April 18, 2018

Public Employees Resist Pension Reform as Crisis Looms

According to a new report, states face a collective pension funding shortfall of $1.4 trillion.

“Government is the great fiction, through which everybody endeavors to live at the expense of everybody else.” —Frederic Bastiat, French Economist (1801-1850)

For years, state and local politicians have ignored a looming fiscal crisis; namely, rapidly exploding deficits to public-sector employee pensions. Unfortunately, ignoring the problem does not make it go away, and now politicians, public employees and unsuspecting taxpayers face a brutal reality.

According to a new report by the Pew Charitable Trusts, states face a collective pension funding shortfall of $1.4 trillion. To put that into perspective, that amounts to roughly three times the annual budgets of California, Texas, New York and Florida … combined.

States must now choose among unpleasant options: cut back on other government services like education, public safety and parks to redirect funds to public employee pensions; raise taxes (angering voters and slowing economic growth); or reduce lavish public employee benefits (angering powerful unions).

The painful process is already underway. States like Arizona, Oklahoma, West Virginia and Kentucky face or have faced teacher strikes if demands for massive pay increases — as much as 20% immediately — are not met. Oklahoma’s teachers have been striking for more than a week, and West Virginia’s returned only after securing a 5% pay raise, even as state leaders warned of budget cuts elsewhere, including Medicaid, to pay for the raises.

Politicians have played a shell game for years, making contractual promises to public labor unions that are impossible to meet, using sleight-of-hand accounting gimmicks to hide the truth, even as they negotiated ever larger pensions with the unions with no way to fund them, hoping to be retired when it blew up.

For example, pension administrators used a baseline growth projection of 7.5% in 2016, but actual growth was only 1%. And while growth outlook for this year is significantly better, pension funds still face a massive and growing shortfall.

Pension reform is desperately needed. Illinois is rapidly spiraling toward bankruptcy, with fully 25% of general fund revenues allotted to public employee pensions, and state legislators fighting tooth and nail against Republican Governor Bruce Rauner’s efforts at reform. Due to fiscal mismanagement, overly optimistic growth projections and escalating costs, California faces a staggering $153 billion shortfall to CalPERS, the state employee retirement system. The Los Angeles Unified School District alone has a $15 billion funding deficit to its health care plan, which covers both current and retired employees, who pay no premiums for their insurance.

Nationwide, states have just 66% of assets on hand needed to meet pension obligations, and many states have under 50%; Kentucky and New Jersey are worst off, with just 31% of needed funding.

The Pew study notes that even if pension funds had met 2016 growth estimates, there would be a significant shortfall because state governments are not providing enough funding. Efforts to require state employees to increase their own contributions to their retirement are met with fierce resistance, even as they enjoy retirement plans far superior to those of the private sector workers whose taxes fund these pensions. This despite the fact that taxpayers are paying twice as much into public employee pension plans as a share of state revenue than just a decade ago.

And many pensions are borderline criminal. Oregon’s lavish pension plan gives Joseph Robertson, the retired head of Oregon Health & Science University, a pension of $76,111 per month. In Scranton, Pennsylvania, an astonishing 58% of police and firefighters are on disability pensions, long before the normal retirement age. As reported by The New York Times, the average age of retired Scranton police officers is 44.9 years old.

Facing these daunting deficits, some politicians have turned to risky investments to try to rapidly make up the shortfall. That is a path fraught with danger, and could lead to an even greater collapse.

Democrat politicians and their labor union cohorts continue to resist meaningful reform, saying that the states made a deal with the unions, and if higher taxes and fewer services are the price, then so be it.

Other politicians look to the federal government — itself sporting a $21 trillion deficit — for a bailout. It’s hard to imagine legislators from fiscally responsible states agreeing to higher taxes on their constituents to bail out irresponsible states.

The most logical and fair path is to put all new state employees into a defined-contribution plan like a 401(k) and give them responsibility for their own retirement, ending pensions in future negotiations.

This, however, is far easier said than done. From 2010-2016, labor unions gave $1.1 billion to Democrat politicians and leftist advocacy groups, and they expect rewards for their payouts, including protection for their extravagant pensions. Unfortunately for taxpayers, the relationship between labor unions and Democrats is an incestuous one, giving the taxpayer no seat at the negotiating table.

Even Democrat hero FDR opposed public-sector labor unions as being unfair to the employer: the taxpayers. Of course, when it comes to Democrats and labor unions, they learned well the axiom of socialist playwright George Bernard Shaw, who smugly noted, “A government that robs Peter to pay Paul can always depend upon the support of Paul.”

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