Political Promises Will Pound Taxpayer
Who guards the guardians? That question is usually applied to national security. But it's pretty applicable to the public budget. When it comes to public employee pensions, the public gets pounded.

Here's an article from the vault, as it appeared in March 5, 2007

Public pension funds are a ticking time bomb

John La Plante

You probably know about the troubles with Social Security. But there’s another retirement system in trouble: public employee pensions. A combination of too many promises and too little funding, fostered by political tradeoffs, has left many state and local governments in a precarious position.

In 2005, Stateline.org declared “Pensions pose time bombs for budgets.” Last month, USA Today noted that, at the federal level, the unfunded pension obligations for civilian employees and military personnel ($4.7 trillion) exceed the unfunded liability for Social Security ($4.6 trillion).

In January, the Wisconsin Policy Research Institute (http://www.wpri.org) put the amount of unfunded state obligations at $340 billion nationwide. In Illinois, one Chicago Democrat lamented “In coming years, we will have an unbearable burden for money we owe to the pension systems.”

Private companies may foist their obligations on the Pension Benefit Guarantee Corp. But there is no “out” for lawmakers or for taxpayers. So meeting pension obligations will mean tax increases, less money for other government purposes, or both.

Unfortunately, the road to reform is blocked, or at least made much more difficult, by the political power of public employee unions. It’s a classic problem from economic theory. The costs of public pensions are hidden in the cost of government, dispersed among the members of an unorganized public, each of whom pays only a portion of the pension. The benefits, meanwhile, are easily identifiable and concentrated in a relative small group of highly motivated and politically organized employees.

Governor Arnold Schwarzenegger (R-Calif.) learned about the power of public sector unions. After his reform proposals were soundly defeated at the polls with the help of union activism, he changed his political stripes. Nationally, the powerful public union AFSCME argues that little needs to change.

How did we get into this mess anyway?

Budget trickery is one source of the increase. Like a homeowner who skips payments and then refinances the mortgage, the state government of Washington (among others) skipped several required payments as a cost-savings measure. The missed payments (and the missed investment returns) were rolled into ongoing actuarial assumptions.

The Evergreen Freedom Foundation (http://www.effwa.org) says these steps contributed to a dramatic increase in unfunded liabilities for Washington state’s two major public pension plans. In 2000, the unfunded liability was $778 million. That gap rose eight-fold to $6.4 billion in 2005.

States have argued that the 2001 recession did them in. True enough, declining tax receipts and investment returns made their work more difficult.

But too often, they did not take full advantage of dot-com boom. Thank, or blame, gain-sharing.

Here’s how it works. Say that a pension plan assumes an average annual return of 7 percent on investments.

What happens if a recession hits and returns are only 5 percent? The fund is in a hole, and needs above-expected returns in other years to make up the difference.

But under gain-sharing, only some of the surplus in good years goes into the fund. The rest goes, not to shore up the plan, but to send bonus checks to current employees. An even more precarious practice is to permanently increase the public obligation to employees. Under gain-sharing, taxpayers are obligated for shortfalls, but do not enjoy all the benefits of surpluses. That’s just wrong.

Political dynamics go a long way to explaining current shortfalls. John Moorlach, an Orange County, Calif., supervisor, blames a peace-now, pay-later mentality. "Elected officials love to give generous retirement benefits because they don't cost anything today, and they'll be out of office when the payments come due.” What about the public? Eyes droop with boredom when you bring up the topic.

Where to Go?
I’m not optimistic about the prospects for meaningful reform. As the Wisconsin Policy Research Institute says, the politics of government undermine the business of government. The politics won’t change anytime soon. The primary responsibility of government employee unions is not to be concerned about the public purse, but that of its members. They resist making changes for new employees.

That said, elected officials need to make several changes, as political and legal considerations allow.

First, move to a defined contribution system, which is used by 80 percent of private sector employees, but only 18 percent of public employees. Union leaders know these plans put some risk on the employees, which is one reason they oppose them. But they
make sense in an age of mobility.

Second, stop gain-sharing. Even AFSCME says that “governments should avoid providing benefit increases based on plan ‘overfunding’ or ‘excess assets.’”

Third, align plan specifics with private sector practices. Press accounts are rife with stories of public employees gaming the system. It’s understandable why employees would do that. But that is no defense for public managers not doing something to put a stop to it.

Government needs workers. That’s obvious. So too is this sad fact: the public is going to pay dearly for the mistakes of the past.

Labels: Legal-Ledger, Public employee pensions

(permalink)

Public Pension Mess: Reports.
The problem of public pension obligations has been getting renewed attention from some research and education organizations. Here's a sampling.

An Analysis of Local Government Pension Plans in Pennsylvania (PDF)
Allegheny Institute

State Throws Cold Water on City Pension Aid Request (PDF)
Allegheny Institute

Three Myths About State and Local Government Pensions Plans
AFSCME (government workers union). Crisis? What Crisis?

Status of Local Pension Funding Fiscal Year 2005: An Evaluation of Ten Local Pension Funds in Cook County (PDF)
Chicago Civic Federation
Summary: "This report provides a trend analysis of indicators that measure the financial health and performance of ten major local government pension funds from 1997 to 2005. It finds a combined 16.5 billion dollars in unfunded liabilities for the ten funds."

Defusing New York's Pension Bomb
Empire Center for New York State Policy

Washington Pensions See Eight-Fold Increase in Unfunded Liability
Evergreen Freedom Foundation

An Evaluation of Public Employee Retirement Systems in California (PDF)
Howard Jarvis Taxpayers Association

Public Pensions in Minnesota (PDF)
Minnesota Center for Public Finance Research and the Minnesota Taxpayers Association

Pension Intervention (PDF)
Pacific Research Institute

Public Pensions: Unfair to State Employees, Unfair to Taxpayers (PDF)
Pioneer Institute.

Leaving Money on the Table: The 106 Pension Funds of Massachusetts (PDF)
Pioneer Institute.

The Gathering Pension Storm (PDF)
Reason Foundation

2005 Wilshire Report (PDF)
Wilshire Research

The Mounting Cost of Deferred Responsibility in Government (PPF)
Wisconsin Policy Research Institute.
Summary: "State and local governments have made promises that they cannot afford. The price tag of the promises of pension and health care payments made to retired state and local government workers, when combined with debt, represents $3.5 trillion in IOUs that will be passed on to future taxpayers. This report spells out how a mandate from the Government Accounting Standards Board (GASB) will require state and local governments to report their real budget shortfalls. It estimates the unfunded amount owed by local governments in Wisconsin could add up to $13.8 billion. It is already known that Wisconsin state government will spend $3.6 billion to retire its unfunded liability for pension and retiree health care."

Labels: Public employee pensions

(permalink)

Public Pension Mess: News Accounts and Editorials
Public employee pensions are a mess. How so? What follows are some clippings from recent newspaper articles, coast to coast.

First we start with the publication sometimes derided as the "McPaper." USA Today comes in with mes a lengthy, and depressing, look at the state of public pensions. It's the best of the bunch.

Pension gap divides public and private workers
USA Today, February 21, 2007

Key quotes:
As the first wave of 79 million baby boomers heads to retirement, the nation is dividing into two classes of workers: those who have government benefits and those who don't. The gap is accelerating in every way — pensions, medical benefits, retirement ages. ...

Retired government workers are twice as likely to get a pension as their counterparts in the private sector, and the typical benefit is far more generous. ...

Governments' generosity could have serious consequences for taxpayers and pensioners. Some states — including Illinois, Indiana, Michigan, New Jersey, Ohio and West Virginia — have troubled retirement systems that may require huge tax increases, spending cuts or even defaulting on promised benefits. The U.S. government has a bigger unfunded liability for military and civil servant retirement benefits ($4.7 trillion) than it does for Social Security ($4.6 trillion). ...

Only 18% of private workers now have traditional defined benefit pension plans, compared with more than 80% of government employees.

Contrary to a widely held notion, the extra government benefits aren't compensation for lower pay. Most government workers are paid more than private employees in similar jobs, and the wage gap is growing.

Out to pasture: Don't mess with state employee pensions
Salt Lake Tribune, February 20.

In an editorial, the paper responds to a proposal to bring 401k/defined contribution plans to the Utah civil service. It dismisses the idea by appealing to tradition, and a red herring as well:

"If a 401(k) plan becomes an option, it will attract short-timers and transients, people who are looking to take the money and run instead of paying their dues and acquiring the institutional knowledge necessary to make public agencies work, and work efficiently. Do you want a revolving door at the police department, and the fire department, and the teacher's lounge? We don't."

Oh yes, we need that "institutional knowledge" at the counter of the DMV.

The SL Tribune argues that the plan is merely an act of war on public employees by conservatives.

What then to make of the Los Angeles Times, no member of the vast right-wing conspiracy?

Vote Yes on M.
Los Angeles Times
February 26, 2006

Excerpt:
There's a looming financial crisis as retired school, city, county and state employees claim larger chunks of public funds each year for their pensions, in part because people are living longer, in part because elected officials have been catering to the demands of employee unions. The state has a huge and growing unfunded pension liability — meaning government could be on the hook to pay retirees money it doesn't have and isn't likely to get. Money needed for public safety and other services will go instead to support retired government workers.

State owes public employee pension system $7.2 billion
Asbury (NJ) Park Press
February 22, 2007

Excerpt:
New Jersey's deficit for its largest public employee pension system grew to $7.2 billion last fiscal year, a $2.7 billion increase from the previous year.

To begin closing the growing gap between the state's pension assets and what it is expected to owe retired public workers, state and local governments would have to pay $950 million to the Public Employee Retirement System this year, according to Janet Cranna, an actuary hired by the state.

‘Contribution-based’ benefit would ease inequities
Worcester Telegram
February 23, 2007

Excerpt:
Public employees, including elected officials, may count part of a year — even one day — as a full year of service. Married public employees retiring early may pool years of service to maximize benefits. ...

The system is particularly lucrative for people who land full-time public-sector jobs after serving in part-time elected positions such as city councilor, selectman, school board member and, sometimes, town meeting moderator. Thus Raymond V. Mariano, who heads the Worcester Housing Authority, is projected to retire with a $111,000 annual pension, although 16 of the 28 years for which he will be credited were in part-time, elective school board and council positions with a maximum stipend of $18,000.

Council weighs pension raises
Philadelphia Daily News
February 28, 2007

(Setup: A committee of the city council faces a choice. It can approve a measure to increase pension obligations, or not.)

Excerpt:
So what happened? Hint: Voters will go to the polls in mid-May to choose City Council candidates. With mere lip service to the city's fiscal condition, the committee gave unanimous support yesterday to Councilman Jim Kenney's bill. [To increase obligations-ed.] ...

The move comes when the pension fund is eating up more and more taxpayer dollars. In 2005, the city spent $315 million on pensions. In the upcoming year, the city projects to spend $457 million in a city budget that will be almost $90 million in the red.

But even with the increases, the fund covers only about 53 percent of its projected payouts; well-funded public pension plans cover between 80 percent and 90 percent.

Get a handle on retiree costs
Beloit (Wisconsin) Daily News
February 5, 2007

Excerpt:

THE QUESTION is often asked: How did benefit costs for public employees get so out of hand?It's really not that complicated. Back when items like health insurance and pensions were cheap, government negotiators gave away the farm. It was relatively cost-effective, it bought labor peace and, besides, it's always easy to spend other people's money. ...

Governmental jurisdictions have a $17.4 billion fiscal hole, over and above what already has been set aside for public employee pensions and post-retirement benefits.

Pension fix draws mixed reviews
Helena Independent Record
February 2, 2007

(Thinly populated states have this problem, too. Here's an except:)

HELENA — Gov. Brian Schweitzer’s plan to patch up three public-employee pension funds had more than its share of naysayers Thursday, as some groups representing workers objected to scaling back future retirement payments for new workers.

Yet, despite the objections, some still appeared in support of the bill, saying the 2007 Legislature must do something to fix public-employee pension funds facing long-term shortfalls of $570 million.“

You cannot afford to leave this session without solving this problem,’’ said Tom Schneider of the Montana Public Employees Association, a union representing about 7,000 government workers. “The entire system has to be funded. We just can’t allow this to go on and on.’’

Pittsburgh's pensions: Sans reform, disaster
Pittsburgh Tribune-Review
February 16, 2007

(Problems are not limited to state governments.)

Excerpt:
One of Pittsburgh's several elephants in the room is the dangerous underfunding of its pension plans.

Thus far, entreaties for a state bailout have not gotten anywhere; one can speculate why. Lawmakers are not eager to saddle state taxpayers with the mistake. Meanwhile, increases in pension costs for state and public education employees loom.

Sinkhole!
BusinessWeek, June 13, 2005

Labels: Public employee pensions, School choice

(permalink)

Pension Problems: This Post is for You, John.
I recently talked with someone who said he appreciated my comments on the looming crisis in public pensions.

Certainly it is a problem that we don't see addressed too often. Government goes off getting involved in more and more areas of life and the economy, and doesn't even do a good job sticking to its knitting--in this case, running the pension programs of its employees in a rational fashion. Blame the pleasure-seeking of politicians: they want to minimize the pain inflicted on taxpayers, and they want to maximize the pleasure enjoyed by public sector employees. The end result: under-funded programs that promise more than they can (or should) deliver.

So for the reader, John, here are two more stories on the topic, one from Baltimore, and another one that takes a look at the national picture.

Labels: Public employee pensions

(permalink)

Public Pensions: A Problem for Taxpayers, Not Employees.
Standard and Poors reports that the average large-city pension fund is weaker now than it was six years ago.

From the Wall Street Journal

Some of the nation's largest cities are falling further behind in funding their employees' pension plans, according to Standard & Poor's. The credit-rating firm looked at 20 large U.S. cities and found that most faced rising shortfalls in their employee plans, thanks to a combination of sizeable stock-market losses early in the decade, enhanced benefit packages to employees and longer life spans.

Over the survey term from 2000 to 2005 (some cities only had data through 2004), the average level of pension funding in the 20 cities fell to 84% from 99.8%.

As the Journal points out, the biggest threat is to taxpayers, not retirees and current city workers. Public employees will get their money; the public may have to pay more to make up for shortfalls. "Enhanced benefits packages," as the Journal puts it, are in some cases supercharged benefits that exceed what is commonly available in the private sector. To paraphrase the old country music song, they get the goldmine, and the public gets the shaft.

BusinessWeek looked at the problem just over a year ago.

Labels: Public employee pensions

(permalink)

When Pension Plans Encourage Costly Early Retirements.
While in questions of morality, the role of individual choices cannot be denied, public policy makers deal in providing incentives—incentives that either harm or benefit the public. The harmful effects of some incentives can be seen in California’s state pension plans.

Most state employees are still in defined benefit plans, in which the retiree draws a pension whose amount is based on length of service and earnings history. Many states use the average of the three highest-paid years of an employee; some use five. The longer the averaging period, the less the average, the lower the payout to the employee—and the smaller obligation to be shouldered by taxpayers.

As part of a political deal made over 15 years ago, California employee pensions are calculated without any income averaging. The highest salary in an employee’s history is the salary used to calculate pension benefits.

It’s not unusual for an employee to get a promotion, work for a short time, and then retire at the higher rate. The costs of this phenomenon—“Pensions Spiking”—are substantial, says Anthony P. Archie of the Pacific Research Institute. The extra pension costs alone are $100 million per year. Since this arrangement serves as an enticement to early retirement, an additional cost is the time and money that must be spent to replace employees who retire prematurely. In the first year the rule was in place, the number of retirees increased from less than 3,700 to over 6,400. Today, state workers retire, on average, two years earlier than employees in the private sector.

So much for the hardship of public service.

The state is finally making a move away from this arrangement. Though this generous provision cannot, for political and perhaps legal reasons, be revoked to existing employees, those who hired after January 1 of next year will be subject to income averaging in the calculation of their benefits.

While this problem is unique to California, public pensions are in trouble across the country, in large measure due to political deals like the ones that lead to pension spiking in the first place.

Perhaps California will lead the nation for pension reform.

Labels: Public employee pensions

(permalink)

Public Choice and Public Pensions.
The management of public employee pension plans is a topic that may induce a few naps, but it's vital to the public purse.

Various government pension funds are in trouble, with insufficient means of paying out promised benefits over the long run. You may have heard of Orange County, California, or the trouble in San Diego. But some of the most serious problems lie in that land of "good government," Minnesota.

The place is awash in public sector pension plans--about 700, many of them small--and some of the bigger ones are in trouble. The six largest plans, for example, have nearly $10 billion in unfunded liabilities. That's the difference between what is promised over the long run and what the funds are expected to take in and generate in investment income. The topic is large enough that I have started a separate web page to deal with it.

The shortfalls are entirely consistent with the public choice theory of political economy:

There is no direct reward for fighting powerful interest groups [public sector unions] in order to confer benefits on a public that is not even aware of the benefits or of who conferred them. Thus, the incentives for good management in the public interest are weak. In contrast, interest groups are organized by people with very strong gains [richer pension schemes] to be made from governmental action.

Here, in brief, is how it works: politicians are eager to please constituents and donors, and more importantly, to gain re-election. What do members of the public and of various interest groups want? One, tax cuts, or at least tax increases on somebody else. Two, spending for themselves.

So when it comes to public employees, we have a desire to increase the payouts of public employee pension plans, and a desire to avoid tax increases to pay for those increases. And of course public sector employees, like anyone, recognize and will take a "free lunch" when they can take it. But since no lunch is ever free, it's taxpayers who, having paid the salaries for official cadres, will have to pay again for pensions that in some cases pay their recipients more in a year than they ever received in a paycheck.

If you're interested in the details, click to the link above, and make your way through the various items. While it is still available on the web, the links to KARA-11 (a local TV station) are worth taking in.

Labels: Public employee pensions

(permalink)

Got Benefits?
Among the many fiscal problems facing the city of Detroit: employee benefits that are on average 88 percent of employee salaries.

On the face of it, the distribution of cash versus benefits should not make any difference: it's all compensation that must be paid by the employer. But the types of benefits--pension liabilities and a health care model that encourages irresponsibility--matter indeed.

(Thanks to fellow Detroit News blogger Jeffrey Hadden, who also links to a story about the latest effort to bring the city's finances under control, complete with the usual complaints that are greeting the plan.)

Labels: Public employee pensions

(permalink)

Pennsylvania's Pension Problems Could Be Yours.
Both corporate officials (see: GM, airlines, etc.) and public officials have made pension promises that they can't keep. Here's the latest example of problems with a public plan, from the Keystone state. (The text comes in an e-mail from the Commonwealth Foundation. Emphasis added. In short, it looks like long-term improvements can be made, but short-term pain is unavoidable. The only question is whose ox will be gored.)

Getting Out of the Pension Dilemma
Richard C. Dreyfuss
03.08.06

Pennsylvania’s public employee pension plans are facing a looming financial crisis. Regardless of how one looks at the current situation, our policymakers must confront a serious dilemma.

Taxpayer costs to fund the State Employees Retirement System (SERS) and the Public School Employees Retirement System (PSERS) are expected to increase in six years from about $1 Billion next year to close to $4.2 Billion in 2012 – and that’s only if the actuarial value of assets earns 8.5% annually. Returns that are more favorable, of course, would decrease future costs just as the reverse holds true.

So what can policymakers do to avert this coming financial crisis – other than hope for superior financial performance to continue into the foreseeable future?

The first step is to remind our state policymakers (those who designed these taxpayer-funded pension plans) to go back to the basics of Pension 101. There are only three ways to grow assets: 1) Increase employee contributions, 2) Increase taxpayer contributions, or 3) Increase investment earnings. Significant increases in any of these inputs could solve the looming pension crisis.

The first option lawmakers could consider is to increase employee contributions, as well as prohibit employees from withdrawing all of their accumulated contributions from the plans at retirement (which virtually everyone does). Employee contributions are reasonably significant, relative to the total pension plan assets, and every little bit would help.

However, according to PSERS Board Member and State Rep. Steve Nickol, the pension problem in Pennsylvania cannot be averted by raising employee contributions, or by reducing pension benefits, because courts have ruled both of those measures illegal.

The second option is to increase taxpayer contributions significantly. This tends to be the universal solution to many problems within government – and it is the likely solution to the coming crisis if nothing is done to avert it. In fact, even as property tax reform bills bounce around the Capitol, many lawmakers are working to ensure that pension costs are excluded from any taxpayer control. Doing so would allow unlimited property tax increases to pay for these pension liabilities.

Another related alternative is to start increasing the taxpayer contributions now so that the sticker shock of the taxpayer contribution amount in 2012 is muted. This seems to be the preferred approach of many in state government. In other words, start paying more now instead of waiting until later. Of course, this only spreads out the pain, it doesn’t relieve it.

The third option is to increase investment earnings. It’s simple: Harrisburg passes a law mandating the PSERS and SERS must earn at least 20 percent return on investment per year, every year. This, of course, is nonsense.

What, then, should state government do when all three options are unreasonable, impractical, or prohibited?

Gov. Rendell’s budget secretary, Michael Masch, proposed a fourth way; one that actually has some promise. He said he supports caps on employer (taxpayer) contributions that would prevent the state and school districts from paying exorbitant amounts toward pensions. This would keep the state’s pension promises to employees, but also start to protect the taxpayers from skyrocketing taxes.

Additionally, Masch said he would require taxpayers to continue contributing at constant rates even when PSERS and SERS’s assets performed well. Not necessarily a bad thing. But where would that leave us? Actually, it would do exactly what nearly every major corporation in America is starting do – move toward a “defined contribution” retirement plan where employer (taxpayer) costs are capped and predictable.

Unfortunately, this doesn’t solve the looming crisis, but it would certainly put Pennsylvania on the path toward good financial health. Now all Mr. Masch has to do is sell the solution to his boss.

# # #
Richard C. Dreyfuss is a Senior Fellow with the Commonwealth Foundation (www.CommonwealthFoundation.org), a public policy research and educational institute located at the foot of the Capitol in Harrisburg. For more information on this topic, see Dreyfuss's policy report Beneath the Surface: Pennsylvania's Looming Pension & Healthcare Benefits Crisis.


----------------------------------------------------------
Earlier, Commonwealth Foundation president Matthew Brouillette explained how the state got into this mess:

Pennsylvania Pensions: Man-Made Financial Disasters
Matthew J. Brouillette
03.07.06


The “Process Improvement Theory” relates to the timing in a process when errors are diagnosed and fixed. As the theory goes, at each ensuing interval in which a problem is not detected the potential damage increases exponentially.

The current design of Pennsylvania’s taxpayer-funded pension is a case study of what happens when problems are either not detected or detected and not addressed. The result: Man-made financial disasters.

Unfortunately, these disasters are not limited to state government in Harrisburg, but also extend to the pension plans sponsored by county and municipal governments across Pennsylvania.

The financial calamity facing taxpayers is not in the administration of Pennsylvania’s Public School Employees Retirement System (PSERS) and the State Employees Retirement System (SERS) plan, but the result of failing to correct plan design decisions that occurred almost on an annual basis beginning in 2001 with the passage of Act 9.

Following favorable investment returns in the 1990s, the costs to taxpayers to fund retirement benefits were lowered significantly. But rather than maintaining these low costs to taxpayers, policymakers decided to increase pension benefits for employees by essentially tapping the surplus.

Act 9 of 2001, part of a political tradeoff with the Pennsylvania State Education Association (PSEA) by then-Governor Ridge, dramatically increased both pension benefits. The plan was to draw down the surplus over 10 years and cover the Act 9 costs over that same period. Later that year, the financial downturn following the terrorist attacks of September 11th negatively affected the asset returns of both PSERS and SERS.

In 2002, Act 38 increased benefits for retirees who were left out of the 2001 pension enhancements. However, another poor year of investment returns further increased the pensions’ unfunded liabilities.

To be clear, the investment losses were likely as significant as the Act 9 and Act 38 changes. The surpluses were such that the plans were financially positioned to cover either the benefit improvements or significant investment losses such as those incurred – but not both.

Therefore, with the economic downturn, the plan to use the surplus to pay for the additional costs of Act 9 and 38 was no longer feasible. In response, Governor Rendell signed Act 40 of 2003, which among other changes effectively refinanced the additional liabilities incurred from Act 9 from 10 years to 30 years.

With this financial engineering, the expected taxpayer contributions were projected to be lower in the near term then rise and spike in the year 2012-13. The strategy was that the economy of Pennsylvania would be so robust in the years leading up to 2012 that this action would prove more affordable to the taxpayers.

While the projected 2012 pension costs have diminished from the original 2003 projections due principally to asset returns, the expected taxpayer contributions will nonetheless jump from $1.376 billion in 2011-12 to $4.176 billion in 2012-13, according to PSERS and SERS latest estimates projections. As such, it remains a looming fiscal crisis.

In 2004, a Joint State Government Commission report on PSERS and SERS recognized this looming financial crisis. However, the report noted that while full funding – or having current assets meet liabilities – “may be a necessary standard for a private plan … it is not necessary for a public plan because a public entity can assume perpetual life” [emphasis added]. This operating premise, although astonishing, is nevertheless clearly reflected in the plan funding of both PSERS and SERS.

Although assets returns by PSERS and SERS have exceeded expectations in recent years, the taxpayers’ contribution continues to escalate. PSERS alone expects an increase of over $200 million, with the state paying more than its traditional share. Apparently, the taxpayer can now pay at the state level what they presumably could not afford at the school district level.

PSERS costs are currently projected to increase by another $100 million in 2007. Unless the state continues to assume these added pension costs in future years, property tax increases school districts to fund these liabilities will be inevitable.

To make fiscal matters worse, two PSEA labor union-backed bills in the House of Representatives (HB 2268 and HB 2339) would further increase the costs of pensions to taxpayers by providing current beneficiaries another cost of living enhancement.

As policymakers prepare to return to Harrisburg to address pressing issues, it is time they pay attention to the “Process Improvement Theory” and attend to problems in the pension systems. Although there is plenty of blame to go around for past mistakes, proposed actions by Governor Rendell and the public school lobby will only assure that Pennsylvania’s man-made financial disasters will continue in perpetuity.

# # #
Matthew J. Brouillette is president & CEO of the Commonwealth Foundation (www.CommonwealthFoundation.org), a public policy research and educational institute located at the foot of the Capitol in Harrisburg. For more information on this topic, see the Commonwealth Foundation's policy report Beneath the Surface: Pennsylvania's Looming Pension & Healthcare Benefits Crisis by Senior Fellow Rick Dreyfuss.

Labels: Education, Public employee pensions

(permalink)

Pension Mess Shows Need for Public Accountability, Reform.
The Wall Street Journal gives another reason why chasing after major sporting events can be a fool's errand: it was one factor in the San Diego pension debacle. (link for subscribers).

The scandal, which has claimed the job of the mayor, as well as some other city officials. The city has spent over $15 million in legal fees trying to sort out the mess, which includes a pension fund deficit that was $1.1 billion in January of 2004. Worse yet, the city's auditors have refused to sign off on its financial statements, given their unreliability. The implications: the city can't issue new bonds for necessary public works projects.

So how did the city get into this mess? Doubtless there are many reasons, but sports lust was a contributing factor: "San Diego's problems began with a cash crunch in 1996 caused by the cost of hosting the Republican National Convention and bidding to host the Super Bowl, among other expenses."

Two questionable policy decisions became the occasion of financial folly in the pension arena: "To soften the pain, the city made a deal with its pension fund, which was sitting on a $100 million surplus. The fund allowed San Diego to reduce annual contributions for 10 years. In return, the city pledged to make a one-time payment if the pension fund's assets fell below 82.3% of its projected liabilities."

Do you remember what was happening during the late 1990s? That's right; the stock market got soft, and then tanked, making the fund's situation even worse, and exposing the city to increased liability.

The city made things worse with another deal: "Eager to avoid the one-time payment -- which would have totaled $500 million -- San Diego negotiated another deal in 2002: In lieu of handing over a lump sum, it agreed to increase employment benefits to city employees and raise annual contributions to the pension fund."

To make matters worse, the city engaged in what behavior that would easily be called fraud if practiced in the private sector: "Between 1996 and 2003, San Diego sold $1.2 billion of bonds in 16 offerings, but it didn't disclose either the pension fund's deterioration or the city's liability. Any entity selling stocks or bonds on the open market is obliged to divulge all significant financial data."

The city is now engaged in a dispute with an auditing firm as well as a law firm over matters relating to clearing up the problems.

The big boys in Washington are hounding the city, too: "The SEC, which is conducting its own probe along with the Justice Department, has told the city it wants the same level of cooperation it expects from corporations under investigation."

Slowly, expectations for the public sector are being revised to reflect what is demanded in the private sector.

Labels: Public employee pensions

(permalink)

School Pensions Must Be Reformed.
The Detroit News calls on Michigan to turns its defined benefit pension system for teachers to a defined contribution one.

Yawn?

Here's something to make it more interesting: the current approach is leading schools across the country into fiscal trouble, meaning that overall spending is going to increase, or money spent on other items in the school budget will go down.

Labels: Public employee pensions

(permalink)

Double-Dipping for the Public Good.
What some may call double-dipping, paying school retirees both a pension and a paycheck (through a contractor) is a good thing.

I explain it in today's Current Comment, from the Mackinac Center for Public Policy.

Labels: Education, Public employee pensions

(permalink)

School employees retire, get rehired, save taxpayers money.
A man retires from a school district Then he goes back to the same desk, doing the same tasks, drawing both a pension AND a paycheck from his new employer, a staffing firm.

Outrageous? Not exactly. The Detroit News reports on the practice. I have already written a story that explains how this works, to the benefit of employees, employers, and taxpayers. But it's not yet in published form, so I am not able to reproduce it here. But here's the short of it:

(a) the employees who draw retirement money while "re-employed" would have been drawing the money anyway, so there is no net increase in taxpayer pension costs.

(b) since they work as contractors to a staffing firm, not as school district employees, they typically receive less in compensation than someone else who would have filled the job.

Someone retires. Assuming the job will be filled, re-hiring a retiree as a contract employee is often the smartest choice.

Labels: Public employee pensions, School choice

(permalink)

Education: Private Schools Bad, Except When They're Not.
Not quite sure what to make of this. Teacher unions are not exactly known as fans of helping people send their children to privately owned and operated schools. After all, the represent the competition.

And yet ... teachers in the Minneapolis school district (like many government employees) can "purchase" service time, which enhances their pension payout in a defined benefit scheme.

Say that you work as a teacher in a military school for five years, and then take a job in the Minneapolis schools. You can then deposit a sum of money into the Minneapolis teachers retirement fund, and then be treated, in the benefits calculations, as if you worked in the MPS for those 5 years.

Aside from working in the military, you can get credit for working in what other organizations? Among other things, private and even parochial schools.

Labels: Public employee pensions

(permalink)

A Boring Financial Disaster Awaits Taxpayers
Do your eyes glaze over when someone mentions the Social Security debate? Here's something even more boring, but important to your pocketbook: the health of public employee pension plans.

Why is this important? After all, you're paying for them. The Reason Public Policy Foundation has a new study that explains why a series of incentives translates into generous benefits for public employees, political gain for politicians, and a looming fiscal crisis for taxpayers. In West Virginia, for example, the public pension debt exceeds the size of general fund!

The Reason Public Policy Foundation offers a press release, executive summary, and full-blown study on its web site.

Labels: Public employee pensions

(permalink)

Paying off a VISA Bill with the MasterCard
Illinois lawmakers are getting ready to add $1.1 billion in pension debt "after the Democrats who control state government were unable to agree on any other way to fix lingering budget problems," reports the Daily Herald. (Under the current schedule, the state must make $2.6 billion payment.)

This year's skipped payment could be followed up with another planned $900 million shortfall next year. Meanwhile, the retirement system's leaders say that $1 foregone now will require $13 in payments later.

So why the maneuver?

The Senate president says "We need revenue."

Actually, it's more like "We need to cut costs and find better ways of doing things."

Labels: Public employee pensions

(permalink)

The Meltdown of Detroit Continues
The City of Detroit is on the edge of a fiscal cliff once again. The mayor's unpopular for some problems stemming from his personal conduct, and the budget, $300 million short, will be balanced in part with cuts in public safety. Is this any way to run a city?

Meanwhile, there's already talk of whether the State of Michigan will take over the city. Says the Detroit Free Press,

"State officials may not want to take over Detroit's finances, but under state law they would not have a choice if the city falls into complete disarray. Under the state's Public Act 72, the state treasurer would initiate a review of a city's finances if the city defaulted on a bond payment or pension obligation, or if it can't pay employees or vendors."

Labels: Public employee pensions

(permalink)

Get Thee a New Job: Disability Pension Plan Needs Reform.
A firefighter in California says that he has a phobia of entering burning buildings. In return he gets a disability pension.

In a commentary on the need of California to move its public employees to a defined-contribution benefit system, the Pacific Research Institute says "What this person needs is not a disability pension but a different job."

Labels: Public employee pensions

(permalink)

The Structure of City Government: Minneapolis as a Case Study.
A while ago the Minneapolis Star-Tribune ran a review of the multi-headed government of the City of Minneapolis, Minnesota. Blogger Speed Gibson offers a long running commentary on the Star-Tribune's coverage.

Part one tells us that the city is largely dominated by ward politics (strong council, weak mayor system). In addition, there are many other forms of government (park board, etc.) that have some jurisdiction in the city, but which are not part of city government. Reform is required; spending, not including spending on schools, is roughly $4,000 per person. That's a lot for a city.

Part two contains the following language from a Star-Tribune editorial: City government is a bunch of fiefdoms from which it is difficult to wring savings, consolidate services, set proper priorities or communicate Minneapolis' needs and desires to other levels of government. Compounding the problem are the independent, frequently dysfunctional park and library boards.

Sounds like we have a good example of public choice theory going on.

Part three tells us that the city has a large problem with debt, due in large measure to generous pensions.

Part four reviews the city's standing with the state legislature. In two words: not good. The legislature believes (rightly so, I expect) that the city is a bloated mess, and that increased funding without reform will only delay the day when necessary changes are implemented. Speed Gibson calls for a strong mayor, which may be a good thing. How about some contracting out of government services? Load shedding? But that may take us back to the form of government (a ward system, for example), as well as the attitudes of the leadership. And of course don't forget the political culture: if people think it's a good thing for government to do all sorts of things for them, an expansive government is likely, regardless of form of government.

Part five mentions that council members perform constituent work. This brings to mind the classic of American political science, Congress: the electoral connection, by David R. Mayhew. Mayhew says that re-election is the primary goal of congressmen is to get re-elected. (I can hear someone asking: You needed a Ph.D. to tell you that?).

But what's most interesting, from my years-ago reading of the book, is that the key to re-election is not taking stands that represent your constituents, or serving as a careful, thoughtful overseer of the executive, or being the most thoughtful person, carefully examining public issues.(This model is given great rhetorical weight in Minnesota.) No, the key is to shower your constituents with favors from the executive branch, whether that mean pork-barrel politics ("bringing home the bacon") or simply helping people navigate the bureaucracy (having an aide call someone so that grandma gets her Social Security check on time.)

Political changes in the last decade (e.g., the change in Congress from Democratic to Republican control) may at first blush make this analysis obsolete, but they don't. Republicans came to power in large part through gerrymandering, driven by demographic changes favorable to them. And they have been quite capable and willing to practice the same politics of careerism as the Democratic congresses studied by Mayhew.

Part five of Speed Gibson's series, by the way, is notable for its review of two objections raised to proposals for reform. Naturally, they are raised by two politicians (library board and parks board, respectively) argue that folding their organizations into city government is a bad idea.

Part six blames some of the city's problems on what someone else celebrates as "unprecedented participation" of citizens in government.

Part seven finishes off with a condemnation of the current system by the Star-Tribune:
The problem with Minneapolis' current structure -- and political culture -- is that it values inefficiency and insularity; residents tend to think in terms of neighborhoods only, instead of a single, living, breathing, more broadly competitive city. The focus tends to become my park, my school, my council member, my ward, my intersection.

The original series of Star-Tribune articles and editorials can be found here. While Speed Gibson has given an overview of the articles that makes a case for the strong mayor system, I have not studied local government enough to make a definitive endorsement of one approach over the other. Still, from an intuitive point of view, structure does make a difference.

There's also a publication from the International Monetary Fund that bears further examination. In a working paper called "District and Government Overspending," Reza Baquir concludes (from the abstract):

Models predict that, other things being equal, greater political districting of a jurisdiction raises the scale of government. This paper presents new evidence on this and related predictions from a cross-section of city governments in the United States. The main finding is that one additional legislator is associated, on average, with 3 percent larger expenditures per capita. Evidence also suggests that forms of government with strong executives, particularly those with veto powers, break the link between districting and government size.

Minneapolis, with a population of roughly 380,000, has 13 wards, by the way. It's also very high on the list of cities in the state when it comes to per-capita spending. The Auditor's Big Book of Cities has a lot of data.

Labels: Public employee pensions, School choice

(permalink)

Retirement and Health Costs Loom Large for Local Government
Milwaukee county governments, already with short-term troubles, is facing a long-term crisis in retirement and health care costs. That's the word from a series in the Journal-Sentinel, which begins today.

Says the paper, "While governments typically set aside and invest money ahead of time for pensions, fewer than one-fifth of state and local governments in the United States - and none in Milwaukee - have done so for retiree medical coverage." The result: an unfunded liability of anywhere from $2.1 to $2.9 billion. The cost to taxpayers: double-digit tax increases for as long as 30 years, if the money is found only through tax increases and no other changes are made.

The situation is only going to get worse, when, in 2007, the Governmental Accounting Standards Board, will require local and state governments to list the costs for retiree health insurance as a liability--meaning they will be paid off at once (unlikely), or carried as debt.

Similar accounting changes in the private sector have contributed to the rise of defined-contribution plans, which shift some of the risks, and decisions, to employees

The reason for the liability: soaring costs for health care. While the wages of unionized workers have risen four-fold since the 1970s, the cost of health care has risen 12 times.

The unions may play this in a "pity us" mode--their wages have not kept up with health care inflation. Yet health care coverage, like wages, is a form of compensation.

The head of the local chamber of commerce describes the problem well: "Because public employees pay so little for insurance, cost is not an issue when buying medical care. We have created an army of rotten consumers that have helped drive up medical costs. Private companies are also part of the problem, but the public sector is a significant contributor."

And of course, standing in the way of any changes are the lawyers.

Labels: Health care, Public employee pensions

(permalink)

Changing the Business of County Government in Milwaukee
Milwaukee County Executive Scott Walker [yeah, I hate all those caps in a row, but what am I to do?] continues to shake things up. Among his proposals for the next budget, which stands at $1.13 billion.

- Making county supervisor's jobs part time, and reducing their salary from $50,000 to $15,000.

- Eliminating free bottled water for employees, who will, as Walker says, "drink the same tap water as everyone else." (Milwaukee is notorious for dumping untreated sewage into Lake Michigan during heavy storms. Maybe the county ought to shift some money around to take care of that problem.)

- Contract out some services to the mentally ill and the disabled.

- Make some cuts to arts groups.

- Sell some county-owned land.

On the other hand, Walker does some blame-shifting, proposing that the state highway patrol take over the duties on expressways in the county.

The county has 6,000 employees; a "pension upgrade" by Walker's predecessor requires an infusion of cash. Spending on pensions and allocations for employee sick leave claim 20 percent of tax dollars.

Labels: Public employee pensions

(permalink)

Rank Has Its Privileges
According to a report in the Chicago Sun-Times, the recently retired superintendent of a school district in Palatine, Ill, got $353,351. This includes over $70,000 in unpaid sick days, a benefit not even, to my recollection, available to federal government employees hired since 1980 or so. John Conyers, now 57, will now get $130,000 a year in a state-paid pension.

And opponents of school vouchers say that people shoudn't profit off of education.

Labels: Public employee pensions

(permalink)

County Freezes Pay
Members of the Waukesha County board in suburban Milwaukee vote to freeze their pay for the next two years. It's not going to save the taxpayers much--$26,000 over the next two years--but the symbolism of restraint is commendable. As corporations are suspending matching funds to employee 401k accounts, raising copays on health insurance, suspending raises or even cutting pay, some politicians understand that enriching themselves isn't the best thing to do right now.

Labels: Health care, Public employee pensions

(permalink)