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.
The Dorm Wars have not yet caused the numerous bankruptcies amongst minor and maybe even some more established colleges that seem inevitable. What they have done is change the nature of college education. Whether at Harvard or Ramapo, students want luxury dorms with private bathrooms and glitzy campus centers. And since students—fueled with cheap student debt are the all-powerful consumers—campus administrators have followed the money. Unfortunately, they also too often followed their students into debt. As the NY Times reports today,
A decade-long spending binge to build academic buildings, dormitories and recreational facilities — some of them inordinately lavish to attract students — has left colleges and universities saddled with large amounts of debt. Oftentimes, students are stuck picking up the bill.
I recently visited my alma mater for a reunion and was housed in the building where decades ago I labored long into the night as an editor for my beloved Prism magazine. It is the dorm in which I once put my hand through a glass door in the midst of a late-night editing and layout session. I barely recognized the Pratt Dormitory, which resembled more a Tablet style hotel than a college dormitory.
Such lavish quarters are now seen as necessary to attract the best students—something that is sad if it is true. And this perception, true or false, has unleashed the dorm wars. Some colleges, like the one I attended, don’t need to borrow to build. But many others think that they do.
“If Ramapo College was going to respond to what students wanted, which was larger, more comprehensive programs and residential housing, then we were going to have to go out and borrow,” Peter P. Mercer, President of the public liberal arts college in New Jersey told the Times.
How wrong is that. Borrowing can of course be justified. But if you want to build something, there are other options. You can, for example, go out and raise the money. That requires work, convincing people, many of whom have no personal connection to your college, that what you are doing is important and worthy of support. Excessive borrowing is, too often, the resort of those unwilling to take the longer and yet more responsible path of building an institution that people are willing to invest in and support.
More importantly, the enormous borrowing of colleges reported by the Times is evidence of an educational system that has simply lost its way. The fastest growing costs at colleges across the country are for administrators and for capital projects. Much of the borrowing is financing new luxury buildings and a bloated services staff. The priorities are wrong and real focus on teaching and learning seems to have been largely ignored. As students and parents confront extraordinary costs that go increasingly to pay interest on debt and support lavish undergraduate living, many are increasingly rebelling.
And for the first time in generations, students have other options. The rise of Internet learning is going to disrupt college education in this country as the Internet has transformed nearly every other area of life. And it will do so at the very moment when the finances of colleges and universities around the country are shakier than they have been in generations. The shake out will be painful.
What needs to be thought here is what is it that allowed debt to become so infectious within and amongst our educational institutions. With $1 trillion in student debt and $200 billion in institutional debt, education more and more resembles the housing and financial sectors of our economy.
Education is supposed to be a conservative enterprise, a bastion of learning and teaching the accumulated history and knowledge of the past. Somewhere along the line, education changed from being an experience of teaching and forming young individuals and citizens and became something very different. Higher education is now a progressive launching pad for careers. It is job security for tenured professors. It is the center of research and the producer of valuable sports franchises. Lost in the mix, I fear, is original mission itself. Just as banks and financial institutions abandoned their old job of lending and saving money and sought to become investment banks, so too have colleges changed from being educational institutions to being consumer brands selling luxury and success instead of the life of the mind. Some can do both. But many more will go the way of Pan Am and Hostess.