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.

Unions, Municipalities & The Democratic Party's Future

Last month, the Wall Street Journal ran an interesting editorial by Doug Schoen, Bubba Clinton's former pollster. Schoen, though a Democrat, has become, with Carter's former pollster, Pat Caddell, a more moderate teammate trying to rescue their party from the grip of far-leftists and unionists.

Schoen's editorial, chock full of details concerning union spending and various state crises, contends,

"Unless the party confronts its allies in the public-employee unions, it will continue to lose credibility with voters around the country."

Essentially, Schoen believes that the Democrats' long term strategy of turning to unions, especially the government workers unions, for funding and votes, will now, after 50 years, come back to ruin them by alienating the voters who now realize they are paying the exorbitant tab for this unholy alliance.

Schoen contends,

"A key reason for the Democrats' extraordinary defeat in the mid-terms is that the party lost critical support from independent swing voters. In large part, as polls consistently show, this is because of the party's big-government programs such as health-care reform, the bailouts, and the stimulus packages.

If the Democrats want to be competitive in 2012, they must move decisively back to the center. And unless they're able to break the stranglehold that government-employee unions have on the party on policy, as well as in financial and political support, it will be virtually impossible for Democrats to restore fiscal health to states like New York and California."

Thus, the long run effect of the Democratic party's bedding down with the public sector employee unions it allowed has been to alienate the key swing voters who now realize they are paying for the expensive, unaffordable result.

It's a very insightful, concise argument that makes a lot of sense. Personally, I don't see the Democrats being capable of severing that link, so it's a decent bet that if the GOP can just maintain a focus on spending cuts and entitlement reforms, at all governmental levels, they may enjoy a decade-long run of electoral dominance in America.

More Municipal Bankruptcies Coming

Last Friday's Wall Street Journal featured a staff editorial describing the financial woes of Hamtramck, Michigan.

Towns in Michigan apparently require the state's permission to file for bankruptcy, and Hamtramck is so seeking. The editorial cites the town's $3MM deficit on its $18MM budget. According to the article, million-dollar deficits have been recurring for the past 10 years to fund lavish union compensation and benefits.

But the latter paragraphs of the editorial contain stunning figures.

"Municipalities nationwide are running a $574 billion unfunded pension liability, on top of $3 trillion in state unfunded liability. Philadelphia's pension fund is set to run dry in 2015 and Boston's in 2019, when over half of the city's revenue will be dedicated to pensions."

These are staggering sums, and, when added to federal deficits, produce astounding levels of per capita indebtedness for US citizens. Moreover, knowing that large US cities are facing totally-exhausted pension funds before the end of the decade is sobering.

You can't avoid realizing that there will have to be a general reduction of expectations by US citizens regarding government-provided pensions and pensions to state and municipal employees. Unaffordable promises were struck in the past which simply won't be met by the working public's taxes. Either pensions get trimmed, and/or converted to defined-contribution plans, like the private sector, or cities and states are going to file for bankruptcy protection, in order to forcibly alter those pension plan terms.