pension erode in this economic maelstrom.