The Pension Time Bomb
Kurt Brouwer September 12th, 2008
The Washington Post has an alarming column about the pension crisis in towns and cities across the state of California and the nation. What the heck is going on? In a nutshell, while you were out living your life, your local and state politicians were making pension promises that extend many years into the future. And, in many cases, the required funding simply is not in place. To make things worse, these promises were made to our firefighters, police and other employees of the government. These are the people who make everything in a given town work.
Columns such as this one from the Washington Post and others on this issue have been attacked by unions as an attack on municipal workers. I view it differently. I come from a union family. My father drove a Dolly Madison Cakes delivery truck for 40 years and he was a member of the Teamsters Union. My mother still receives a very modest monthly check from the Teamsters.
My view of this issue is that if a city or county makes a promise to its employees, it should keep it. But, if the city goes bankrupt, then of what value is the promise? Both sides — taxpayers and employees — should be on guard to make sure that promised benefits are reasonable and sustainable.
This is no longer a boring and arcane topic of interest only to local politicians, municipal employees, union officials and pension plan actuaries. We posted on this several months ago when pension obligations threatened the city of Vallejo, CA (see California City On Verge Of Bankruptcy). Now, of course, the potential bankruptcy has become reality. And, almost certainly, severe budget cutbacks or higher taxes or both lie ahead for the city.
Pension Time Bomb (Washington Post, September 11,2008, George F. Will)
Mayor Osby Davis, who has lived in this waterfront city across San Pablo Bay from San Francisco for 60 of his 62 years, says: “If you have a can that’s leaking two ounces a minute and you put an ounce a minute in it, it’s going to get empty.” He is describing his city’s coffers.
Joseph Tanner, who became city manager after this municipality of 120,000 souls was mismanaged to the brink of bankruptcy, stands at a whiteboard to explain the simple arithmetic that has pushed Vallejo over the brink.
…So a police captain receives $306,000 a year in pay and benefits, a lieutenant receives $247,644, and the average for firefighters — 21 of them earn more than $200,000, including overtime — is $171,000. Police and firefighters can store up unused vacation and leave time over their careers and walk away, as one of the more than 20 who recently retired did, with a $370,000 check. Last year, 292 city employees made more than $100,000. And after just five years, all police and firefighters are guaranteed lifetime health benefits.
Even the City Council has at last faced facts and voted 7 to 0 for bankruptcy. “The day after they voted,” Davis says, “I didn’t go out of the house — I was that embarrassed.”
Mayor Davis has not been in office for very long, so most of this problem can be attributed to previous administrations. Yet, bankruptcy is a serious problem and it will be up to the present mayor to find solutions that allow vital city services to continue and to continue paying the workers who provide these services. And, what is a city after all, if it cannot provide basic services such as fire protection, police protection and so on.
In the past, the argument for generous government pension and retirement benefits was that government workers made less than those in the private sector so it was fair that they had a nice pension. I’m OK with that, with one caveat. If the numbers shown above are at all representative, cops and firefighters and other municipal workers in Vallejo are being paid very well. A police lieutenant makes $260,000? It’s hard to see how that constitutes being underpaid.
As this piece from USA Today points out, government workers tend to receive more in pay and benefits than similar workers in the private sector and the benefits gap is driving the difference:
The pension gap will continue to widen because governments pump far more money into employee pensions than companies do. Civil servants earn an average of $12.38 an hour in benefits, about $5 an hour more than private-sector workers, according to the Bureau of Labor Statistics. The difference was just $2.70 an hour in 1995.
…A typical full-time state or local government worker made $78,853 in wages and benefits in the third quarter of 2006, $25,771 more than a typical private-sector worker, the Bureau of Labor Statistics reports. The difference was $7,604 in 2000. The compensation advantage holds true for all types of public workers, from teachers to laborers and managers. Better benefits for government workers is the biggest reason for the growing compensation gap.
This increasing gap in government benefits and pay is simply not sustainable and it is the primary reason for the Vallejo bankruptcy. Fortunately, municipal bankruptcies have not occurred very often, but that too may be changing:
…Vallejo is an ominous portent for other cities, and some states, few of which are accumulating financial resources sufficient to fulfill pension promises they have made to employees. Are you weary of the crisis du jour — subprime mortgages and all that? Get a head start on worrying about the next debacle by reading Roger Lowenstein’s new book, “While America Aged: How Pension Debts Ruined General Motors, Stopped the NYC Subways, Bankrupted San Diego, and Loom as the Next Financial Crisis.”
…Credit Suisse estimates that state and local governments have a cumulative $1.5 trillion shortfall in commitments for retiree health care. But it is the pension crisis that most dramatically illustrates Lowenstein’s thesis about the slow accretion of power by the unions. Pensions “are a perfect vehicle for procrastination; in the financial world, they are the most long-enduring promises that exist.” Human nature — the propensity to delay the unpleasant — rears its ugly head: When pension benefits come due, the people who promised them, thereby buying labor peace and winning elections, are long gone.
Vallejo’s unions contend that the city is solvent enough to meet its obligations. But last Friday a court disagreed, holding that the city is eligible for bankruptcy protection. A lawyer for Vallejo says the unions will have to negotiate a “plan of adjustment”…
The city is eligible for bankruptcy protection and that means creditors of all types - not just employees and retirees - may take a hit.
Like most boring topics, this issue never got a lot of attention from voters because it was neither urgent nor interesting. Well, at least in Vallejo, California, it is now an urgent issue. And, the problem may be coming to your town or city next. One attempt to deal with this issue is to put pension proposals before voters. This Los Angeles Times piece spells out how this would work:
County pension hike issue to go on Orange County ballot (Los Angeles Times, July 30, 2008, Christian Berthelsen)
Orange County supervisors voted unanimously Tuesday to place a measure on the November ballot letting voters decide if future pension increases for county government workers should be put to a public vote.
…the measure would amend the county’s charter to require that retirement benefit increases for county workers be approved by a majority of voters, with a study of the benefits’ cost published in ballot pamphlets.
…The proposal comes in response to officials’ efforts to harness the county’s soaring pension costs, after years of benefit increases based on expectations that stock market growth would continue to pay for the cost. Estimates have found the county’s pension system underfunded by $2.7 billion, or with just 73% of the money it needs to cover its costs over the next 30 years — less than what experts consider a safe level.
…Though the Orange County proposal bears all the traits of fiscal conservatism, it owes its heritage to that most liberal of cities to the north, San Francisco.
That city has had a measure in place for more than a century requiring pension enhancements to be approved by voters, and as a result its pension fund is more than fully funded. Statistics cited during Tuesday’s board meeting showed that San Francisco voters have approved pension increases 78 times and rejected them 39 times since its measure has been in place.
The city of San Diego also adopted such a system in 2006, after lavish public pension hikes led to federal sanctions for securities fraud and a flirtation with municipal bankruptcy.
The Orange County measure was put forward by board Chairman John Moorlach, who earlier this year led the county to file a lawsuit seeking to roll back pensions for sheriff’s deputies. It also had the support of conservative activist groups including the Lincoln Club and the Orange County Taxpayers Assn.
“This gives the public an ability to weigh in and say, ‘Yes, this is a good idea,’ or ‘This is not a good idea,’ ” Moorlach said.
The measure’s only opposition came from the unions that represent county workers.
I don’t understand the reluctance of the unions to have this kind of measure on the ballot. If a given measure makes it through, then the city and its residents will have blessed the proposed increases. Having voted for them, they are much more likely to support them in the future. And, the point I made earlier bears repeating. Both sides — taxpayers and employees — should be on guard to make sure that promised benefits are reasonable and sustainable.
As one final point, here is a retirement planning tip: If you are an employee of a government entity with a pension, you would do well to consider taking a lump sum distribution rather than electing a monthly payout for life. Once you have the distribution, you have the money. It’s yours. There are drawbacks to this choice and there are income tax issues, but it is an option I would explore if I were in that situation.
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“And, the point I made earlier bears repeating. Both sides — taxpayers and employees — should be on guard to make sure that promised benefits are reasonable and sustainable.”
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The problem with your point is that the taxpayers, the public, are never in on, made aware of or gave the OK to these gold plated, Cadillac pensions and benefits, becuase if they were the scam penions/benefits would have never been approved.
These scams are done in private behind closed doors, ususally where all you need is the approval of 3 or 4 county supervisors or city council members voting on the scam deals. Santa Ana is engaged in this very same thing scam-and even as they catch major heat from taxpayers who oppose these backroom deals (tipped off by a city councilman aware of the backroom scam) they continue-why??
Because the public employee unions are trading their votes and campaign dollars for the increased benefits-a quid pro quo bribe/fraud.
That’s the reason these scams get approved, NOT because the taxpayers are unaware or don’t care.
Good point Johnny. I like the measure in Orange County to put all pension changes before the voters. But, you’re right. If the politicians are in cahoots with the employees and the unions, the voters don’t have much chance. This is another example of that old saying, the price of freedom is eternal vigilance. If voters get complacent, the special interests will take advantage of them.