Many state and local pension funds are still struggling from the financial crisis. Between 2007 and 2008, they recorded a loss of 27 percent. Pension assets have bounced back some – they stood at $2.664 trillion at the end of Q3 2011 – but are still approximately 17 percent below their 2007 high. Although many state legislatures and city councils have taken steps to shore up their pension funds, including the elimination of cost-of-living adjustments and requirements for higher contributions from employees and taxpayers as well as later retirement ages, there are still struggles ahead.
Chris Christie rode to national prominence when he publicly excoriated a New Jersey teacher and other citizens over differences in opinion in town hall meetings. In contrast to the plain vanilla politispeak of most public officials, his blunt, confrontational style of governing was seen as a breath of fresh air. Christie either has a naturally combative governing style or believes that choosing a new target will get the national spotlight back on him. Or maybe he just wants to create a legacy as New Jersey’s most powerful battering ram.
Christie’s latest target is New Jersey state judges. Since no federal law other than IRS statutes has jurisdiction over public pensions, state judges are the chief interpreters of what is owed to public-sector retirees. A New Jersey judge recently overturned a pension reform that Christie spearheaded and that the state legislature passed in the spring. This new law would have required state judges to increase their pension payments from 3 percent of their salary to 12 percent over seven years and make a much bigger contribution to towards their health care costs.
Now, New Jersey’s constitution prohibits the governor or the legislature from reducing the salaries of state judges. The framers included this provision to insulate the judiciary from the types of political attacks that Christie is making on them.
In her 2,500 word feature on the pension reform process in Rhode Island, New York Times reporter Mary Williams Walsh seems to have found more color than facts. The piece reads more like a campaign profile of Treasurer Gina Raimondo than an assessment of the gritty fight over public pensions in the nation’s sixth smallest state:
Ms. Raimondo also learned early on about economic forces at work in her state. When she was in sixth grade, the Bulova watch factory, where her father worked, shut its doors. He was forced to retire early, on a sharply reduced pension; he then juggled part-time jobs.
“You can’t let people think that something’s going to be there if it’s not,” Ms. Raimondo said in an interview in her office in the pillared Statehouse, atop a hill in Providence. No one should be blindsided, she said. If pensions are in trouble, it’s better to deliver the news and give people time to make other plans.
Hat tip to Ted Nesi of WPRI.com for pointing out this excellent union sponsored video that discusses the problems for the public pensions of Rhode Island. Although the details are specific to that state the structural problems apply to almost every state because public pensions across America are underfunded. Every state faces problems that are politically or financially difficult. Either taxpayers will be paying more to top pension plans or retirees will be receiving smaller pension payments. Pension reform is a complex topic and I hope we see more educational efforts like this video.
Desperation costs are steep
Harrisburg, the state capital of Pennsylvania, has narrowly averted filing for Chapter 9 bankruptcy as their independent city Parking Authority has secured a loan to advance future payments to the city for use of city land. Unfortunately the unnamed lender will be charging the Authority 10.75% interest. The costs of desperation are steep. This one-off lease payment from the Parking Authority allows the city to make their September 15th bond payment on their crushing incinerator debt and avoid Chapter 9, but what about the next bond payment in 2012? They don’t seem to have any more assets to borrow against. So they’ve postponed the problem but not solved it. From Bloomberg:
The Parking Authority will borrow to make the payment, and some on the council balked at the interest rate of as much as 10.75 percent on the loan. About a third of the city’s 49,500 residents live below the federal poverty level. The lease covers land under several garages, and the loan costs may reduce the authority’s income, which provides revenue to the city.
One of America’s oldest institutions is facing default. The United States Post Office could be forced to stop delivering mail at the end of September. The rhetoric around the issue is beginning to sound like the potential default of U.S. government debt obligations during the debt ceiling debate. A report from the Government Accountability Office (GAO) tells the fiscal tale:
USPS has experienced a cumulative net loss of nearly $20 billion over the last 5 fiscal years. USPS does not now have—nor does it expect to have—sufficient revenue to cover its costs without legislative changes.
Every nation on earth has a postal service. Some countries have combined mail and phone services, although many have been privatized in recent decades. In Japan the post office is combined with the world’s largest deposit bank and mail carriers serve as bank tellers as they do their delivery rounds. Postal service is indispensable to an economy and society.
Public pensioners everywhere should be worried today. There is devastating news from Central Falls, Rhode Island as the city’s receiver has cut the monthly pension payments to retirees. From WPRI.com:
Central Falls slashed one in three of its retirees’ pension checks by more than half this month, with the majority of the city’s former public-safety workers set to lose tens of thousands of dollars a year.
Receiver Robert Flanders reduced 48 of the city’s 141 police and fire pensions by 50% or more, with all but three of those cut 55% from their original amount, according to financial records obtained by WPRI.com.
Meredith Whitney’s prediction last November of hundreds of billions of dollars in municipal defaults over the next 12 months was totally wrong. But she was right on one thing: pension plans for state and local workers are unsustainable. I totaled up the data in a new paper by Robert Novy-Marx and Joshua Rauh (page 50) and got a nationwide funding shortfall of approximately $1.19 trillion. This data is from June 2009; pension fund data is only reported every three years, so it wouldn’t reflect the large equity-market increases over the last two years. But it’s still a whopping sum. On average U.S. public pension funds are only 61% funded.
The chart above shows the ten states with the least funded pension plans on a percentage basis. Illinois has the worst problem, as it does on many muniland metrics.
There are not any easy solutions to this problem. Options for states include cutting other expenses or raising taxes to make larger pension contributions. States generally cannot lower or terminate already promised benefits as these are rights enshrined in state constitutions. There have been cases where future increases have been lowered or withdrawn, and this can help make up the shortfall.
It’s hot in Washington DC and Congress will return soon to figure out how to balance the federal budget. Part of the equation is likely to include raising more tax revenue. It’s easy to picture the thousands of lobbyists on K Street polishing their Gucci loafers and sharpening up their arguments to protect the interests they are hired to lobby for. There is no more epic battle in Washington than when tax benefits are being redrawn. The federal pie is getting smaller, and the battles will be fought in close combat.
As the struggle around taxation heats up you hear two recurring arguments. First is the idea that if you raise taxes on the upper-income earners you would kill the incentive to invest in job creation. And because job creation is the most essential need of our economy, raising taxes on the wealthy would kill the golden goose. Saying that raising taxes hurts the “job creators” is generally a Republican talking point. The other common argument is one of fairness. This is a liberal talking point, although it should be one embraced by all elected officials representing “the people.”
In his well-circulated New York Times op-ed, Warren Buffett talked about the unfairness of the low tax rate for those who earn income from their wealth as opposed to those who earn their income from their wages:
New Jersey downgraded again
Yesterday Fitch joined Moody’s and S&P in downgrading the state of New Jersey to AA-, the fourth lowest investment-grade rating. This places New Jersey in the lowest 10% of states in terms credit quality and deflates the story of Governor Chris Christie’s repair of the state’s unfunded pension liabilities. From Bloomberg:
A bill putting more of the pension and health-care burden on employees, signed by Governor Chris Christie in June, won’t prevent the need for increased state contributions, Fitch said yesterday in a report. Other negatives were a weak economic recovery, persistent deficits and high debt, the company said.
Christie, a 48-year-old Republican, signed a $29.7 billion budget in June in which he vetoed about $1 billion in spending added by Democrats who control both the state Senate and the Assembly. The spending included a pension payment of about $480 million, below the $3 billion recommended by actuaries. The state hasn’t made full payments into its pension system for most of the past decade.
“The unions are buying power”
This is a great video of Stephanie Gomes discussing her experience as a member of the City Council in Vallejo, California, as they struggled through a municipal insolvency and bankruptcy. She talks about the power of the police and firefighter unions and their stranglehold on local politics. Gomes comes across as passionate citizen who was willing to confront some of the deep-seated problems in her community. She highlights the importance of local and national media attention on the “dirty laundry” of municipal finances like high salaries and generous pensions for union workers. Her experience is an important lesson for anyone interested in muniland.
Jefferson County nearly files bankruptcy but instead ditches negotiator
The Birmingham News ran this above video of Jefferson County Commission President David Carrington discussing the commission’s meeting on Friday when they voted to delay filing Chapter 9 bankruptcy, cut out their court appointed receiver and deal directly with bond creditors. From what President Carrington says, it sounds like they almost filed bankruptcy at the meeting::
I thought we were going Chapter 9. I think I could take a test on Chapter 9 I know it so well.