Heritage Report Sounds Alarm On Out-Of-Control State Pensions

Today’s Morning Bell from the Heritage Foundation paints a gloomy picture of what will likely be the number one issue in American politics in 2011; pensions for members of public employee unions.

Hamtramck, Michigan, is running out of money. City Manager William Cooper tells The New York Times: “We can make it until March 1—maybe.” And Hamtramck is not alone. According to the Times, 15 municipalities have pursued bankruptcy in the past two years. And if the economy does not improve revenues, many other local governments will be in the same boat.

Many of these cities, like Hamtramck, have already cut spending on parks, senior centers, and road maintenance. But there is one area they can’t cut: salaries, benefits, and pensions of government workers. According to the Times, 60 percent of Hamtramck’s general fund goes to paying 75 current police officers and firefighters and about 240 worker and spouse pensions. “They kind of have the Cadillac plan,” Cooper tells the Times, “and we’d kind of like the Chevy.”

The Heritage piece notes a recent poll finding that while most Americans believe firemen and police make salaries that are about right or even too low, some two-thirds of the public recoils at the idea public employees can retire at 80 percent of their final year’s salary after 20 years in. Some 71 percent of those polled really don’t like the fact that the average policeman retires at better than $70,000 a year.

And the effect of this largesse?

A recent study by Robert Novy-Marx of the University of Rochester and Joshua Rauh of Northwestern University found that major pension plans for city workers have a combined estimated under-funding of $574 billion. Heritage Foundation scholar David John details: “For instance, Chicago has only about $22 billion in pension assets to pay for $66 billion in pension promises to its city workers, while New York City has $93 billion available to pay $215 billion in city pension promises, and Boston has only $3.5 billion available to pay $11 billion in promises. That means that every household in Chicago has a liability of about $42,000 just to pay pensions to city workers, while each household in New York City owes $39,000, and each in Boston owes about $31,000.”

The problem is even worse at the state level. An earlier Novy-Marx and Rauh study of the 116 major pension plans sponsored by the 50 states found these plans had assets of about $1.8 trillion to pay pension promises of between $3.6 trillion and $5.2 trillion. This leaves a gap of between $1.8 trillion and $3.4 trillion. Unsustainable public employee compensation is a major reason why large states like California, Illinois, and New York are teetering on the brink of insolvency.

Obviously, this can’t continue for much longer. It’s a problem which can’t be allowed to get worse, and the bigger offenders are going to have to find a way to get out from under these obligations.

Heritage notes that one solution which won’t pass muster is the one the unions have been funneling campaign cash to Democrats throughout the recently-concluded election cycle in an effort to bring about – namely, a federal bailout of state governments and in turn those pension plans.

California already came to Washington asking for an $8 billion bailout last year. The spendthrift 111th Congress said no. At a bare minimum the 112th Congress should hold the line and refuse to bailout any state government. Instead, Congress should consider a way for states to file for bankruptcy or its fiscal equivalent. While such a law would raise some serious federalism issues, as long as states are allowed to enter into bankruptcy voluntary, it could be constitutionally acceptable. But David John warns:

“Such a process should not be part of a deal under which states can also receive a federal bailout. State and local governments made the mess of their finances, and they should have to clean them up. Congress should provide a mechanism to make the process more direct, giving the states the flexibility to address their fiscal problems consistent with federalism and the principles of limited constitutional government.”

That mechanism isn’t just a pipe dream from a conservative think tank, by the way. Earlier this month we ran a video of Dick Morris speaking at a Center For Security Policy dinner at which this topic surfaced. Morris predicted exactly such a process by which state governments could enter into some form of bankruptcy and in doing so free themselves of the pension obligations currently putting their solvency in crisis. Morris, who said he’s been consulting with House Republicans on the political fallout from a very aggressive agenda including an attack on the pension problem, envisioned a scenario wherein a California, New York and Illinois went back to Washington hat in hand next spring to no avail, then are afforded a new bankruptcy law passed through the House which voids all state contracts in lieu of a bailout.

Such a law might prove quite popular with state elected officials beyond just the ones in states Democrat machine rule has put on the path to ruin. After all, the presence of a legal ejection seat as an option for a governor demanding a renegotiation of pension obligations is a powerful asset even without that governor actually pushing the state into a bankruptcy.

Regardless, public pensions are coming to a head as a red-hot political issue in 2011. And the $100 million spent by unions like AFL-CIO, SEIU and AFSCME on Democrats who ultimately didn’t win in November is likely to be an albatross around those unions’ necks as Washington grapples with dead-broke cities and states.



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