public sector

By GREGORY N. HEIRES

Outgoing New York City Mayor Michael R. Bloomberg added his voice to the nationwide attack on public-employee pensions as he prepared to end his 12-years in office.

In his last major public policy speech, he put his imprimatur on a campaign to reduce the retirement benefits of public employees—a campaign based on overstating and misrepresenting the financial burden that pension obligations impose on states and municipalities.

Bloomberg, in an address Dec. 18 at a luncheon of the Economic Club of New York, warned that pensions are a ticking time bomb that threatens to cripple municipalities financially.

“As a country, we must confront this crisis before that happens,” he said. “It is one of the biggest threats facing cities—because it is forcing government into a fiscal straight jacket that severely limits its ability to provide an effective social safety net and to invest in the next generation,” Bloomberg said. “The costs of today’s benefits cannot be sustained for another generation—not without inflicting real harm on our citizens, on our children and our grandchildren.”

The culprits?

Bloomberg took aim at what he described as a “labor-electoral complex that is undermining our collective future.” And by playing on President Dwight Eisenhower’s warning about the “military-industrial complex,” he made it clear that he wants to be remembered for sounding the alarm about pensions.

So, in Bloomberg’s view, an alliance of politicians and unions is responsible for the financial woes of state and local governments. This ignores how the 2008 financial crisis hurt the earnings of pension funds, the economic downturn caused revenue losses, governments failed to meet their pension obligations, and politicians used pension funds to cover public services.

Now, we don’t want to suggest that warnings about pressure that present and future pension obligations put on governments are entirely groundless. But to a large extent, the warnings are exaggerations and being used to cut the retirement benefits of public employees. They are part of a larger campaign to impose cuts on the public sector.

Last year, pension scare mongers won a victory when a court ruled that by declaring bankruptcy, Detroit could unilaterally change the pension terms of its employees even though benefits are protected by the state constitution. Now the question is whether other municipalities will try use bankruptcy as a tool for cutting or abandoning the defined-benefit pensions of their employees. Decades ago, of course, corporations started using bankruptcy to do just that as they sought to slash the pay and benefits of their unionized workers.

A Bogus Crisis?

A brief released in December by the Center for Retirement Research of Boston College describes the concern about pensions as overblown. And the report, “Are City Fiscal Woes Widespread? Are Pensions the Cause?,” suggests the impact of pensions on the financial troubles of cities and towns is also overstated.

“The question is whether cities across the country are about to topple like dominoes. And whether pensions are the problem,” the report says. “The answer appears to be ‘no’ on both fronts.”

The report examines 181 localities using the center’s database of 173 cities and towns and includes 41 municipalities (some already in the database) cited in press accounts as fiscally troubled. The center’s database represents 40 percent of reported local revenue in the country.

The brief concludes that, “when identifying the source of problems, fiscal mismanagement leads the list.” It adds, “Economic problems, in large part a response to the financial crisis and ensuing recession, come in second. Pensions do play a role, but that role is much smaller than the other considerations.”

Some large cities have serious pension funding problems, but Elizabeth Kellar, president and CEO of the Center for State and Local Government Excellence, says that, “across the country, most cities are in good shape.”

Eighty percent of cities are well funded, according to the center. Its survey of 173 municipalities found that the average amount of money earmarked for funding public pension plans amounts to 7.9 percent of revenue.

The Right Wing Agenda

Steve Kreisberg, director of research and collective bargaining at the American Federation of State, County and Municipal Employees, said public employee pensions took a big hit as a result of the 2008 financial crisis and the falling revenue in the following years. Kreisberg said that the immediate pension shortfall may seem scary, but he noted that pension obligations actually represent a very small percentage of projected gross state product—0.2 percent to 0.5 percent over the next three decades, according to the Center for Economic and Policy Research.

By focusing on the pension shortfalls caused by the drop in revenue following the economic downturn and the losses resulting from the financial crisis, anti-government interests are exaggerating the budgetary woes of the public sector.

“The right wing is using this opportunity to further their agenda,” Kreisberg said.

“The Plot Against Pensions,” a 2013 report by the Institute for America’s Future, examines a campaign by the Pew Charitable Trusts’ Public Sector Retirement Systems Project and the Laura and John Arnold Foundation to manufacture a crisis about public-employee pensions.

“The amount states and cities spend on corporate subsidies and so-called tax expenditures is far more than the pension shortfalls they face,” the report says. “Yet, conservative activists and lawmakers are citing the pension shortfalls and not the subsidies as the cause of budget squeezes. They are then claiming that cutting retiree benefits is the solution rather than simply rolling back the more expensive tax breaks and subsidies.”

Pew has created a scare about public-pension gap by saying governments face a 30-year shortfall of $1.38 trillion, or $46 billion a year. Yet the Center for Economic and Policy Research points out that most of the pension gap is caused by lawmakers raiding retiree pension monies ($77 billion) to cover other public programs and losses related to the 2008 financial meltdown.

Whatever its cause, the $1.38 trillion figure is “dwarfed” by the $80 billion that cities and states spend each year on corporate subsidies, the report by the Institute for America’s Future says. Pension costs only account for 3.8 percent of local and state spending, according to the Center for Retirement Research of Boston College.

A former Enron executive, billionaire John Arnold advocates replacing traditional pensions (which guarantee a steady retirement income based on a worker’s years of service and salary) with risky “cash balance” and 401(k)-like plans. That would be a windfall for Wall Street while subjecting the nest eggs of public employees to the uncertainty of the market.

We need to get some perspective on this before we join the Bloomberg-Pew-Arnold campaign to gut the retirement benefits of public employees.

Last year, New York Times columnist Paul Krugman pointed out in a blog post (appropriately titled “The Great Pension Scare”) that state and local governments are underfunding their pensions by 3 percent of their $850 billion annual payroll, which amounts to $25 billion a year.

“A $25 billion shortfall in a $16 trillion economy,” Krugman writes. “We’re doomed!”