STUMP » Articles » Public Pensions Watch: Choices Have Consequences » 13 March 2014, 06:24

Where Stu & MP spout off about everything.

Public Pensions Watch: Choices Have Consequences  


13 March 2014, 06:24

I came across a “will those big meanies stop beating up on public pensions” piece recently, from a progressive group called Campaign for America’s Future — I am not familiar with any of these names, except for the ones being dropped in this piece itself.

There is a lot I agree with in this piece — while the perspective is obviously progressive, there are many facts I agree with. I want to skip over a lot of the math stuff for the purpose of this post, because I have found arguing over the math tends not to persuade anybody, much less the combatants. Here is the particular paragraph I want to highlight:

6. Cutting pensions is a choice, not a necessity. As Johnson and others have noted, there seems to be a discrepancy in how the sanctity of contracts is viewed in America. When it comes to the bonuses of AIG executives after the financial crisis, we were told by experts and pundits that contracts must not be broken, and that taxpayers should foot the bill to avoid breaking this fundamental trust. But in Detroit or Chicago, we are told that the contracts of pensioners are not really worth the paper they’re written on. The difference? AIG executives are powerful and well-connected. Pensioners are not.

There are resources to meet pension obligations, if only politicians could make decisions in the interests of ordinary people, rather than the 1 percent who do not wish to see their taxes raised. Johnson further notes that where pension shortfalls exist, they are far smaller than giveaways to corporations.

Ah, the ever-vilified 1 percent. How dare they want to hold onto their own money.

But let’s be realistic. The issue is usually twofold: 1. the 1 percent don’t actually have enough money to fill the holes in the pension gaps (and thus taxing them more doesn’t accomplish much) 2. the 1 percent are the most mobile and most able to legally dodge any tax rate increases.

So these vaunted “let’s tax the 1 percent” schemes rarely produce much money. And even when the rates are extended to hit many more people to try to make up the shortfall, they still don’t get the take they thought they would.

Boo hoo.

That said, I agree that cutting pensions is a choice. Let’s look at what happened in Vallejo, California, when they decided not to cut pensions in bankruptcy

The California city of Vallejo emerged from bankruptcy just over two years ago, but it is still struggling to pay its bills.

The main culprit: Ballooning pension costs, which will hit more than $14 million this year, a nearly 40% increase from two years ago.

Amid threats of legal action from the state’s pension giant, CalPERS, Vallejo did little during its nearly three-year stint in bankruptcy to stem the growth in its pension bills.

As a result, Vallejo continues to dole out large sums of money for retirees. Except for new hires, Vallejo’s police and firefighters can retire at age 50 with as much as 90% of their salary — for life. Public safety workers who retired in the last five years have average annual pensions of more than $101,000.
Vallejo City Manager Dan Keen counters that the city’s financial position isn’t as bleak as Moody’s says. He said the city is in a much “better place” than when it filed for bankruptcy, in part due to a 1% sales tax hike that is funding new city services, like the installation of new surveillance cameras aimed at improving public safety.

In addition, employee concessions, such as a 5% pay cut for police, will allow the city to fill this year’s projected $5.2 million budget shortfall, he said.

Still, Keen said pension costs are a major concern.

“If we don’t resolve those costs, then we’re going to see services continue to suffer,” said Keen, who has led the city since 2012. “We’re going to have to cut somewhere.”

Remember, cutting (or not cutting) pensions is a choice.

And choices have consequences.

But more to the point, that choice lasts for only so long until the money sources go away. If the choice is to cut staffing levels or to cut services to pay for underfunded pensions, people may decide to live elsewhere.

For what it’s worth, I live in an extremely high tax location by choice. While I wouldn’t be happy with taxes going up, we are definitely getting money’s worth in services (including excellent snow clearing compared to Hartford, but that’s for another day).

If I found that services were cut to pay people for service they did decades ago….. I might not be so happy about the level of taxes we pay.

This is why public pensions need to be fully funded as close to the year of service as possible — later taxpayers may not feel all that beholden for service done in the 1970s. And it’s really difficult for retired people to strike. Especially if they moved to lower tax locales like Florida or Texas. If money is paid for the benefit when service is rendered, then pensioners are more secure.

The concept is called “generational equity” and usually talked about in terms of “fairness”. Fairness is really beside the point, because after a while, people don’t care about “fair”. They care about trade-offs, and political realities. Those who are retired and living elsewhere are in a really weak position compared to taxpayers actually in the locale and pissed off that services are being cut. And such people may not find much solidarity from fellow public union members, when those who are still working are also hit with these taxes and also have had their benefits (and hours) cut.

So choose carefully.

Related Posts
Around the Pension-o-Sphere: Actuaries Testifying, New Standards, Actuary Bloggers, Pew Report, and Connecticut
STUMP Classics: The Fragility of Public Pensions Due To Can't-Fail Thinking
Nevada Pensions: Asset Trends