Hannah Arendt Center for Politics and Humanities
15Feb/130

Borrowing from Peter to Pay Paul

Stephanie A. Miner, the Mayor of Syracuse NY, has an important op-ed essay in The NY Times Thursday. Syracuse is one of hundreds of cities around the state and tens of thousands around the country that are struggling with the potentially disastrous effects of out-of-control pension costs. Where this crisis is heading can be seen in California, where San Bernadino has become the third California city to declare bankruptcy. These cities are dying. They are caught in a bind. Either they decide not to pay their promised debts to pensioners; or, in honoring those debts, they so fully raise taxes and cut services as to ruin the lives of their citizens.

In Syracuse, Mayor Miner understands well the depth of the problem. First, public employee labor costs are too high not because salaries are high, but because pension costs and medical benefits are rising without limit. Second, revenues are being slashed, both from the recession and from cutbacks from the state and federal governments. Finally, the middle and upper class flight from cities to suburbs have left the tax base in cities low at the moment when poorer city dwellers are disproportionately in need of public services.

The result is that cities are faced with a stark choice: Do they pay older citizens what has been promised to them? Or do they cut those promised pensions in order to provide services for the young? This is a generational conflict that is playing out across the country.

Miner is worried that the response by NY State is making the problem worse. In short, Governor Cuomo and the legislature have decided to let cities that cannot afford to fund their burgeoning pension obligations borrow money to pay those pensions. The kicker is, that the cities are being told to borrow money from the very same pension plan to which they owe money.

If this sounds suspicious, it is. As Danny Hakim—one of the best financial reporters around—wrote almost exactly one year ago in the NY Times, this is a desperate and dangerous move:

When New York State officials agreed to allow local governments to use an unusual borrowing plan to put off a portion of their pension obligations, fiscal watchdogs scoffed at the arrangement, calling it irresponsible and unwise.

And now, their fears are being realized: cities throughout the state, wealthy towns such as Southampton and East Hampton, counties like Nassau and Suffolk, and other public employers like the Westchester Medical Center and the New York Public Library are all managing their rising pension bills by borrowing from the very same $140 billion pension fund to which they owe money.

The state’s borrowing plan allows public employers to reduce their pension contributions in the short term in exchange for higher payments over the long term. Public pension funds around the country assume a certain rate of return every year and, despite the market gains over the last few years, are still straining to make up for steep investment losses incurred in the 2008 financial crisis, requiring governments to contribute more to keep pension systems afloat.

Supporters argue that the borrowing plan makes it possible for governments in New York to “smooth” their annual pension contributions to get through this prolonged period of market volatility.

Critics say it is a budgetary sleight-of-hand that simply kicks pension costs down the road.

Borrowing from the state pension plan to pay municipal pension costs is simply failing to pay the pensions this year and thus having to pay more next year.

Hakim, as good as he is, allows Thomas P. DiNapoli—the state’s comptroller—to get away with calling the scheme “amortization.”

The state’s comptroller, Thomas P. DiNapoli, said in a statement, “While the state’s pension fund is one of the strongest performers in the country, costs have increased due to the Wall Street meltdown.” He added that “amortizing pension costs is an option for some local governments to manage cash flow and to budget for long-term pension costs in good and bad times.”

But how is this amortization? The assumption or hope is that the market will rise, the pension fund will go up, and then the municipalities will owe less.  That is hardly amortization. No, it is desperate speculation with public monies.

The crisis in our cities afflicts the whole country, according to a study by the Pew Center on the States.

Cities employing nearly half of U.S. municipal workers saw their pension and retiree health-care funding levels fall from 79% in fiscal year 2007 to 74% in fiscal year 2009, using the latest available data, according to the Pew Center on the States. Pension systems are considered healthy if they are 80% funded.

The reason to pay attention to the problems in cities is that cities have even less ability to solve their pension shortfalls than states. The smaller the population, the more a city would have to tax each citizen in order to help pay for the pensions of its retired public workers. The result is that either cities get bailed out by states and lose their independence (as is happening in Michigan) or the cities file for bankruptcy (as is happening in California).

Mayor Miner, a Democrat, takes a huge risk in standing up to the Governor and the legislature. She is rightly insisting that they stop hiding from our national addiction to the crack-cocaine of unaffordable guaranteed lifetime pensions. Piling unpayable debts upon our cities will, in the end, bankrupt these cities. And it will continue the flight to the suburbs and the hollowing out of the urban core of America. Above all, it will sacrifice our future in order to allow the baby boomers to retire in luxury. Let’s hope Miner’s call doesn’t go unheeded.

-RB

The Hannah Arendt Center
The Hannah Arendt Center at Bard is a unique institution, offering a marriage of non-partisan politics and the humanities. It serves as an intellectual incubator for engaged thinking and public discussion of the nation's most pressing political and ethical challenges.
20Mar/1211

Pension Ponzis: Questions About the Public Interest

The public pension crisis is eroding the American social contract. While many are up in arms against Governor Scott Walker's heavy-handed attack on public unions, the fact is that Democratic governors in NY and California are also struggling with the inevitable need to reduce public pensions. Governor Jerry Brown in California admitted recently that public pensions were a Ponzi scheme. That is obvious. What is now sinking in as reality is that the Ponzi scheme is out of money and falling apart.

The Pew Center on the States published a study in 2011 called the Trillion Dollar Gap. The first sentence states the point:

$1 trillion. That’s the gap at the end of fiscal year 2008 between the $2.35 trillion states had set aside to pay for employees’ retirement benefits and the $3.35 trillion price tag of those promises.

A mere one year later, the gap had increased 26%!

The gap between the promises states have made for public employees’ retirement benefits and the money set aside to pay for them grew to at least $1.26 trillion in fiscal year 2009-a 26 percent increase in one year-according to a Pew report.

The gap is actually much bigger than the Pew Center numbers suggest, since the report is based on the official numbers that use way too optimistic expectations of returns.

The Pew Center Report continues, stating the reason this matters so much:

Why does it matter? Because every dollar spent to reduce the unfunded retirement liability cannot be used for education, public safety and other needs. Ultimately, taxpayers could face higher
 taxes or cuts in essential public services.

Municipal bankruptcies are mounting. Prichard, Alabama and Central Falls, Rhode Island both filed for bankruptcy, and they have had to vastly reduce the pensions promised to their public employees. The city of Stockton, California is in bankruptcy court now, and it must pay $30 million every year in pension costs, even as it only sets aside .70 cents for every dollar it must pay.

The crisis is spiraling. In essence, cities and states around the country will have to decide whether to honor their legal debts to public employees or pay for services like police, fire, and parks needed by their current residents. The only other option is a bailout from the federal government, but the size of the problem is enormous and such a bailout seems highly unlikely.

In the meantime, states continue to juggle money around to keep the Ponzi scheme going.  Just this month New York State decided to let municipalities and public entities borrow money from the state pension fund to make their payments back into the state pension fund. This is nonsense. Dangerous nonsense.

And while New York State did finally pass a version of pension reform last week, the reform falls far short of what Governor Cuomo wanted and what is needed. The Assembly raised the retirement age for public employees (not for policeman and firemen) to 63 from 62, whereas Cuomo sensibly asked it be raised to 65. As it stands now, the New York State pension plan is expected to consume 35 percent of the New York State's budget by 2015. This is up from a mere 3% in 2001.  More.

For anyone who cares about government and wants government to succeed, the pension problem must be addressed, for it threatens not only economic disaster, but political cynicism beyond even today's wildest dreams. Across the country, teachers, policemen and firemen, not to mention civil service employees and others, will see their promised pensions shrink precipitously. Not only will this devastate retirement nest eggs for millions of people, it will fray the social contract—pitting young against old and taxpayers against public employees.

It is bad enough that we will have to renege on pensions owed to public service employees (as municipalities in Rhode Island, Alabama, and California are already doing), but it is worse that we will do so after bailing out Wall St. bankers and allowing taxpayers to pay their contractually-obligated bloated bonuses. That these seven-figure bonuses were paid and yet we are unable and unwilling to pay contractually obligated pension costs is both a fact and an example of why the bailout of the bankers was so deeply wrong and misguided.

The issues around public pensions are complicated. They involve contractual promises made to workers that simply cannot be honored as well as pitting public servants against everyday taxpayers. There is also the fact that public employees are paid significantly more than similarly educated private employees at all but the highest levels of income and education. A recent Congressional Budget Office study concluded that:

  • Average benefits for federal workers with no more than a high school diploma were 72 percent higher than for their private-sector counterparts.
  • Average benefits for federal workers whose education ended in a bachelor's degree were 46 percent higher than for similar workers in the private sector.
  • Workers with a professional degree or doctorate received roughly the same level of average benefits in both sectors.

The CBO chart below shows clearly the relative overcompensation of public workers against their private-sector counterparts.  While one could turn this around and argue that private-sector workers are underpaid, the fact is that the current level of benefits for public-sector workers is bankrupting our municipalities and states. We can argue all we want about what is fair pay, but the current pay levels are clearly unsustainable. More, they are threatening to devastate public services as we continue to cut services in order to pay outsized benefits to retired public-sector workers.

Do public employees deserve to make more than private employees? Should we say that someone teaching in public schools deserves more than one teaching in private schools?  For some, the answer is yes and there is a sense that it is more noble and thus valuable to serve in the public interest. Some might even turn to Hannah Arendt to justify such a claim, that a public-service career is more public-spirited and thus more socially valuable than a private-service career.

As much as I value public-sector employees, it is a mistake to put them on a pedestal. It is unclear whether most public employees are more public-spirited than their private-sector counterparts. It is also unclear whether public school teachers and professors are better, more important, or more noble than their private school counterparts.

What is clear, however, is that public employees have a private interest in taking more and more of the taxpayer-generated revenue for themselves. In other words, public employees have a private interest in diverting public funds from public services to their wages and pensions. In this sense, the increasing numbers of public employees and their increasing wages and benefits threaten to hollow out public services in our country.

This is not to condemn public employees. Nor is it to deny that at the higher incomes, wealthy Americans should pay more in taxes to support governmental services. But we should be honest and contest the prejudice that public employees have the public interest at heart. And we need to have an adult debate about what to do about underfunded and ballooning public pensions.

-RB

 

The Hannah Arendt Center
The Hannah Arendt Center at Bard is a unique institution, offering a marriage of non-partisan politics and the humanities. It serves as an intellectual incubator for engaged thinking and public discussion of the nation's most pressing political and ethical challenges.