Freedom Line Blog

After decades of kicking the financial can down the road, some of America’s biggest cities now want to try throwing it up the ladder.

Starting January 1, Detroit will move its retirees to Michigan’s federally-run Obamacare exchange. Instead of the previous full coverage paid for by taxpayers, each retiree will get a $125 monthly stipend. The move is projected to save the city roughly $120 million.

Chicago and other cash-strapped cities are considering similar options.

But the move to offload state and local obligations onto federal taxpayers is just getting started. Writing for City Journal, Steven Malanga explains that municipal debt related to unfunded pensions far outweighs the amount owed to retiree health benefits.

To big city mayors the solutions, of course, are identical – Ask Uncle Sam for a bailout.

At some point, America’s entitlement culture – up and down the socio-economic ladder – has to take a back seat to fiscal reality. We’ll see if enough people are ready to have such a debate when the 2016 presidential election rolls around.

“Most of the 50 local governments with the largest pension debt have worker retirement liabilities that are greater than their annual tax revenue, according to a new report from the credit-rating firm Moody’s,” says the lead in a Washington Post story.

The emerging leader in the deepening pension saga is Chicago, whose “pension liabilities were equal to 678 percent of its revenues as of 2011,” notes US News & World Report.

Here are the others in the top (or is it bottom?) ten:

Rank Debt Issuer Pension Liabilities as Percentage of Revenue

1. Chicago 678.2 percent

2. Cook County (Ill.) 381.6

3. Denver County School District 1 341.6

4. Jacksonville, Fl. 326.9

5. Los Angeles 324.5

6. Metro. Water Reclamation District of Chicago 323.4

7. Houston 312.4

8. Dallas 292.5

9. Clark County (Nev.) School District 259.1

10. Phoenix 240.2

Michael Warren of The Weekly Standard has some analysis of a big name running for a little known office that should gets lots of attention.

In the piece, Warren explains how Eliot Spitzer – disgraced former New York Governor and current candidate to become New York City’s Comptroller – would use the powers of the obscure financial office to foist a liberal political agenda onto corporations.

The key to the scheme is the $140 billion worth of public employee pension funds that Spitzer would be in charge of administering. If elected, Spitzer plans to use the money invested in private companies as leverage to demand corporate policy changes in-line with his political agenda.

Of course, that’s not what the job of the NYC Comptroller is designed to do.

“As Yale law professor Jonathan Macey says, the comptroller’s top duty is to get a good return on the city’s investment of its pension funds. ‘It’s a public trust,'” Macey tells Warren. “‘His fiduciary responsibility is to maximize the returns of the beneficiaries.'”

“But what Spitzer is proposing instead—in interviews, in articles, and in his new book, Protecting Capitalism Case by Case—is to use the power of public-employee pension funds to influence corporate policies. Ostensibly, he’d do that for the sake of the public good. What’s more likely to happen is that Spitzer will use the city’s power as shareholder to extract concessions from corporate America that further a populist liberal agenda.” (Emphasis added)

Along with Troy’s excellent column this week, this is yet another reason for New York voters to reject Eliot Spitzer’s political comeback bid.

Steven Greenhut in City Journal has an update on California’s nascent pension reform deal:

Despite its relatively modest contents, AB 340 has been bitterly denounced by public-employee unions. “The pension proposals outlined today represent a retreat from collective bargaining and basic principles of retirement security,” said one firefighter-union official in a press statement. Union officials obviously don’t want the state capping pensions. The unions would prefer to work out “reforms” at the collective-bargaining table, where they exert the most power and often control both sides of the negotiation (union officials and city staffers sometimes belong to the same union, and many city council members get elected with union support).

But just because the plan is angrily opposed by unions doesn’t make it a good one. “Let’s be clear,” said assembly Republican leader Connie Conway, “the Democrat proposal is no substitute for serious reforms to get our public employee pension crisis under control. This is no time for the liberal majority to pat themselves on the back and say the job is done.” Indeed, AB 340, designed mainly as a fig leaf for a big tax increase, won’t fix the state’s massive pension problem. It’s a minor reform at best—and sadly par for the course with this governor and legislature.

All true.  But I submit there is still a silver lining.

Last week I posted some thoughts on this issue.  In those remarks I said that any real reform is welcome, if only to set the table for larger, more substantive changes in the future.

While more can and should be done to address California’s $500 billion in unfunded pension liabilities, this kind of “fig leaf” is welcome, if inadequate.

Here’s one reason to be cautiously optimistic about a pension reform deal announced between California Governor Jerry Brown and state Democratic lawmakers:

California’s public pensions are currently governed by a patchwork of contractual agreements and retirement-system rules. The deal, likely to win approval in the Democratic-controlled Legislature, would bring most of those systems under the same pension standards.

Yes, as critics correctly point out, Brown’s deal with his fellow Democrats is “insufficient to cut billions of dollars in unfunded obligations on governments’ books.”

But the value in Brown’s pension reform deal is that for the first time most of the state’s public employees will be under the same set of pension rules.

This is important for at least two reasons.

First, it makes the pension liability problem more understandable for everyday Californians.  Sure, we all know the state’s unfunded liabilities are huge – around $500 billion according a Stanford study – but what good does knowing that number do if reform opponents can sidetrack reasonable debate by citing a dizzying array of competing pension rules?  By consolidating most public employees under the same standards, citizens can begin to see the pension crisis in a simpler, more straightforward way.

The other potential improvement is related to the first.  Brown’s deal sets the table for a future reformer to make the changes Brown’s critics want now.  No one expects Brown to be that guy, so why not welcome a plan that at least moves the ball in the right direction?

Besides, a pension reform deal like Brown’s that puts most of California’s public employees under the same standards means that a future governor will have that many less obstacles to achieve the cost savings the state needs to get back its golden sheen.

H/T: Governing.com

The Manhattan Institute is honoring Rhode Island Treasurer Gina Raimondo for doing the seemingly impossible – reforming a Democratic state’s public pension system so that it starts to realize savings within years, not decades.  (The key is changing the contribution and pay-out systems for everyone, not just new hires and non-vested employees.)

But beyond dollars and cents, Raimondo made an appeal that should convince people whether it’s made by her or Paul Ryan.

Without real reform, Rhode Island’s annual pension costs would soar by hundreds of millions of dollars a year — a large figure in a state of one million residents. Raimondo emphasized that the ever-rising demands of the pension system would mean less money available for education and municipal services, and a deterioration in the effectiveness of government.

The emphasis is mine, but it is one Raimondo shares.  Government must do (some) important things and in certain areas it can even do nice things, but it cannot afford to do anything if a policy item starts to eat up the entire budget.

Hat tip to Rep. Darrell Issa (R-CA) and his staff at the House Committee on Government Oversight for sharing this “Myth v. Fact” explanation via email of the USPS’s alleged overpayment into the federal retirement system.

Myth: The Postal Service has overpaid by $50-$75 billion into the Civil Service Retirement System and Congress owes this money back.

Fact: There is no Postal Service overpayment.

The United States Postal Service was created in 1971 from the old Post Office Department in order to provide better mail delivery and let it act more like a business. In 1974, the Postal Service agreed to a formula to share the retiree costs of individuals who worked for both the Post Office Department and the Postal Service, calling it “proper, as a matter of principle.” Now, with revenues declining, the Postal Service argues that that formula is unfair. The Postal Service argues that if a formula it considers to be fair had been used instead, then it would be owed $50-$75 billion by the US Treasury.  This is an attempt to rewrite history. The original formula was instituted as part of a broader set of decisions concerning the creation of USPS.  For instance, those decisions included not charging any fee to USPS in return for the postal monopoly it was granted.  Another reason why it makes little sense to speak of an overpayment due to USPS is that the Postal Service had a clear requirement from 1971 until 2006 to raise postage rates to cover all costs, including its cost of retirement funding.  If a different formula had been used all these years that had resulted in lower annual payments by USPS for its federal employee retirement costs, those savings would have been used to lower the cost of postage rates.

Issa’s postal reform bill is up for consideration in a congressional subcommittee today.  You can get more information on his version of postal reform at this website.

Politico highlights how the budget battles between the Tea Party and Big Labor are threatening to shift firefighters and police officers into the Democratic Party, setting up a dilemma for fiscal conservatives.

The blowback from unionized first responders is being felt by Republicans in Ohio, New York, and Wisconsin.  In the latter, Republican Governor Scott Walker tried to exempt police and fire from the ban on public employees collectively bargaining, but they still refused to follow his order to remove protesting teachers from the state capitol.

Ironically, Politico quotes one police union leader saying his members are going to hold pro-union Republicans “accountable” for the cuts being made to balance state budgets.

Apparently, it’s a different kind of accountability than one based on sustainable funding formulas.  If the GOP is serious about reining in runaway government spending, it’s going to have to take on all public employee unions, and demand lower compensations (e.g. pensions, buy-outs, overtime, retirement eligibility, etc.).

We’ll see who has the stomach to make that case anytime soon.

In a characteristically well written piece Matt Bai identifies several political skills wielded by New Jersey’s dynamic governor.  Among them, Chris Christie’s ability to humanize mundane issues like pension policy stand out.

The theme of the week was pension-and-benefits reform, and in his introductory remarks, Christie explained the inefficiency in the state’s health care costs not by wielding a stack of damning statistics, as some politicians might, but by relating a story.

When he was a federal prosecutor, Christie told the audience, he got to choose from about 100 health-insurance plans, ranging from cheap to quite expensive. But as soon as he became governor, the “benefits lady” told him he had only three state plans from which to choose, Goldilocks-style; one was great, one was modestly generous and one was rather miserly. And any of the three would cost him exactly 1.5 percent of his salary.

“ ‘You’re telling me,’ ” Christie said he told the woman, feigning befuddlement, “ ‘that no matter which one I pick, the good one or the O.K. one or the bad one, I’m going to pay 1½ percent of my salary?’ And she said, ‘Yes.’

“And I said, ‘Then everyone picks the really good one, right?’ And she said, ‘Ninety-six percent of state employees pick the really good one.’

“Which led me to have two reactions,” Christie told the crowd. “First, bring those other 4 percent to me! Because when I have to start laying people off, they’re the first ones!” His audience burst into near hysterics. “And the second reaction was, of course I would choose the best plan,” Christie said, “and so would you.

Bai goes on to report seeing Christie’s mixed race audience nodding in agreement that public employees should be required to pay more for the better plan.  As Christie says, this isn’t rocket science, just common sense.  His ability to relate hard truths in understandable terms is a unique gift shared by the likes of Bill Clinton, Ronald Reagan, JFK, and FDR.  Not bad company for a guy from New Jersey.

If you ever doubted the indivisibility of disparate Leftist causes, then for proof look no farther than Madison, WI.  A community organizer-turned-POTUS is sending his minions to supplement Badger State public employee unions.  Jesse Jackson is leading a march in support of workers’ rights.  (Apparently, the only color in Jackson’s Rainbow/PUSH Coalition these days is red.)

All we need now is a cadre of eco-friendly celebrities to descend on the Wisconsin state capitol and declare their love for collective bargaining (while demanding A-list treatment in their next film contract).  With the battle over union overreach spreading to other states, this may the beginning of a very tense year in states across the country.

Florida Republican Governor Rick Scott unveiled his much-anticipated budget proposal on Monday in front of a crowd teeming with Tea Party activists.  Slashing $4.6 billion from last year’s budget, Scott takes aim at many sacred cows.  AOL News lists the five most controversial:

(1)   10% cut in education spending

(2)   Eliminating 1,690 jobs from the Department of Corrections

(3)   An 8,700 overall reduction in the state government workforce

(4)   Tax cuts worth $4 billion

(5)   A $4 billion Medicaid reform

None of these changes, however, may be as consequential as Scott’s proposal to require state public employees to start contributing 5% of their paychecks to their pensions.  If state retirement funds are ever to become solvent the employees who benefit from them will have to put some money in the kitty.  Scott also wants to put new state hires into a 401(k)-type retirement system, a shift that would move the state toward a pension system of defined contributions instead of defined benefits.

If Scott is successful in Florida other states might follow suit.  For the sake of taxpayers in the Sunshine State and beyond, let’s hope he prevails.

The Wall Street Journal‘s Daniel Heninger explains why the New York State Comptroller race is the most important race no one has heard of:

In a year or two, we may look back on the City of Bell public employee compensation scandal as the modern day equivalent of Upton Sinclair’s The Jungle.  Both stories showed the general public how bad a particular industry behaved, and prompted serious, far-reaching reforms.

The chief villain in the Bell fiasco (so far) is its former city manager Robert Rizzo.  At the time of his resignation, Rizzo was making close to $800,000 a year, and due to earn hundreds of thousands of dollars a year from his public employee pension.  Now that he’s retired, the pension is kicking in – and so are taxpayers in cities that share Bell’s pension pool.

That means that Hesperia, CA, is on the hook for $80,000 of Rizzo’s estimated $600,000 a year pension (not to work!), even though it fired Rizzo after his four year stint ended in 1992.  Taxpayers in Rancho Cucamonga will be paying $160,000 of the bill, with Bell and other cities who never even hired Rizzo chipping in the rest.

And remember, the estimated $600,000 is owed to Rizzo – by law – every year for the rest of his life.  After being fired by at least two of the cities that hired him.  Insane.  Public employee pension reform may not be a “sexy” issue on the campaign stump, but it is certainly a topic that is sure to get people’s attention during this era of runaway government spending.

The Bell scandal may be the the last, best chance to reign in the power of the public employee unions before they ruin the American economy.

Once CFIF reported on the outrageous compensation packages of top city officials in Bell, CA, the city council announced the following resignations just after midnight today: Chief Administrative Officer Robert Rizzo ($787,637 annual salary); Assistant City Manager Angela Spaccia ($376,288); and Police Chief Randy Adams ($457,000).

Although none of the three will get severance packages when they leave, all will get substantial taxpayer-funded pensions not to work.

Rizzo would be entitled to a state pension of more than $650,000 a year for life, according to calculations made by the Times. That would make Rizzo, 56, the highest-paid retiree in the state pension system.

Adams could get more than $411,000 a year.

Spaccia, 51, could be eligible for as much as $250,000 a year when she reaches 55, though the figure is less precise than for the other two officials, the Times said.

The reason these pensions are so high is simple.  In California, many state workers get pension awards based on their highest income earning year.  All the years of lower pay – decades’ worth! – are ignored.  Since the pension amount is a percentage of the worker’s best paid year, abuse is rampant.

Anyone familiar with the system knows a police officer, firefighter, state nurse or other public employee who arranges to get tons of overtime during their last 1 to 3 years of service.  Since overtime boosts a person’s highest annual income amount, it inflates the resulting pension percentage.  This allows thousands of California public employees to retire in their 50s making hundreds of thousands of dollars per year – for life – not to work.

In fact, that’s exactly the kind of retirement Bell Police Chief Randy Adams was enjoying when Bell officials approached him for the job.  Adams had retired as the police chief of Glendale, CA, and said he would only work for Bell if the city paid both his $165,000 annual salary and the amount he was making in retirement.  If we subtract $165,000 from his annual compensation of $457,000, we can see that Adams was making $262,000 a year in retirement.

This is insane.  The public employee unions who negotiate these kinds of ridiculous contracts – and the politicians who sign off on them – have corrupted both the budget process and the integrity of their offices.  A reckoning is coming at all levels of government for precisely this kind of behavior.  The “Bell Three” are just the first of many to be rung out of office.

H/T: FoxNews.com