Dick Morris: How To Avoid The State Pension Timebomb
Originally appeared at DickMorris.com
Reprinted with permission.
By Dick Morris & Eileen McGann
The Greek fiscal crisis is going to come to the United States next year via the vulnerable state governments of (at least) California, Michigan and New York. Look for these states to descend once more on Washington DC with their tin cups seeking additional federal subsidies, disguised as stimulus payments. But…with Republicans in control of both Houses (bet on it) they will meet a frosty reception on Capitol Hill. While Obama will try to pass the subsidies, the GOP will turn them down. The American people – from the other 47 states – will ask why they should reward state irresponsibility with federal dollars.
Faced with a cutoff of additional federal aid, these state legislatures will be unable to balance their budgets and bond buyers will back off their paper. Ratings agencies will downgrade their bonds to junk status and bankruptcy will ensue.
From there, the fiscal crunch will extend to states throughout the nation and the reduction of state expenditures will assume critical importance at just the time that a slew of Republican governors and state legislators – who have pledged not to raise taxes – will take office.
One area they will look at closely in their efforts to rein in spending will be education. Look for the school choice and voucher movements to get a massive shot in the arm as governors and legislatures seek to find lower cost ways of improving educational quality.
Another key focus will be on reforming state pension systems. The recent crash of 2008-2009 cost the average state pension system 30% of its assets. Already, this crunch will force legislatures to slash current spending on education, highways, law enforcement, etc. to accommodate the needs of their pension systems.
Unfortunately, even though the market was crashing, the pension systems had to keep sending out checks. The result is a shortfall will take 25 years for the average state to make up for the losses they sustained in the few months of the crash and in the two years since. And, should the market crash again (think: Obama’s economic policies and their impact) then the states will find they have to contribute more and more to their pension systems.
Enter a bold new proposal introduced by Utah State Senator Republican Dan Liljenquist for a massive overhaul of his state’s pension system, a bill which was passed and signed into law in March of this year.
The Utah reform changes the pension system for public employees to a fixed defined state contribution so that the state has no longer to raise or lower its contributions to the retirement fund in response to the market fluctuations in the return these funds earn on their investments. It fixes the state contribution each year at 10% of the employees’ salary whether pension fund investments are doing well or doing poorly.
If the investments are tanking and earning too little to sustain the guaranteed benefits, the state would not be obliged to pay more than 10% and the employee would have to make up the difference out of his or her salary. If the investments were doing well, the state would still invest 10% annually and, if this sum came to more than was required to meet the guaranteed benefits, the state worker will get to invest the difference in a personal 401 (k). The worker would not be permitted to borrow against his 401 (k) and would have to invest the funds according to parameters set by the Utah Retirement System so that the savings are not squandered.
Each state employee would also have the option of opting out of the state system entirely. In that case, the state would just forward its 10% annual contribution to the employee’s 401 (k).
This system will start covering all new state workers after July 1, 2011. Existing workers are grandfathered in under the current system.
The Utah bill will allow the state to begin cutting its contributions to the pension system after seven years. For that do not pass this reform, it will take twenty-five years.
States throughout America – and their taxpayers – need to study the Utah system and work to pass it in their states. Cut payments now or get soaked later…that’s the choice for our states and their citizens.
(For further information: dliljenquist@utahsenate.org)
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Aug 9, 2010 at 4:56 PM
Reader Comments (15)
http://globaleconomicanalysis.blogspot.com/2010/08/last-ditch-attempts-by-state-and-local.html
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The problem is politicians, I have a private pension, and if someone got caught jacking around in there, they would be put in prison for embezzlement/ misappropriation of funds (it has happened before in America). State and Federal Governments meddle and "steal" (they say borrow with no wish to pay it back) from the retirements all the time, and then convince the moron class it is somebody else's fault, i.e. the union, etc.. Can we blame all the "IOU's" in Social Security on the unions?
"The answer stretches back decades, covering numerous political administrations and legislative careers at the Capitol, all of whom had a role in spending state pension money on things other than state pensions."
"A lawmaker who has to run for re-election in the relatively near future is more interested in using the money for programs that provide results for the here-and-now than squirreling away money for benefits that won't come for decades," said political observer Charlie Wheeler, who's tracked state spending since the early 1970s, first as a statehouse reporter and now as a professor at the University of Illinois' Springfield campus."
http://www.dailyherald.com/story/?id=375752
http://whatreallyhappened.com/WRHARTICLES/ARTICLE2/budget.html
And then end political careers accordingly...
This has been a long time building, and in typical banker manifesto fashion, blame gets pointed away from the source.
And yet again it circles back to the elected, the unions do not make law, and there are two sides to a negotiation, and both sides must agree.
Just like with Wall Street, it is not the fault of the "asker", as with a child asking for something you do not want them to have, someone must be able to say NO!!
But unlike a child, Wall Street punishes the no's come election season.
WHY WE NEED TO LET STATES GO BROKE
By DICK MORRIS & EILEEN MCGANN
Published in the New York Post on August 10, 2010
Printer-Friendly Version
Federal Band-Aids won't cover the fiscal problems of such states as New York, California, Michigan and Connecticut forever. State bankruptcy and fundamental restructuring of state and local finance -- and labor relations -- is at hand.
Take Connecticut. In the current fiscal year, $2 billion in federal subsidies have helped tide it over the recession -- a hefty share of its $15 billion budget. But these infusions are one-shot grants, renewed only if Congress acts affirmatively to do so. Other states depend on similar manifestations of federal largess.
In Washington, the House is set to pass a $26 billion aid package this week -- fresh federal aid amounting to about 2 percent of state and local spending. But if the Republicans win control of Congress this fall, it is hard to see any legislative willingness to renew these subsidies.
Instead, GOP lawmakers will point to the examples of New Jersey, Virginia and Indiana -- where conservative governors have slashed spending to avoid tax hikes. In Virginia, Gov. Bob McDonnell has reduced spending to pre-2006 levels.
If Congress fails to renew its subsidies, the more profligate states will face cash shortfalls in the current fiscal year. They'll threaten school closures, prison releases and all manner of mayhem if their subsidies aren't renewed. But the Republicans in Washington are likely to refuse -- asking why the responsible states should bail out the spendthrifts in Albany, Sacramento, Lansing and Hartford.
At that point, the bond markets will start eyeing state (and local) balance sheets more critically -- demanding higher rates or even refusing to lend. California won't be the only one trying to get by on IOUs.
But beyond this tale of woe lies a golden opportunity to reform state governments and redress the imbalance of power between elected officials and public-employee unions.
Absent endless federal subsidies, states will simply no longer be able to afford to give the unions everything that they want. And governors -- many of them newly elected Republicans -- will realize that they can't even afford to honor agreements their big-spending predecessors OK'd.
The GOP Congress should then amend the federal bankruptcy law to provide for a way -- now absent -- for states to declare bankruptcy. (Municipalities can do so under current law, but states have no such relief.)
Here's the key: The reforms must require that states abrogate their public-employee union agreements in the bankruptcy process, just as private corporations like Delta and Chrysler have done. The wage hikes, the work rules, the pension plans all go out the window.
Few states will have the starch to cut benefits for those now receiving them. But most will cut pensions for current workers and all will slice them for future employees. Even the threat will be a powerful bargaining tool.
And beyond the fiscal adjustments, the power of the municipal- and public-employee unions will be broken.
Voters throughout America will loudly applaud if Congress tells the profligate states, "Work it out on your own. Don't look to us for a bailout."
President Obama could veto the bankruptcy reforms -- but a Republican Congress need do nothing to assist states in their plight until he relents. All of the political and financial leverage will be on Congress' side.
The result could be the greatest revolution in state and local governance since public-employee unions came on the scene. The public and the voters would get their local governments back, and the grip of public unions will be weakened. It would be the state and local equivalent of President Ronald Reagan's tough stand against the air-traffic controllers' strike.
Politically, the unions that fund and fuel the Democratic Party would be emasculated, dramatically shifting the national balance of power.
Former British Prime Minister Margaret Thatcher's prediction about socialism will have come true for America's states: "Sooner or later, they run out of other peoples' money."
Go to DickMorris.com to read all of Dick's columns!
Not yet, prepare for the worst, but hope for the best... I am still working a few angles...
http://www.thedailycrux.com/content/5492/Bankruptcy/eml