Where is the political accountability for America’s pension disasters?

December 11, 2013

Five years after the financial crisis, there’s still a hue and cry about sending people to jail. After all, financiers were, at best, self-servingly optimistic about the future. At worst, they said things that weren’t true, and made promises they couldn’t keep. Investigations are still ongoing, and although it’s doubtful, maybe some big guys will go to jail. But there’s another group of people who have injured, and are continuing to injure, millions of Americans with purposefully blind optimism and false promises. Those are politicians in every city and state that is facing a pension shortfall.

You can’t read the news without hearing about the pension problem. Last week, federal judge Steven Rhodes ruled that Detroit can proceed with the largest municipal bankruptcy in history, thereby allowing the city to cut billions of dollars in payments that are owed to city employees, retirees, investors and other creditors. In Illinois, Governor Pat Quinn signed into law a plan that will trim Illinois’s pension hole, which is viewed as being one of the deepest and darkest in the country. (Labor unions say they will challenge the plan in the courts; credit rating agencies have pointed out that the legal protection of pension benefits is particularly strong in Illinois, so it remains to be seen what will happen.)

Inevitably, there is more to come. Rhodes’s ruling could have implications for California cities, like San Bernardino and Vallejo, that are wrestling with bankruptcies. In Chicago, the pension hole is estimated at $20 billion, and according to the New York Times, payments to the local pension fund are expected to increase by $590 million in 2015 to a total annual contribution of almost $1.4 billion. “Should Chicago fail to get pension relief soon, we will be faced with a 2015 budget that will either double city property taxes or eliminate the vital services that people rely on,” Mayor Rahm Emanuel told the Times.

There is disagreement about the size of the problem — it depends on how optimistic you are about the future, and how you truly account for pension liabilities — but most people agree that a problem exists. Estimates of the size of the hole range from almost $1 trillion to well over $4 trillion, according to a 2012 paper by the Kennedy School. In a recent report, the credit rating agency Moody’s, which calculates the pension hole using something called adjusted net pension liability — basically, the difference between the value of a pension plan’s assets and its future benefit payments adjusted for a present-value calculation — wrote that “several large local governments have pension burdens large enough to cause material financial strain.” For instance, in Chicago, the adjusted net pension liability is 678 percent of its annual revenue; 28 other local governments in Moody’s list of the top 50 (based on the amount of debt outstanding and whether or not Moody’s rates them) have an adjusted net pension liability that is greater than their annual revenue. Four of the top 50 local governments have actuarial contribution requirements in excess of 15 percent of operating revenues. In fiscal 2011, 33 of the top 50 local governments contributed less than what was actuarially required. And so on.

The argument generally centers on whose fault it is. You can pick your villain: Labor unions, Wall Street, the rich, the recession, an uncooperative market that can’t deliver the ridiculous 8 percent returns that many plans have counted on, the politicians. In simple terms, the right wing generally blames the unions for negotiating what some view as overly generous packages, while the unions have mostly argued that their benefits are legally protected by the state, and therefore cannot be cut back. Both miss the point. The unions should be angry about the underfunding of their pension benefits, while no one should be angry at the unions: it was their job to get the absolute best deal for their constituents that they could, and so they did. It doesn’t really matter if the promises were too generous or not generous enough: they were promises, and people relied on them.

There’s only one group whose job it was to navigate a course between different groups with different interests, and not to make promises that couldn’t be kept. That’s the politicians. And they have repeatedly failed.

Take Detroit. The Detroit Free Press, which analyzed the city’s history back to the 1950s, says that “its elected officials and others charged with managing its finances repeatedly failed — or refused — to make the tough economic and political decisions that might have saved the city from financial ruin.” The paper concluded, “When all the numbers are crunched, one fact is crystal clear: Yes, a disaster was looming for Detroit. But there were ample opportunities when decisive action by city leaders might have fended off bankruptcy.” The story quoted Bettie Buss, a former city budget staffer who spent years analyzing city finances for the nonpartisan Citizens Research Council of Michigan, and who said, “That was the whole culture — how do we get what we want and not pay for it until tomorrow and tomorrow and tomorrow?”

Indeed. That seems to be the culture in lots of places. “For years, cities have promised rock-solid pensions without setting aside enough money to pay for them, aided by lax accounting practices, easy borrowing and sometimes the explicit encouragement of labor unions,” wrote the New York Times last week. “Officials were counting on rich investment gains to fill the holes; unions and their retirees were counting on legal provisions — like Michigan’s Constitution — that said pensions were unassailable and that benefits would always be paid, whether through higher taxes or budget cutbacks elsewhere.”

Doesn’t that sound just like bankers counting on home prices going up forever, and investors believing that a triple A rating was invincible? Maybe you can argue that the politicians didn’t know any better. But they’ve certainly gotten warnings, just as bankers did. According to the New York Times, way back in 1978, an actuary named Russell Mueller filed a report. He quoted a Michigan state representative, Dan Angel, complaining about the way pensions in his state were being granted. “This takes place in a totally political atmosphere, without any regard for how the bill will be paid, by whom, and when,” Angel said in the report. “Employees had better get concerned that there is enough cash on hand to meet retirement needs, and taxpayers had better get concerned with these massive and increasing debt obligations.” “Public pension legislation is inevitable,” Mr. Mueller concluded in his report. But as the Times reported, state and local officials shot down the proposed federal funding requirements. Let’s remember that the next time we complain about bankers lobbying against new regulations.

I certainly don’t know what the solution is, and I don’t envy anyone who has to grapple with these intensely difficult issues. But especially at this point, there’s just one word that describes politicians who promise to pay that which cannot be paid: Fraud.

PHOTO: Detroit firefighter Darrell Tucker holds a sign in front of the Federal courthouse as he rallies against cuts in their city pensions and health care benefits during a protest against the city’s municipal bankruptcy filing, in Detroit, Michigan October 23, 2013.    REUTERS/Rebecca Cook


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The answer is simply: Collapse.

Posted by tmc | Report as abusive

“Five years after the financial crisis, there’s still a hue and cry about sending people to jail … At worst, they said things that weren’t true, and made promises they couldn’t keep.”

Wrong. At worst, they said things that weren’t true and which they knew were not true. That is not misrepresentation, it is fraud, a felony.

You appear to be saying that the banksters have gotten away with their crimes and the only solution is to force politicians to fess up and tell the unwashed masses that their pensions are long gone. I hope I am reading you wrong.

On the contrary, the solution is to prosecute banksters within an inch of their dishonorable lives. There are thousands of them who committed fraud; every person in the chain of sub-prime mortgages is guilty of perjury at a minimum and we can use these people to roll over on their managers, working our way to the very top. Many of these people were paid really big bucks, money which can be confiscated under RICO statutes. They can be fined — really big fines. They can receive stiff prison sentences. After they receive the Bernie Madoff treatment, we can transfer their ill-gotten gains into pension funds to make them at least a little more whole.

Of course, what we also should do is prosecute former Treasury Secretary Tim “I never met a banker I didn’t love” Geithner for being an accomplice, but given political realities, that would never happen.

Posted by baroque-quest | Report as abusive

Blame politicians, not unions? That’s simplistic, too. It’s not unions, it’s not politicians, it’s the unhealthy relationship between public sector unions and politicians. In many small municipalities, unions are stronger than small-time politicians who may, in fact, be part-time and not even paid.

The answer is to get rid of public sector unions, or at least have a check on the contracts that politicians and their supervisees negotiate, for the most part in private. Require a vote of the people on new contracts, for example. Either that or the Scott Walker remedy.

Posted by Calfri | Report as abusive

I don’t believe the base problem is with politicians or with financiers. The base problem is with us, read the public, or society.

Those rosy 8% investment return assumptions were A-OK with almost everyone I know up until a few years ago. Had a comptroller suggested using a 5% rate of return he or she would have been laughed out of office. With a lower rate of return, we’d all have to pay more today to fund our pensions of tomorrow.

Now who in America wants to pay more today?

Those mortgages? Well you can certainly argue that the ratings were suspect and the CMO’s too. I’d argue that the people who took out interest only loans and the so called no-doc (liar) loans or the NINJNA loans knew deep down that what they were doing was wrong. It’s pretty easy to go along when the mortgage originator tells you that you can get rich while sitting on your backside, since your house will always be worth more and you can cash out over and over again. Money for doing nothing.

Does that really make any sense to anyone?

Who said “We have met the enemy and he is us!”

Posted by Missinginaction | Report as abusive

McLean has failed to identify one of the greatest miscreants in pension fund collapse, namely the Federal Reserve and its policy of zero interest rates, QE forever,
ignoring what banks were up to in the derivative and mortgage markets, etc.

Sure the Pols promised and whenever they need votes they hand out the nickels and dimes to the unwashed for a vote.

But the Federal Reserve has not only destroyed pension funds, they have also stolen 3/4 trillion $ a year in interest from prudent savers to hand over to deadbeats, debtors, banks, speculators, carry trade, fueled cheap $$ stock buybacks, job destroying mergers/ acquisitions, you name it. What genius. What a scam.

Posted by inkydinky | Report as abusive

TMC – That seems to be correct. The house was robbed and the inhabitants are not getting there “stuff” back.

Posted by 2Borknot2B | Report as abusive

@ Missinginaction

“We have met the enemy and he is us!”

Everyone who shops with a credit card is being conditioned to buy now and pay in thirty days, if not longer. What’s more, we pay with our card, THEN we’re handed our receipt. If there is a problem with what we’ve been charged we have to stand in another line at customer service to deal with it. Most shoppers leave big box stores not knowing what how much we have spent.

Few and far between are the consumers who say, “If I can’t pay for it, I don’t need it,” and the grandmothers who budget by having bills in separate envelopes labeled for their various expenses. Enough of these people would be a good bulwark against consumer fraud and financial manipulation.

Our being conditioned to be vulnerable to the machinations of the banks is no excuse for what they did.

Posted by Oma | Report as abusive

Oma, I don’t say you have to track every little thing (even though we do because the little things add up) but if people are walking out of a store with no idea of what they have spent they are heading for financial problems. There are many ways to keep track BEFORE you head to the check out line. Apps, a calculator, even a pencil and paper will do. Hopefully folks can add.

Few and far between are the consumers who say, “If I can’t pay for it, I don’t need it,” Oma, you’re absolutely right and therein lies a huge problem. I’d go one step further. I say “If I can’t pay for it, I’m not buying it”. With the exception of a home, which most people cannot pay cash for.

People may indeed be conditioned to the machinations of the banks. That’s a choice that people make. Perhaps people need to begin to think for themselves and decide for themselves what is really important to them.

IMO a persons time is their most valuable asset. We all have a finite amount of it. We cannot buy a minute more and we don’t really know how much we have left. Work, borrow and buy more. Repeat the cycle over and over, until our time is up. It’s tragic. That is how many live. There is a big beautiful world out there, waiting for you to discover it. You never will if your focus is simply consumption.You will not have the time. Sadly, that’s how many have been “conditioned”. Look in the mirror. Think for yourself.

Posted by Missinginaction | Report as abusive

The politicians and unions deserve equal blame. The author seems to be ok with the idea that unions should ask for irresponsible pension benefits and pass the cost on to taxpayers. Keep in mind they exercised their political power to gain exorbitant defined benefit pensions at the expense of taxpayers. And now the time has come for the payoff, with devastating consequences for many states and localities – higher debt burden, cuts in services and employment, and ironically, pension reform so that new union hires will have to pay for the old union hires that are retiring. In New York State, the baby boomers are are retiring from state service with incredible pensions that they did not contribute a dime to.

Posted by Cassiopian | Report as abusive

@cassiopian is right, both sides are to blame. And the public for sleeping thru it too.
Now we need to fix the problem. Playing blame games do nothing but more damage. The union pensioners must realize that though they were screwed, it does not give them the right to screw others. The politicians need to do all they can to minimize the impact on those pensioners and find a way to stop this from happening.

Posted by tmc | Report as abusive

Just call the Fed and have them print up $24B for Chicago! Problem fixed! Hell the Republicans just spent/lost billions on the govt shutdown… we could have used that money…

Posted by j8h9 | Report as abusive

First of all, there is a need to distinguish between government insolvency — which in every instance is temporary — and bankruptcy of the underlying metropolitan entity.

Insolvency due to pension obligations is always temporary as pensioners die; afterward they do not collect their pensions any more.

Leaving aside the Detroit government insolvency, the city of Detroit as a whole is ruined. Fiddling with the city government’s books will not help Detroit at all. Ditto the rest of the country … and around the world. Detroit and other cities and states (and nations) are bankrupt structurally, they are unable to meet their expenses because they cannot offer value and they are unable to borrow further to roll over previous rounds of loans.

The real problem is a development model that is bankrupt even as it is applied: reliance on fuel-guzzling automobiles that cannot offer a return, separation by wide distances of workplaces and dwellings, uncontrolled costs that are rationalized as ‘investments’ when they are not. The defects of this model are not limited to overpayments to municipal workers, also included would be most ‘public infrastructure’ such as highways, gifts to tycoons (such as sports arenas) and ‘incentives’ directed toward industries that play one district against others. Right now this development regime is collapsing under its own weight, our ‘investments’ are wasteful and have become unaffordable.

Even solvent governments will have no effect over the generalized bankruptcy of the country as a whole.

Posted by econundertow | Report as abusive

BTW: the finance sector has committed great crimes and requires being held to account. Not simply fraud but outright theft — MS Global comes to mind.

During the 1990s criminals with neckties were prosecuted and remanded to prison. Certainly the same kinds of criminals committing the same crimes after the year 2000 deserve the same fate.

Posted by econundertow | Report as abusive

A child of five would understand this. Send someone to fetch a child of five.

Groucho Marx

Posted by agular17 | Report as abusive