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The Conservative Curmudgeon
July 12, 2012
Excessive Public Pensions Are Bankrupting
Many States
by Allan C. Brownfeld
ALEXANDRIA, VA — In June, Wisconsin voters soundly defeated the effort by labor unions and others to recall Governor Scott Walker. Governor Walker had not committed a crime or other indiscretion. He was threatened with recall simply because he had implemented the policies he promised he would during his campaign.
In February 2011, Walker announced his plan to do the following:
• limit the subjects covered by collective bargaining for public employees
• compel public employees to contribute more to their health care and pension plans
• stop the government from collecting dues automatically on unions' behalf
• require public employees’ unions to hold annual certification elections.
Once in office, he effectively implemented these policies.
Wisconsin's recall policy is questionable and, in many ways, is a threat to representative democracy. Its message is clear: Officeholders may be removed at the conclusion of their terms for policy disagreements. Wisconsin has had 14 elected state government officials involved in recall elections during the past year alone. The state's largest newspaper, the Milwaukee Journal Sentinel, endorsed Governor Walker, arguing that elected officials should not be recalled merely for policy differences. Some 60 percent of voters in exit polls agreed.
Beyond this alarming trend, the union effort in Wisconsin has focused a much-needed spotlight on the excesses of public pensions. Over the years, politicians have given in to union demands for higher pensions — rather than wage increases — because these elected officials knew that such pensions would be paid many years later, under someone else's watch. Now, however, these bills are coming due — and many states and cities are no longer in a position to pay them.
In New Jersey, Governor Chris Christie is seeking to reform his state's sick-pay policies. Current law allows public workers to accumulate unused sick pay, which they can cash in upon retirement. "They call them 'boat checks,'" Christie says. "Now, the reason they call them boat checks? It is the check they use to buy their boat when they retire — literally." He tells the story of the town of Parsippany, where four police officers retired at one time and were owed a collective $900,000 in unused sick pay. The municipality, which did not have the money, had to float a bond to make the payments.
Governor Christie wants to end sick-pay accumulation. "If you're sick, take your sick day," he says. "If you don't take your sick day, know what your reward is? You weren't sick — that was the reward." Newsweek notes that, "It was by the force of such arguments that Christie was able to overcome the powerful teachers’ union and force educators to help pay for their health care costs, and to win broad rollbacks in benefits for the state's huge public workforce."
Shortly after the vote in Wisconsin, there were landslide victories in San Jose and San Diego, California, of ballot measures designed to cut back public sector retirees' benefits. Warren Buffet calls the costs of public-sector retirees a "time bomb." These benefits are, he believes, the single biggest threat to our fiscal health.
In California, total pension liabilities — the money the state is legally required to pay its public sector retirees — amount to 30 times its annual budget deficit. Annual pension benefits rose by 2,000 percent from 1999 to 2009. In Illinois, they are already 15 percent of general revenue and growing. Ohio's pension liabilities are now 35 percent of the state's GDP.
Commentator Fareed Zakaria notes, "The accounting at the heart of the government pension plans is fraudulent, so much so that it should be illegal. Here's how it works. For a plan to be deemed solvent, employees and the government must finance it with regular monthly contributions as determined by assumption about the investment returns of the plan. The better the investment returns, the less the state has to put in. So states everywhere made magical assumptions about investment returns."
David Crane, an economic adviser to former California governor Arnold Schwarzenegger, points out that state pension funds have assumed that the stock market will grow 40 percent faster in the 21st century than it did in the 20th century. While the market has grown 175 times during the past 100 years, state governments are now assuming that it will grow 1,750 times its size over the next 100 years.
Inflated retirement benefits are the reason for dramatic cuts in spending in other areas by state and local governments. Last year, California spent $32 billion on employee pay and benefits, up 65 percent over the past 10 years. In that same period, spending on higher education dropped 5 percent. Three-quarters of San Jose's discretionary spending goes to its public safety workers alone. The city has closed libraries, cut back on park services, laid off many civil servants, and asked the rest to take pay cuts. By 2014, San Jose, the 10th largest city in the country, will be serviced by 1,600 public workers, one-third the number it had 25 years ago.
The Pew Center on the States has quantified the problem. In 2008, the states had set aside $2.35 trillion to pay for public employees' retirement benefits while owing $3.35 trillion in promises. A year later, the trillion-dollar gap had grown by 26 percent. The massive expanding obligation cuts into the provision of government services. Former Los Angeles Mayor Richard Riordan notes, "A lot of things are going to happen dramatically over the next couple of years, and then people will listen. If you close down all the parks and all the libraries, this is political dynamite."
As a result of Governor Walker's reforms in Wisconsin, the state has balanced its two-year budget without tax increases, and local school districts have used their new bargaining power to save money without layoffs or significant increases in class size. While leading Democrats, such as President Obama and former President Clinton, supported the recall effort in Wisconsin, many others, such as the liberal Democratic mayor of San Jose, recognize that it is time to bring the excesses of public sector unions under control.
Editorially, The Washington Post declared, "... those who voted for Mr. Walker to show approval for his policies, and not just disapproval for the recall itself, had plausible reasons for doing so.... Public employee union leaders are pledging to fight... new laws in court... They would do better to engage governments in a good-faith effort to restructure and preserve public services for the long term. States and localities face genuine problems, and the unions share responsibility for them."
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The Conservative Curmudgeon is copyright © 2012 by Allan C. Brownfeld and the Fitzgerald Griffin Foundation. All rights reserved. Editors may use this column if this copyright information is included.Allan C. Brownfeld is the author of five books, the latest of which is The Revolution Lobby (Council for Inter-American Security). He has been a staff aide to a U.S. Vice President, Members of Congress, and the U.S. Senate Internal Subcommittee.
He is associate editor of The Lincoln Reveiw and a contributing editor to such publications as Human Events, The St. Croix Review, and The Washington Report on Middle East Affairs.
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