Mail Magazine 24...
Just when you thought things couldn’t get worse…
by Michael Becker  
March 25, 2012 

There’s a financial tsunami nobody’s talking about. 

OK, so maybe I’ve overstated the point. It’s certainly being talked about in the far corners of the nation, in some cities and towns, and an occasional state house, but it’s not being addressed on the national level and the parties responsible – primarily at the state and local level – are hoping against hope that the federal government will step in. After all, California and Illinois, to name just two, are simply too big to fail. 

We’re talking about state, county and municipal pension funds. If the people who run your city aren’t talking about your city’s pension fund, go to a city council meeting, go to your representative’s office and the mayor’s office and find out why. 

Here’s the crux of the problem. These pension funds are set up as “defined benefit” retirement funds. In other words, the retirement package is predefined when an employee is hired and the contributions by both the employee – in the rare case the employee actually contributes anything – and the hiring entity (state, county or municipal government) are supposed to be adjusted to keep the plan “funded”. Unlike your 401K or IRA, which is a defined contribution plan, it lays out the level of contribution by the employer and employee and the benefit is undefined. 

The primary cause of our current problems with the defined benefit plans is the one-two punch of public employee unions and politicians managing the plans. This combination is a death spiral, not just for the pension plans but for the nation at large. It’s a really simple exercise of political power. Public employees are a large voting bloc, politicians promise their union ever increasing benefits, the unions deliver votes on behalf of those politicians. If you’d like to know specifically who is complicit in this racketeering and vote buying, take note that the largest single contributor to political races in 2010 was the American Federation of State and Municipal Employees (AFSME) and virtually every nickel of their $87.5 million went to Democrats. 

Private sector unions are in the boat with their public sector brethren, they contributed over $400 million primarily to Democrats in 2008, another $200 million in 2010 and in the upcoming cycle, they can likely be counted on for well over $500 million in cash and likely 400,000 union bodies to knock on doors and work in Democratic campaigns. 

It’s worth noting that union controlled pension funds are over $160 billion underfunded. Guess who they’re going to come to in order to make up the difference. 

With reference to the states, counties and municipalities, just how big is the hole? Well, it makes the 2008 banking disaster look like the good old days. Really. 

Senator Orrin Hatch held hearings last year – and you can guess why you haven’t heard about them – and found that the pension problem across the country was in the realm of $4 trillion dollars. Four trillion dollars. 

In California, the state pension funds are underfunded by about $350-$400 billion. The folk managing the funds dispute this, and the heart of the dispute is the assumed return on investment of the fund. CalPERS has been assuming an 8% return and a Stanford University study notes the projected returns should be more like 4%. CalPERS historical return is 8.1%, but last year they earned 1.1%. The CalPERS committee did finally take action, they voted to reduce the expected rate of return from 8% to 7.75%. Still Neverland, but at least they moved in the right direction.  

The CalPERS move has consequences for the municipalities in the state. This means that cities will see their required pension payments rise — between 1 percent and 2 percent for general workers, and between 2 percent and 3 percent for more expensive public safety workers, beginning next year, according to a CalPERS “warning” that went out last month. 

Throw in price inflation and wage inflation, and you’re looking at cities and the state paying pension bills that are 4 percent to 5 percent higher for general workers, and 7 percent to 8 percent higher for public safety workers, CalPERS said… 

“Many public agencies are concerned that this change in the discount rate will cause considerable financial hardship to already financially strapped local budgets,” the League of California Cities said of the change. 

But it’s not just cities. State and schools employer contributions will increase by 1.2 to 1.6 percent for general workers and 2.2 to 2.4 percent for safety workers, CalPERS said in a statement Wednesday. 

That’s expected to cost the state $303 million. 

Schools will see an increase of $137 million. 

And you may have heard that the state budget is not in the most robust health. 

I could cite state after state: Illinois, Pennsylvania and a good summary of 25 states from, of all people, NPR. 

The pension problems at the state and below level are much more serious and more problematic than federal deficits because the feds can print money and are not required to balance their budget. States and localities do not have that option, and they also have very limited options for increasing taxes. In California, for example, Governor Brown is pushing a ballot initiative that will “temporarily” increase state taxes. He’s threatening Armageddon if it doesn’t pass. In jurisdictions that raise most of their operating budget from things like property taxes, they are in a huge bind, not only are property owners over-taxed, property values are still dropping and banks are increasing their foreclosure activity which will lead to a real cash flow crunch because banks don’t typically pay the property taxes. 

The chickens of unlimited, unending prosperity and vote buying are coming home to roost. We’ve already seen a couple of municipalities declare bankruptcy and it will be a wave. Talk to the folks who manage your city. Do everything you can to push them to find a responsible solution to your city’s pension issues now because it won’t get any better. 

Source: libertynews  

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