The Pew Center on the States issued a study this week that sheds further light on our municipal pension problems, a political crisis with strong Arendtian overones. Where most studies have focused on the enormous problems faced by states, this one focuses on cities:
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 growing funding gulf, which the study estimated at more than $217 billion for the 61 cities in the study, raises worries about local finances at a time when states are also struggling to recover from the recession. Property-tax revenue dipped during the housing crisis, straining city finances amid a weak national economy.
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).
Also this week the NY Times ran a story about San Bernadino, one of three California cities to file for bankruptcy as a result of their pension obligations. It is a stark reminder of why we should care about public pensions:
Five months after San Bernardino filed for bankruptcy — the third California city to seek Chapter 9 protections in 2012 — residents here are confronting a transformed and more perilous city. After violent crime had dropped steadily for years, the homicide rate shot up more than 50 percent in 2012 as a shrinking police force struggled to keep order in a city long troubled by street gangs that have migrated from Los Angeles, 60 miles to the west. … “The parks department is shredded, the libraries similarly,” [the mayor] said. “My office is down to nobody. I’ve got literally no one left.”
A similar fate is befalling other California cities that are in bankruptcy:
Stockton, Calif., which filed for bankruptcy in June, has followed a similarly grim path into insolvency, logging more homicides last year than ever before. In Vallejo, Calif., which filed for bankruptcy in 2008, cuts left the police force a third smaller, and the city became a hub for prostitution.
As I have argued, the pension crisis is not arcane policy or economics. It is a crisis of politics and government. It came about because municipal and state governments offered irresponsible contracts to public employees. There is no way these contractually guaranteed pensions can be paid. By refusing to face up to this fact now, we are making the problem worse. The result will be the hollowing out of local government services across the country. Police forces will be decimated. Public libraries and fire stations will close. Parks will fall into disrepair. All in order to pay full pensions to retirees. This of course won’t happen. Cities will refuse to do it, as they have in California and elsewhere. The result will then be bankruptcy, which comes with its own tragedies.
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. This is already happening.
What is more, the pension crisis will likely further erode local control over our lives. As municipalities go bankrupt they turn to states. As states go bankrupt, they turn to the federal government. Bailouts come with strings and ever-increasing levels of bureaucracy. For those who understand that our federal system was designed to thwart the establishment of sovereignty by dispersing power through competing levels of governance, the pension crisis has the potential to radically disempower local governments and further the amassing of federal power already long underway.
There may not be pretty or easy solutions, but ignoring or denying the problem is no longer an option. It is time for those who care about government and freedom to engage the pension issue and insist to our legislators that we act to treat pensioners with respect but also preserve the power of local governments to support rich and vibrant political institutions.
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.