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Commentary: True state pension reform begins by taking the hit now

By   /   February 27, 2012  /   No Comments

COMMENTARY By FRANK KEEGAN

State Budget Solutions

New Jersey Gov. Chris Christie and Louisiana Gov. Bobby Jindal could set a national standard of honesty by pushing real solutions for their states’ bankrupt pensions.

Instead, they dangle mirages of reform that merely continue pushing huge costs — plus losses and interest — onto future taxpayers.

If these self-proclaimed fiscally conservative Republican reformers are faking it until they can move up, leaving generations of taxpayers indentured, bet your house every state, city and town politician is doing worse.

Actually, politicians already have bet our houses, businesses, farms and savings on losing pension gambles and lost.

So, taxpayers, get ready for at least 50 years of devastating service cuts and crippling tax increases to pay state and local government costs that deliver no benefits of any kind. Every year our leaders lie, it gets worse.

No matter how much pension investments gain in the future, they will keep falling further behind even if markets never crash — as they did twice in the past decade while politicians promised us they could earn us out of the pension hole.

And many just made it worse by borrowing to invest, sticking taxpayers with bonds to pay off in addition to exploding pension debt.

Christine Todd Whitman, another self-proclaimed fiscally conservative Republican governor of New Jersey, borrowed $2.2 billion at 8 percent in 1997 to invest in a booming stock market and fix state pension plans forever.

How’d that work out? Pension fund managers lost all the money, and taxpayers must pay $750 million every year in principle and interest, according to New Jersey actuary and blogger John Bury.

On top of that, said Bury, the pension debt now is at least $162 billion, and Christie’s “reforms” are “whoppers.”

New Jersey is far from alone. A study by the Center for Retirement Research found that as of 2009, there were at least “2,931 serial POBs (Pension Obligation Bonds) issued from 236 different governing entities, totaling approximately $53 billion ….”

In Louisiana, the public pension plans were born dead. They had no funding and always counted on sticking taxpayers with pension costs forever.

By 1987, even politicians realized that is impossible and pushed a constitutional amendment to require paying off the official $5.8 billion pension debt by 2029, in effect borrowing money from pension plans to pay the pension debt, according to the Pelican Institute.

Guess how well that worked? By 2009, the delusional official debt had doubled and then tripled by last year. But the real shortfall was at least $40 billion. Since then, it has gotten worse.

According to latest full fiscal year data from the U.S. Census, the state’s 14 pension plans paid out $10 billion more than they took in between 2007 and 2010. Investments crashed more than $7 billion, about 20 percent, even as pension obligations increased almost 46 percent, or $16 billion. Louisiana never will be able to earn, cut and tax its way out of this abyss.

So, what does Jindal do with this retirement system even he truthfully says is “unsustainable and irresponsible”?

He follows that truth with lies. The big lie is that the debt is only $18.5 billion. Second is how fast it is growing. Third is that his “reforms” will “save taxpayers over $450 million in the first year and over $1.5 billion over the next five years … free up money at agencies” and “not impact retirement for employees in K-12 schools or employees in law enforcement and other hazardous duty positions.”

While his “hybrid” plan might slow Louisiana’s accelerating plunge into a bottomless fiscal abyss, it still sticks taxpayers with all the risk. More significantly, it would only work, if he could just wipe out the $40 billion existing debt.

In New Jersey, Christie’s lies are even bigger. For one thing, he exacerbated the $150 billion pension debt he inherited by simply not paying the annual pension bill for two years so he could claim a balanced budget.

That is money residents must pay, plus 8 percent compounded interest, no matter what.

Then last week he claimed “courageous” pension reforms “will reduce the projected deficit of the pension system by over $120 billion in 30 years, putting it on a much more stable and sustainable footing for years to come.”

Key words here are “projected deficit.” His plan does nothing about the existing — and growing — pension debt and the fact that New Jersey is not paying it down faster than it grows with his proposed “phased-in increase of the state’s contribution.”

The numbers are inexorable. Census data show that New Jersey’s seven state pension plans paid out $21 billion more than they took in from 2007 through 2010. Investments crashed $10 billion, when they had to grow at least $20 billion just to stay even. Benefits paid increased 20 percent, while income to pay for them fell 25 percent.

And he forgets to mention taxpayers still are picking up a $750 million annual tab for the last time a governor fixed the pension system forever.

The cruelest lie of all is that any of the money squeezed out of taxpayers and young state workers will be around to pay pensions. Politicians blew it and don’t want anybody to know until after they flee.

What’s really scary is that these two governors along with those in 39 other states who have revised or proposed changes to pension plans may actually think they are dealing with the crisis.

That is dangerous. Whitman in New Jersey thought she solved it in 1997, and all she did was make it worse. Louisiana amended its constitution to fix the problem and merely made it worse.

The first thing all governors should do is forget their political careers and be brutally honest about the magnitude of this catastrophe.

The second thing they should do is slam down real, draconian reform proposals that stop — not just slow — the plunge and begin to pay for existing obligations.

Take the hit now.

Frank Keegan is editor of Statebudgetsolutions.org a project of sunshinereview.org. The State Budget Solutions Project is non-partisan, positive, pro-reform, proactive and anchored in fundamental-systemic solutions. The goal is to successfully engage political journalists/bloggers, state officials and opinion leaders in a new way of thinking about state government and budgets, fundamental reforms, transparency and accountability.

frankkeegan@statebudgetsolutions.org

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