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LIKE A CALIFORNIA WILDFIRE, populist rage burns over bloated executive compensation and unrepentant avarice on Wall Street.
Deserving as these targets may or may not be, most Americans have ignored at their own peril a far bigger pocket of privilege -- the lush pensions that the 23 million active and retired state and local public employees, from cops and garbage collectors to city managers and teachers, have wangled from taxpayers.
Some 80% of these public employees are beneficiaries of defined-benefit plans under which monthly pension payments are guaranteed, no matter how stocks and other volatile assets backing the retirement plans perform.
Most public employees, if they hang around to retirement, can count on pensions equal to 75% to 90% of their pay in their highest-earning years.
And many public employees earn even more in retirement than their best year's base compensation as a result of "spiking" their last year's income by working ferocious amounts of overtime and rolling in years of unused sick and vacation days into their final-year pay computation.
A survey by the watchdog group California Foundation for Fiscal Responsibility found that some 15,000 Golden State public employees are knocking down $100,000 or more, while some 200, mostly police and fire chiefs and school administrators, are members of the $200,000-a-year-and-up club.
THE PROSPECTS ARE BLEAK for many state and local governments as a result of all this. According to a survey last month by the Pew Center on the States, a nonpartisan research group, 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.
Governments could fill that gap by raising property, sales and income taxes, but most are wrestling with huge revenue shortfalls in trying to balance their budgets.
The more likely outcome is dramatic cuts in essential services, such as police and fire protection, health spending, education and infrastructure improvements, in order to cover ballooning pension payments.
State and municipalities, after all, must do something: Most have a legal obligation to pay out earned pension benefits.
And some don't even have the courage to switch new teachers, bureaucrats and police to a defined-contribution system, to prevent the funding problem from worsening as time rolls on.
THUS, MORE DEBT DEFAULTS and bankruptcy filings probably lie ahead, unsettling the $2.7 trillion municipal-bond market. The possibility of taxpayer revolts and likely insolvencies has shaken some investors' confidence in general-obligation bonds -- those backed by the "full faith and credit" of the states or localities. Once the gold standard for munis, GOs are under a cloud in financially troubled areas.
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. MAKING THE STATE AND local pension problem all the more trying is that government entities can do little to wriggle out of their exposure, even if spending on essential services is threatened.
The constitutions of nine states, including beleaguered California and Illinois, guarantee public-pension payments.
"One shouldn't be surprised by this, since state legislators, state and local judges and the state attorneys general are beneficiaries of the self-same public pension funds that they've done so much to promote and protect," Orin Kramer notes wryly.
True, a dozen or so states, including New York, Nevada, Nebraska, Rhode Island and New Jersey, are attempting reforms such as raising retirement ages, cutting pension-benefit formulas, boosting employee contributions, curbing income "spiking" and partially switching employees to less costly defined-contribution plans. But these changes affect almost exclusively new employees and do little to solve the existing funding gap.
VALLEJO, CALIF., HAD NO CHOICE but to file a Chapter 9 bankruptcy in 2008 after property-tax revenue collapsed in the housing bust and a major employer -- the U.S. government's Mare Island Ship- yard -- closed.
With the tax base hammered, rich public-employee contracts granted in better times were devouring more than 90% of the city's budget.
Though Vallejo is still months away from getting a court decision on whether it can go ahead with its debt-adjustment plan, it has succeeded through contract renegotiations and major layoffs in cutting its employee costs by nearly a quarter.
But the fallout has been brutal. Employee health-care benefits have been decimated. Holders of the city's municipal bonds are unlikely to get all their money back. And violent crime rates have shot up dramatically as a result of reductions in its police force from 158 to 104 officers.
The only thing that will be left untouched? The very thing that tipped the California city into Chapter 9 -- its $84 billion in future pension obligations.
I believe the municapality has a contractual obligation to the retiree. The retiree fullfilled their part of the contract. Now it is time for the municapality to honor theirs.
It is not the fault of the retiree.
If the municipalities want to change the retirement package for future retirees that is their perogative.
I believe the municapality has a contractual obligation to the retiree. The retiree fullfilled their part of the contract. Now it is time for the municapality to honor theirs.
It is not the fault of the retiree.
If the municipalities want to change the retirement package for future retirees that is their perogative.
The employees band together in unions and bribe the politicans approving their pensions with campaign contributions, and you think the employees have no responsibility for this? Nice try.
If the pension costs are too high the gov't's should start by cutting off all other retiree benefits - including health care.
It is unrealistic to put the burden of employee contracts on the rest of the community - many of whom had no say in the matter. Folks just don't have enough money to pay what they are asking for - not anymore.
LIKE A CALIFORNIA WILDFIRE, populist rage burns over bloated executive compensation and unrepentant avarice on Wall Street.
Deserving as these targets may or may not be, most Americans have ignored at their own peril a far bigger pocket of privilege -- the lush pensions that the 23 million active and retired state and local public employees, from cops and garbage collectors to city managers and teachers, have wangled from taxpayers.
Some 80% of these public employees are beneficiaries of defined-benefit plans under which monthly pension payments are guaranteed, no matter how stocks and other volatile assets backing the retirement plans perform.
Most public employees, if they hang around to retirement, can count on pensions equal to 75% to 90% of their pay in their highest-earning years.
And many public employees earn even more in retirement than their best year's base compensation as a result of "spiking" their last year's income by working ferocious amounts of overtime and rolling in years of unused sick and vacation days into their final-year pay computation.
A survey by the watchdog group California Foundation for Fiscal Responsibility found that some 15,000 Golden State public employees are knocking down $100,000 or more, while some 200, mostly police and fire chiefs and school administrators, are members of the $200,000-a-year-and-up club.
THE PROSPECTS ARE BLEAK for many state and local governments as a result of all this. According to a survey last month by the Pew Center on the States, a nonpartisan research group, 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.
Governments could fill that gap by raising property, sales and income taxes, but most are wrestling with huge revenue shortfalls in trying to balance their budgets.
The more likely outcome is dramatic cuts in essential services, such as police and fire protection, health spending, education and infrastructure improvements, in order to cover ballooning pension payments.
State and municipalities, after all, must do something: Most have a legal obligation to pay out earned pension benefits.
And some don't even have the courage to switch new teachers, bureaucrats and police to a defined-contribution system, to prevent the funding problem from worsening as time rolls on.
THUS, MORE DEBT DEFAULTS and bankruptcy filings probably lie ahead, unsettling the $2.7 trillion municipal-bond market. The possibility of taxpayer revolts and likely insolvencies has shaken some investors' confidence in general-obligation bonds -- those backed by the "full faith and credit" of the states or localities. Once the gold standard for munis, GOs are under a cloud in financially troubled areas.
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. MAKING THE STATE AND local pension problem all the more trying is that government entities can do little to wriggle out of their exposure, even if spending on essential services is threatened.
The constitutions of nine states, including beleaguered California and Illinois, guarantee public-pension payments.
"One shouldn't be surprised by this, since state legislators, state and local judges and the state attorneys general are beneficiaries of the self-same public pension funds that they've done so much to promote and protect," Orin Kramer notes wryly.
True, a dozen or so states, including New York, Nevada, Nebraska, Rhode Island and New Jersey, are attempting reforms such as raising retirement ages, cutting pension-benefit formulas, boosting employee contributions, curbing income "spiking" and partially switching employees to less costly defined-contribution plans. But these changes affect almost exclusively new employees and do little to solve the existing funding gap.
VALLEJO, CALIF., HAD NO CHOICE but to file a Chapter 9 bankruptcy in 2008 after property-tax revenue collapsed in the housing bust and a major employer -- the U.S. government's Mare Island Ship- yard -- closed.
With the tax base hammered, rich public-employee contracts granted in better times were devouring more than 90% of the city's budget.
Though Vallejo is still months away from getting a court decision on whether it can go ahead with its debt-adjustment plan, it has succeeded through contract renegotiations and major layoffs in cutting its employee costs by nearly a quarter.
But the fallout has been brutal. Employee health-care benefits have been decimated. Holders of the city's municipal bonds are unlikely to get all their money back. And violent crime rates have shot up dramatically as a result of reductions in its police force from 158 to 104 officers.
The only thing that will be left untouched? The very thing that tipped the California city into Chapter 9 -- its $84 billion in future pension obligations.
Thank you Steve Forbes, Those awful Police and Firemen and their bloated Pensions, all they have to do is get shot or crushed and they are set for life. How about honorable mention for the Political Appointees on the PERS Board who were supposed to ninvest that m,oney wisely yet managed to get the State Pension destroyed when the housing bubble burst. These are the HIGHEST PAID STATE EMPLOYEES who did this and face no responsibility for having wasted those billions.
Just like the Rich to find someone on the bottom to blame
Why are so many people who 30 or 40 years ago, would have laughed at the prospect of municipal service as a career so rabidly jealous now!!
These people put in their 20-30-40 years of service and now are enjoying their retirement and pensions, all of a sudden the "private-sector" professionals who are not doing as well are all of a sudden screaming to high heavens!!
Nothing but jealousy, classism, and anti-union sentiment.
You even have those silly enough to suggest that municipal workers should carry a greater load of health and retirement payments than those in the private sector, just because they are public employees, what sense does that make??
During hard times it is easy to bash the millions of municipal employees doing essential services. And no doubt there is a small percentage who game the rules to spike their retirements. But one needs to look much higher on the income ladder to find the real "gamers". There have been trillions of dollars of largely unfunded tax cuts for the ultra rich since the election of Ronald Reagan. This is a large part of our national debt. Income inequality is at an all time level, greater that during the "Depression". It is not surprising that the bubble at the top caused a "crash" as there was no more money left to redistribute upwards.
The interesting thing about this is that it was done by design. The design of the anti-government ultra right wing Republicans. Bankrupt the government and force draconian cuts to all programs and benefits.
There has been much written about this, and there is an excellent summary of this at : Government is Good - Starving The Beast
Underfunded state pensions are the 800lb gorillia in the economy that no one wants to discuss. California is not the only state facing huge state pension shortfalls, just the largest. What happens when members of the public sector retire just to find out that their retirement saving doesn't exist?
During hard times it is easy to bash the millions of municipal employees doing essential services. And no doubt there is a small percentage who game the rules to spike their retirements. But one needs to look much higher on the income ladder to find the real "gamers". There have been trillions of dollars of largely unfunded tax cuts for the ultra rich since the election of Ronald Reagan. This is a large part of our national debt. Income inequality is at an all time level, greater that during the "Depression". It is not surprising that the bubble at the top caused a "crash" as there was no more money left to redistribute upwards.
The interesting thing about this is that it was done by design. The design of the anti-government ultra right wing Republicans. Bankrupt the government and force draconian cuts to all programs and benefits.
There has been much written about this, and there is an excellent summary of this at : Government is Good - Starving The Beast
No, its the spending. States need to budget in pension requirements/obligations before taking on new projects or further Medicaid expansions. They have not. They have, just as Congress is now, spent as though they had a limitless credit card.
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Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
