Freedom Line Blog

Kristina Rasmussen, Executive Vice President of the Illinois Policy Institute, discusses the growing state pension fund crisis and the possibility that the federal government could move to bail them out.

Listen to the interview here.

Over at Ricochet, I have a post today on the inspired example being set by the city of San Diego, a rose among thorns in notoriously misgoverned California. Big labor is currently trying to impede an initiative set for the city’s June ballot that would completely overhaul public sector pensions, moving all new hires (sans police officers) into 401(k) style defined-contribution plans instead of the exorbitant defined-benefit systems that have left the city with a $2.1 billion pension deficit.

While that deserves a hearty commendation, it’s not necessarily evidence of a broader reformist bent. Public pensions, after all, have become the issue du jour in financially strapped cities and states throughout the nation.  What really proves the depth of San Diego’s commitment to good government is the lengths to which the city is going to improve the nuts and bolts of day to day public service. Consider this, from Governing Magazine:

The city also has implemented an effort that creates “managed competition” in which some city departments must offer the lowest bid in order to continue their operations, lest they be replaced with a third-party contractor who can do the job cheaper.

So far, employees who sweep the streets, maintain the vehicle fleet and work in the city publishing shop have all won those bids by pitching proposals that reduced expenses for the city. The next competition will involve the city’s landfill operations. “Employees know where the fat is,” [Mayor Jerry] Sanders said.

Meanwhile, under Sanders’ leadership, the city has shed about 1,800 positions, made pay cuts and freezes, and pushed huge reforms to the retiree health care system expected to save the city at least $700 million over 25 years.

Let’s hope San Diego keeps up the good work. Nothing will do more to undercut the case of California’s regnant liberals than an object lesson showing how successful an alternative model can be.

But it couldn’t happen here. Writing on the online version of the Christian Science Monitor, the Adam Smith Institute’s Jan Iwanik lays out the contemptible plan being used throughout Europe to keep state finances out of the red:

People’s retirement savings are a convenient source of revenue for governments that don’t want to reduce spending or make privatizations. As most pension schemes in Europe are organised by the state, European ministers of finance have a facilitated access to the savings accumulated there, and it is only logical that they try to get a hold of this money for their own ends …

The most striking example is Hungary, where last month the government made the citizens an offer they could not refuse. They could either remit their individual retirement savings to the state, or lose the right to the basic state pension (but still have an obligation to pay contributions for it). In this extortionate way, the government wants to gain control over $14bn of individual retirement savings.

Iwanik then goes on to delineate similar, though less severe plans, in Bulgaria, Poland, Ireland, and France.

Mussolini once summed up his theory of totalitarianism as “All within the state, nothing outside the state, nothing against the state.” Welcome to the millennial version of that philosophy. Who would have thought that Europe’s next generation of fascists would be wearing green eyeshades instead of brown shirts?

CFIF Senior Fellow Troy Senik today reviews the most recent fix-it guide for California state politics in the Opinion section of the Wall Street Journal.  According to Senik the book, California Crackup, does a great job detailing the problems; especially the unintended consequences of pro-taxpayer measures like Proposition 13.  However, the “solutions” section leaves too much off the table – like taking on the mounting pension crisis spurred by public employee unions.

Read the entire column here.

Following on from my column last week, Steven Greenhut, editor-in-chief of CalWatchdog.com, sits down with Reason to explore the excesses of public pensions and public-sector workers in general, especially in California. Enjoy, if you can stomach it:

No, I’m not referring to the recent precipitious decline in global stock markets (though there may be a connection). Instead, I’m talking about the tidal wave of state pension obligations that threaten to put the country’s entire economic infrastructure in peril. From a story in today’s Financial Times:

Joshua Rauh, associate professor of finance at the Kellogg School of Management at Northwestern University said that, without reform, some state pensions might run out within the decade. By 2030, as many as 31 states may not have the money to pay pensions. And, if these funds exhaust their assets, the size of payments for the benefits they have promised will be too large to cover through taxes, putting pressure on the federal government for a bail-out that could potentially cost more than $1,000bn, he says.

For those of you not accustomed to the British rendering, that last number would normally be referred to stateside as a jaw-dropping “trillion” .

But how could this scenario have ever gotten this far? The FT piece explains:

Estimates put the unfunded liabilities at between $1,000bn and $3,000bn after years of states promising benefits but not contributing enough in both good times and bad to cover them.

Many states base their calculations on an 8 per cent annual return and use an accounting method called smoothing, which staggers gains and losses over several years, two factors that some observers warn could mask the size of the shortfalls. The problem has come to the fore with the financial crisis and recession. Pension funds, like most money managers, suffered losses. The tax revenues that fund annual contributions to pensions, along with essential services such as healthcare and education, have plummeted, leaving little room to reimburse the losses.

Assuming that governments can get themselves out of this morass before it’s too late, the only way to prevent a reoccurence is to switch public-sector pensions from “defined benefit” plans to “defined contribution” plans. Mort Zuckerman did a good job of showing why over at U.S. News and World Report earlier this week:

[New York City] pensions are “defined benefit” plans, which are more expensive since they guarantee specific benefits on retirement.

On the other hand, private sector workers in the survey were mostly in “defined contribution” plans, which means that, unlike their cushioned brethren in the public sector, they do not have a pre-determined benefit at retirement. If New York City were to require its current workers to pay contributions toward health insurance equal to the amounts paid by the employees of local private sector firms, the taxpayer savings would approximate $628 million a year. In New Jersey, [Governor Chris] Christie says government employee health benefits are 41 percent more expensive than those of the average Fortune 500 company.

We know when the next bubble is coming.  But with the coming attractions provided by belligerent bureaucrats in Greece, which American politician will be the first to throw himself in front of the union gravy train?