EnduringSense

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Posts Tagged ‘Public’

Public Pension Funds Crisis Looming

Posted by Steve Markowitz on September 10, 2015

Defined benefit pension plans are a thing of the past for most private companies.  Those plans guarantee payments to retired employees based on years of service.  While a wonderful concept that was viable when American industry had little competition following World War II, these plans became untenable as worldwide competition increased.  As a result, most American businesses that offer pension plans have moved to 401(k) &plans whose funding requirements are more flexible and can be kept in line with a company’s economic realities.

In defined benefit pension plans, the real costs are hidden within complex actuarial tables that require assumptions on long-term returns.  Should the assumptions be overly optimistic, which they often are, what may look like a financially healthy company quickly become insolvent.

While most of the private sector has addressed its pension responsibilities, the public sector still offers many governmental employees defined benefit pension plans.  This has created a dangerous economic model for many municipal and state governments, which is being exasperated by decreasing returns for pension plan investments.

Timothy W. Martin’s recent article in the Wall Street Journal highlights the growing problem of public-sector pension plans.  The problem is being brought to a head as long-term plan assumptions by necessity are being decreased due to the long term economic downturn and low interest rates available on fixed income investments.

Historically, annual pension return assumptions have been set at 8%.  This assumption was used to calculate the rate of growth of pension fund investments.  This rate of return has not obtainable for some years.  However, the 8% return rate assumption was maintained by pension fund managers as a way of masking problems within their funds.  As a result, states and municipalities were able to underfund their plans and push liabilities off to a future time.  That time is rapidly approaching.

Martin points out that:

  • Over 60% of state retirement systems have cut their assumptions in the past seven years with the average now being just under 7.7%. This Blog proffers the view that even this lower assumption is overly optimistic.  In fact, it has been reported that for the first half of this year the average annual return for pension funds was less than 4%.
  • Last week one of the nation’s largest public pension funds, the New York State Common Retirement Fund, cut its return rate a half a point to 7%. Similarly, the San Diego County Employees Retirement Association cut its assumption quarter point to 7.5%.  The Oregon Public Employees Retirement System and Texas Municipal Retirement System have also lowered their forecasted return rate by a quarter point.
  • America’s largest public retirement fund, The California Public Employees’ Retirement System, is considering dropping its current return assumption rate from 8%.

While lowering the return assumptions by state and local governments is ultimately a positive step, forcing governments to adequately fund their pension obligations, there is significant pain associated with this action.  Increased taxpayer dollars will be required to fund the pension plans.   This will decrease funds available to support governmental services.  For example, Martin reports that Boulder, CO has eliminated 100 positions and cut services in order to add $1.7 million to its pension fund.

States and municipalities have increased their funding of pension programs by over $120 billion in the past 10 years.  That would pay for a lot of government services!

*******

Pension problems for state and municipal governments will grow significantly since even the new lower assumptions are overly optimistic.  In the 1960s, for example, return assumptions were less than 4%.  Should pension fund returns approach those levels, the result would be catastrophic.  As Martin points out, every 1% decrease in a fund’s returns leads to a 12% increase in the pension’s liabilities.

While the looming public pension crisis was created by state and municipal governments using unrealistically high return assumptions and offering benefits that they could not afford, the problem has been exasperated by the low interest rate policies of the Federal Reserve that further depresses fund returns.  This is one example of the significant consequences of the Fed’s interventionist policy that has distorted expenses for some, cajoled investors into higher risk investments as they seek returns, and created bubbles including overpriced equity valuations. These problems are just now beginning to percolate.  When they boil over, books will be written on the fallacy of the Federal Reserve’s low interest rate policies.

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Public Sector Employee Pensions Devouring Tax Revenues

Posted by Steve Markowitz on February 4, 2015

Often proponents of big government justify the related spending on some supposed some altruistic motive. On the Left the justification often relates to helping the less fortunate, education and “investing” in infrastructure. The Leftists also promote their share of crony capitalism by backing pet projects such as green energy, the education and the social services industries.

While the Right likes to portray itself as fiscally conservative, they too are not against spending on favored program programs that often include defense spending with its industries also benefiting from the corporate welfare, crony capitalism. The proof is in the budgetary deficits that have increased under both Democratic and Republican administrations, although Barack Obama has taken this to new heights.

One of the incestuous relationships between government and special interest resides with public sector employees. This con game is simple.   Politicians promise public sector employees increased wages and benefits in exchange for their political support. For pension benefits, they hide the real cost to taxpayers through unrealistic actuarial assumptions that temporarily mask the deficits these increased benefits create.

Steve Malanga wrote an op-ed last month in the Wall Street Journal titled The Pension Sink Is Gulping Billions in Tax Raises that lays out the insidious effects of the incestuous relationship between politicians and government employees. Malanga points to specific examples of the growing crisis in state and public employee pension funds that include:

·      This year California will need to increase funding for its employee pensions by $1 bil. The funding increase will grow to nearly $4 bil. by 2021.  This increase funding will basically offset a $6 billion annual tax increase that Gov. Jerry Brown promised Californians would be used to improve public schools. Instead, it was in actuality a benefit to state workers.

·      The pension situation in Pennsylvania is also dire. According to the PA Association of School Administrators, nearly every district in the State has increased pension cost for 2014 with three quarters of the districts having increases of at least 25%. This will require higher taxes for the benefit of the State’s public employees. The situation in Philadelphia is even worse with its school system’s pension bill of $55 million in 2011 increasing to $139 mil. in the current fiscal year. At the same time, the school programs are being cut due to lack of funds.

·      West Virginia has had to allow its municipalities to raise taxes to fund their pension challenges. Its largest city, Charleston, added $6 million in local sales taxes to go on top of the $10 million it already contributes to that City’s retirement program.

·      Illinois municipalities reported that their pension funds are only 55% funded. For example, in the early 1990s Peoria spent 18% of its property tax on pensions. That is grown to about 57% this year, clearly an unsustainable number. Chicago’s pension fund is only about 35% funded, a disaster waiting to happen.   It is estimated that the Windy City’s pension bill will be nearly $1 bil. next year, requiring a huge increase in property taxes. On a statewide basis, it is estimated that over the next three decades nearly $150 billion of increased taxes will be required in Illinois.

This is a national problem. The estimated total shortfall for the United States for municipal pension funding is between $1.5 tril. and $4 tril. Assuming the absence of radical pension reform, i.e. cutting benefits, these shortfall will have to be made up by whopping increases in taxes that will not add to the benefit or social welfare of any, but public employees.

The public employee pension crisis began decades ago with politicians of both parties, but with a strong tilt towards the Democratic Party, buying votes by offering benefits that states and municipalities could not be afforded, but would not become problematic until sometime in the future. Detroit, which declared bankruptcy in part because of its huge pension obligations, is but a in the mine.

While the pensions problem can still be rectified, it would not be without significant pain.   Taxpayers will have to pay more for not managing their politicians better, and public sector employees will have to receive less since much of the overpromising of benefits was based on an incestuous relationship with politicians. It is likely that neither these special interests will give in easily, but instead will wait until the can can no longer be kicked down the road.   The likely result will be many more municipal bankruptcies. The irony is that many of the union leaders and politicians who are responsible for creating the pension crisis will be living off fat taxpayer sponsored pensions benefits.

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Obama Administration Admits Government Cannot Match Private Sector Efficiency

Posted by Steve Markowitz on December 2, 2013

This past Sunday the Obama administration released a statement concerning the Obamacare website, healthcare.gov.  It included the following rather remarkable quote:

While there is more work to be done, the team is operating with private sector velocity and effectiveness, and will continue their work to improve and enhance the website in the weeks and months ahead”.

Finally, even Progressives are getting the idea when it comes to ineffectual government.  This was not lost on even the usually Left-leaning NBC when its reporter Chuck Todd said on last weekend’s Meet the Press (see video below): “That is an acknowledgement that, ‘You know what?  If this was a government operation for a long time and it failed, now we’re bringing in the private sector folks.’  I mean, that is an indictment on the whole idea of government as a solution, frankly…

President Obama, through his failed programs, has done more to hurt the cause of expanded big government than any Tea Partyier could have hoped.  Quite remarkable!

 

 

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Union Membership Continues to Shrink

Posted by Steve Markowitz on January 29, 2013

CNNmoney  has published the statistics on union membership in the United States showing its continuing decline, especially in the private sector.  Totally union membership now represents only 11.3% of the American workforce, approximately same percentage as in 1916 and down from its high of 33% in 1953.

A look at the division of union membership between the public and the private sectors tells an even more telling story.  In the public sector nearly 36% of workers are unionized compared to just under 7% in the private sector.

The small percentage of union representation, especially in the private sector, brings into question President Obama’s and the Democratic Party’s pandering to unions.  First, it demonstrates how divisive and in fact radical the Democratic Party has become, over representing the fringes of society.  Also, the large amount of funds that the Party receives from public-sector unions corrupts as they are in essence payoffs for the government giving big contract concessions.  Without this incestuous relationship the government would more likely represent the taxpayers’ interests instead of those of union bosses.

One indication of how radical the modern-day Democratic Party has become is found in the words of one of its founding fathers, Franklin Delano Roosevelt, who said of public employees collective bargaining rights:

All Government employees should realize that the process of collective bargaining, as usually understood, cannot be transplanted into the public service.  …… Particularly, I want to emphasize my conviction that militant tactics have no place in the functions of any organization of Government employees.”

Fast-forward 60 years and Americans who agree with FDR on this issue are demonized by Obama and his Party.

 

 

 

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126 Children Sexually Abused in Just One LA School

Posted by Steve Markowitz on December 13, 2012

Last week newsbusters.org published on a horrifying story about child abuse in Los Angeles, California.  In one LA public-school alone, the Miramonte Elementary School, an additional four lawsuits have been filed against the Los Angeles Unified School District, bringing the total to 189 claims brought against the school on sexual abuse charges involving 126 students.

The mainstream media has been silent on this growing scandal in Los Angeles.  As Blog reader Jim Mahoney said when forwarding in this story: “I can’t believe we haven’t heard about this.  I guess if it involves liberal teachers’ union members it isn’t as newsworthy as the Catholic Church.”  Another nail in the coffin of the claim that the mainstream media is not biased.

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As Deficit Rises, Government Workers Benefit

Posted by Steve Markowitz on July 28, 2010

We are two-years into a nasty recession.  Private businesses continue to struggle with the weak economy and are forced to cut costs to survive.  The government has also been affected with massive shortfalls in tax revenues.  However, unlike the private sector, instead of tightening its belt the public sector has massively increased spending and run record deficits.

Some argue that the government must increase spending in recessions to offset the decrease in private sector economic activity.  There is justification for this argument, but there is no justification for public employees faring better than their private-sector counterparts while the government’s income is down.  The Wall Street Journal has reported just that with the following comparisons from the Labor Department:

  • 88% of state and local government workers have access to employer-sponsored medical plans, compared to 71% in the private-sector workers.
  • Government employers paid 89% of medical premiums for their workers, compared to 80% in the private-sector.
  • 9 out of 10 government employees had retirement plans, compared to 65% in private-sector.
  • For lower paid government workers (lowest 25%), 69% were eligible for medical benefits, compared to 38% in the private sector.  74% of these government workers are eligible for pension plans, compared to 40% in the private sector.

As the government grabs power, it adds workers and increases their compensation even when there are huge shortfalls in tax collections.  This higher pay does not result from a benevolent feeling toward workers.  Instead, it helps insure that the bureaucracy gains power and also insures that government workers will vote for those that will perpetuate the corrupt system.

Posted in Debt, Deficits, Government Ineptness, Government Spendning | Tagged: , , , , , , , , , | Leave a Comment »