“No Man’s life liberty or property is safe while the legislature is in session”.

- attributed to NY State Judge Gideon Tucker

Thursday, July 7, 2011

Us Local Government Pension Costs

Steve Malanga wrote a scary editorial in an edition of last week's Wall Street Journal entitled The Local Government Pension Squeeze. For those who don't take Meredith Whitney's warnings of US city, county and town bankruptcies seriously, consider what Malanga reported.

The featured text box for the article stated this,

"Annual retiree costs for Providence, R.I., now amount to an astounding 50% of city tax collections."

New Haven's Democratic mayor John DeStefano calls municipal employee pay and benefits "the Pac-Man of our budget, consuming everything in sight."

To further understand why Whitney focuses not on state bankruptcies, but local governments, consider this passage from Malanga's editorial,

"Wages and benefits account for 30% of state general fund expenditures, according to date from the National Governors Association. But U.S. Census surveys show that in the typical town or school district, employee pay and benefits can consume from 70% to 80% of the budget.

Pensions are an enormous part of the problem. While pension payments now consume about 4% of state budgets, many municipalities are already spending 15% to 20% of their finances on pension costs."

Here are some additional scary data regarding municipal finances and pension costs,

"Costa Mesa, Calif. (population 110,000) made news earlier this year when it sent layoff notices to 43% of its employees. In 10 years, the city's annual pension bill increased to $15 million from $5 million and now consumes 16% of the city's $93 million budget. In nearby Anaheim, pensions already account for 22% of its $252 million budget. San Jose's pension costs for police and firefighters have quadrupled in a past decade. Without reform, the city estimates that its yearly pension costs, $63 million in 2000, will swell to $650 million in 2015."

San Jose was, as of July two years ago, the tenth-largest US city. It's not some quaint little Silicon Valley town anymore. Yet it, too, despite being populated by so many smart technology employees, is on its way to drowning in municipal pension expenses. Then Malanga provides these data on older cities,

"Elsewhere the numbers are even scarier. Chicago's unfunded public pension fund liabilities are estimated by Joshua Rauh of Northwestern University and Robert Novy-Marx of the University of Rochester at $44 billion—nearly eight times annual city tax revenues. New York City's annual pension contributions were $1.5 billion (6% of city revenues) in 2002. They've exploded to an estimated $8.4 billion (18% of city revenues) in 2012."

So Chicago is, like the state in which it is located, a fiscal basket case.

The delicate ballet of state-local financing isn't typically understood by most voters, which is probably why Whitney's predictions meet with such disbelief. For example, read Malanga's remarks on that subject,

"School districts in New York State contributed $900 million last year to the state's teacher pension system, but districts may have to spend as much as $4.5 billion on pensions within five years to meet rising costs, according to a December 2010 study by the Manhattan Institute. Local property taxes would have to increase an average of 3.5% a year just to pay for those added pension costs, the study estimated.

The budget pain is likely to worsen. Since 2008, states have balanced their own budgets in part by reducing the financial aid they send to municipalities and school districts. And although the main source of revenue for many municipalities—property taxes—kept rising during much of 2008 and 2009 because of multiyear property assessments that stretched back to good economic times, collections are now starting to plummet."

Thus, states are cutting contributions to towns and school districts to balance their budgets, as most are obligated to do. This leaves towns with property tax revenues, which ,thanks to the housing bust, are now headed down, on more recent valuations, instead of up. How to cope? Malanga provides some ugly details right up Whitney's alley,

"Many cities that have employed budget gimmicks in the past have run out of alternatives. To balance its 2010 budget, Providence, R.I., borrowed some $48 million (using its fire stations as collateral); it also drained most of its reserve fund, which shrank to $3 million from $17 million in one year. But the city remains under severe budget pressure—its annual retiree costs now amount to an astounding 50% of its tax collections, according to a new study from the Rhode Island Expenditure Council.

After years of hiring increases, officials surveyed by the National League of Cities estimated that they have cut their work forces by about 9% in the last two fiscal years. More reductions are on the way. Cities like New Haven, Detroit and Chicago are all looking at outsourcing jobs in areas like trash collection or custodial services to the private sector, where costs are generally lower."

Imagine that! Cities actually outsourcing routine services because the private sector provides them, on contract, at lower costs. And unlike municipal unions and their workers, who are difficult with whom to deal and to fire, contracts for services can have performance and penalty clauses, and be re-let on explicit schedules, to prevent uncompetitive cost-creep.

But the overall picture Malanga paints ought to scare everyone. Not to mention put a more appropriate backdrop to the current federal debt limit/spending/tax hike debates in place.

We, as a society, have simply lost the ability, it seems, to save for what we want. Instead, we just promise each other unrealistic financial sums, then borrow and spend them without knowing from where and how the real costs of said promises will met.

Doesn't that sound like a game of financial musical chairs? Or, by it's other name, a Ponzi scheme?

Yes, it does.

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