Proposals to solve public pension crisis show magnitude of catastrophe

By   /   October 21, 2010  /   No Comments

By Frank Keegan – Three recent ideas proposed to pay off trillions of dollars in retirement promises to state and municipal workers should help Americans grasp how deep and desperate this inexorable fiscal pit really is and force politicians to tell us what they are going to do about it.  

The wildest idea comes from a Web site calling itself the Center for a Stateless Society that advocates “building awareness of the market anarchist alternative.”

Forget anything as effete and socialistic as free market and libertarian concepts. “Market Anarchism is the doctrine that the legislative, adjudicative, and protective functions unjustly and inefficiently monopolized by the coercive State should be entirely turned over to the voluntary, consensual forces of market society.”

One of those abused functions, according to a recent posting by C4SS director Brad Spangler, is bankrupt government pensions. Only an equity-for-debt swap can save them. And unions must lead the way. Say what?

Says he, “unions can serve as advocates and midwives for a new model of worker-owned privatization that gives rank and file public employees shares of common stock in formerly public enterprises as compensation for the default on pensions that’s inevitably coming, whether they want it to or not.”

Well, states and cities all over America are selling valuable assets to the rich at fire-sale prices – losing revenue streams and often leasing them back at higher cost – as short-term fixes that make their long-term prospects even worse.

Why not give those assets to public workers in exchange for the reckless retirement promises politicians and union bosses made to public workers, now estimated to be at least $1 trillion and probably more than $5 trillion, including municipal pensions?


These are deferred costs citizens must pay one way or another no matter what pension reforms governments impose now.

Soon, retirement costs are going to bleed public services and social programs those who advocate them hold most dear, and force tax increase proposals that could lead to revolt.

A debt-for-equity swap can easily be thought of as an extreme proposal on one side of the solutions debate.

Economists Joshua Rauh and Robert Novy-Marx recently proposed what some might call a rational solution: tax exempt pension bonds.

They advocate that politicians must acknowledge the immensity and intractability of the problem, then “the federal government should cut a deal with states. They should allow a state to issue tax-subsidized bonds for the purpose of pension funding for the next 15 years — if and only if the state government agrees to take three specific measures to stop the growth of unfunded liabilities.”

Those are: a “soft freeze” of defined benefit plans; making annual required contributions, and including new workers in defined contribution plans and Social Security.

Good luck. Count on politicians taking the bond money and going on a spending spree, breaking any promises, leaving taxpayers and public workers holding a bigger, nastier bag.

Think not? Check history. New Jersey and Illinois tried borrowing their way out of debt, and it merely has added to the catastrophe.

According to the Illinois Comptroller Web site, the $10 billion in 30-year bonds issued in 2003 to fix pensions were a good idea because the assumed 8.5 percent “return on investments will be well in excess of the average 5.05% rate of interest on the borrowed funds.” Oops!

State pension fund investments tanked, taxpayers still have to make the bond payments. Worst of all, Illinois pension debt now has exploded to at least $78 billion, according to the Daily Herald newspaper, which won a national award for exposing abuses in the system.

It’s not as if Illinois politicians didn’t know better. The Comptroller even cites the New Jersey example of what would go wrong: “An example of a state losing the pension obligation bond bet is New Jersey which issued $2.7 billion in pension obligation bonds in 1997.  Unfortunately, the equity markets into which these monies were invested flopped between 2000 and 2002.  The result was New Jersey had to continue making the scheduled debt service payment on the bonds, while making higher retirement contributions not forecasted in the original optimistic funding plan.”

But New Jersey did not make the higher retirement contributions then or now. Republican Gov. Chris Christie just skipped the minimum required payment of $3 billion this year, and must come up with more than $6 billion next year about 20 percent of the entire operating budget.

The Illinois Comptroller notes, “Caution should be taken in proposing future issues of pension bonds however, as the timing of such issues may not be as lucky.”

A third solution proposed recently by economics professor Henning Bohn is to just stop funding public pensions and let future taxpayers worry about it.

In “Should Public Retirement Plans Be Fully Funded?” he answers emphatically: NO!

Bohn says, “In a model where most taxpayers hold debt and face intermediation costs, returns on pension assets are less than taxpayers’ cost of borrowing.”

Leave money in taxpayers’ pockets now, and pay public employee retirement costs out of operating revenue when they come due.

He appears to assume state and local governments can continue raising taxes forever.

Spangler, Rauh and Novy-Marx, and Bohn all should do a reality check on their proposed solutions.

But the most terrifying fact is that their ideas are the only solutions on the table right now.

It tells us how bad things are. Every American worker in the declining private sector owes $41,000 – payable immediately in full – to state and local retirement systems just to get them even for benefits already earned. That will not reduce future payments, by the way.

Ask your candidates for governor and legislature what the hell they plan to do about it.

Frank Keegan is a national editor for The Franklin Center for Government and Public Integrity, and . Any disgusted public employee, journalist, activist organization or citizen watchdog who wants help exposing government waste, fraud and abuse may contact him at: [email protected]