How will unfunded “pensions” affect the local economy?

[CA renter]

[quote=harvey]Tony “Mack” Rodriguez, a retired sergeant on the Desert Hot Springs police force describes how the situation came about. “The union told us that the revenue estimates were unrealistic, and we should do something about it. We were talking about deferring some raises, or maybe cutting back overtime. We had a plan.”

But Rodriguez said the union proposal never made through because of interference from a number of investment firms. “Our plan never got too far. These Wall Street guys came in and made us take raises. They increased the pension payouts and lowered the retirement age. They were ruthless, there was no stopping them.”

Now Rodriguez , 51, is not working but is forced to receive 90% of his prior salary of $132.000. “I’m stuck with these paychecks, for life” he said. “I could live till I’m eighty-five, and I’ll have to deal with this for the next thirty years.”

The situation has required him to fill his garage with motorsport vehicles he rarely uses. He recently was forced to purchase a fifty foot RV. “We had to buy a bigger house because of all this stuff” lamented Rodriguez. “I even had to get a disability tax break because the Wall Street guy told me that my knee hurts.”[/quote]

FYI, it was indeed the Wall Street/financial geniuses who convinced public leaders that they could enhance pension benefits during the internet/stock market bubble *at no additional cost.* While the boots-on-the-ground workers certainly didn’t oppose the benefit enhancements (would you?), the unions more certainly DID warn public agencies that reducing the pension contributions to zero during the bubble years would result in underfunded pensions down the road when the market corrected. They were right.

And why didn’t govt leaders want to fund the pensions during the good times? They did it so that they could take care of other stakeholders, like public contractors (a HUGE problem in local governments) and advocacy groups who wanted their various pet projects completed since all of that “extra money” was just sitting around doing nothing. This is why it’s almost impossible for government leaders to save for a rainy day: every stakeholder is watching the funds and will demand, on a daily basis, that the money be spent on their personal projects and ideas.

[CA renter]

Local and state governments have been spending freely on other things, too. The point is that pensions are only ONE small part of the puzzle. In the case of California, pension contributions represent approximately 3-5% of the state’s expenditures. On a local level, it’s quite a bit higher, though it still varies greatly, depending on the location (high RE prices/taxes, vibrant economy with higher income and sales taxes).

Some local agencies will be in a particularly bad spot because the communities they serve present a double whammy for them: low taxes (property, sales, and income) and a much higher public service burden. These are communities where the houses cost less or where more of the homes are owned by old-timers or landlords who are paying the old Prop 13 taxes, so the property taxes are lower. They also tend to have lower income taxes, where applicable, and lower sales taxes if the community, in general, is poor and there’s not enough high-end commercial RE to boost sales tax revenues. It’s these communities that will also tend to have a much higher crime problem, requiring more cops, often at a higher cost than in more affluent communities (because most cops will move to a nicer area, all else being equal).

And their fire departments will require more personnel and more equipment because these communities will have more crime victims, overdoses, and more patients who will call 911 for medical care vs. going to a doctor and utilizing preventative care measures, etc. They will also have more buildings that have been illegally altered and added onto…resulting in more fires, etc.

It’s a pickle for the govt leaders who try to “do the right thing” by their constituents by providing the necessary services, while also trying to manage a smaller and more volatile budget, as revenues and spending in these communities tend to be affected more by general economic trends than agencies in more affluent areas are.

[Anonymous]

Wow. Not a hint of compassion in your posts.

There are lot of Macks out there, on the golf courses, in the RV parks and marinas — yes they’re out there. They can be easy to miss — their youth masks their retiree status — but they’re out there. Victims, all of them.

What about Mack? Who will rescue Mack from Wall Street?

[phaster]

[quote=CA renter]Many have defined benefits, and DB plans were the norm a few decades ago…you know, when the middle class and the economy were at their strongest.[/quote]

That era back in the 1950’s and 1960’s was IMHO an anomaly in world history, because the USA was the only super power in terms of military and manufacturing.

Consider that Japan and Germany back then had no manufacturing base, so DB were a way to instill worker loyalty (or said another way, DB came about because of a good economy, DB for the “middle class” didn’t create a good economy).

Now with workers in the USA having to compete with workers in not only Germany and Japan, one also has to contend with workers in China, Brazil, etc., so it makes sense that pensions in the private sector for USA workers are no long possible (its the double edge sword of a capitalistic economy). In other words it was inevitable that living standards of people around the world would rise, but since the USA was no longer the only game in town for manufacturing, the standard of living for those with more brawn than brain would fall.

Was reading someone mentioned the dangers of the military industrial complex, actually the concept should be updated IMHO.

Specifically what was once the danger of nepotism w/ the military and their contractors, is paralleled all around the nation (not just here in CA WRT pensions), I just think its going to hit SD first because it has all the right conditions for an economic implosion of biblical proportions!!

The entrenched problem is the “political-legal welfare system” which is the tendency of politicians to pander to public employee unions for political support in a bid to get into or retain an office. The “Quid pro quo” in this instance is a literal “sweet heart deal” payoff when it comes time labor talks. In economic terms, the idea of a public employees union is bad because the interests of politicians and public employees is the same (they are seeking shelter form the “real world” where global competition is now the norm, and DP in the private sector are history)

FDR long ago recognized the problem w/ public employee unions when he said:

“The very nature and purposes of Government make it impossible for administrative officials to represent fully or to bind the employer in mutual discussions with Government employee organizations.”

http://www.politifact.com/wisconsin/statements/2013/aug/13/scott-walker/Did-FDR-oppose-collective-bargaining-for-governmen/

From what I understand of economic, unions in the private sector work because there is alternatives which over the long run makes the product better and lowers the cost (i.e. products like cars and computers).

Now consider what has happened to public services here in SD, have the roads been kept up or are they in disrepair? WRT public schools, what I’ve read is the traditional “factory” one size all school is giving way to new “organic” centers of learning, like high tech high in point loma, albert einstein charter school in golden hill, etc.

[quote=CA renter]The worst employees tend to leave before benefits vest to any large extent. That doesn’t mean that some dead wood isn’t hanging around after too many years — and I absolutely support making it easier to fire truly bad employees.[/quote]

could not agree more, and think this concept should be extended to entrenched politicians (both on the left and right) because it seem they enable lots of the problems:

http://patrick.net/forum/?p=1247288&c=1114955#comment-1114955

[CA renter]

[quote=harvey]Wow. Not a hint of compassion in your posts.

There are lot of Macks out there, on the golf courses, in the RV parks and marinas — yes they’re out there. They can be easy to miss — their youth masks their retiree status — but they’re out there. Victims, all of them.

What about Mack? Who will rescue Mack from Wall Street?[/quote]

Bullshit. Very few can retire at 50 with full benefits because they’d have to start at 20 to do so.

And talk about a lack of compassion. You think nothing at all about taking away someone’s compensation that was already earned over many years. If you think that’s a good idea, great; you can step up to the plate and reduce your own pay and donate that to a public agency of your choice…you know, to help out the poor taxpayers and all. That’s what you’re asking these public employees to do, so you should be happy to serve as a role model, right? IIRC, you didn’t favor clawing back compensation of the people who caused the mess in the first place — the Wall Street scum who’ve made *far more* than any cop, firefighter, or teacher in the U.S.

[CA renter]

[quote=phaster][quote=CA renter]Many have defined benefits, and DB plans were the norm a few decades ago…you know, when the middle class and the economy were at their strongest.[/quote]

That era back in the 1950’s and 1960’s was IMHO an anomaly in world history, because the USA was the only super power in terms of military and manufacturing.

Consider that Japan and Germany back then had no manufacturing base, so DB were a way to instill worker loyalty (or said another way, DB came about because of a good economy, DB for the “middle class” didn’t create a good economy).

Now with workers in the USA having to compete with workers in not only Germany and Japan, one also has to contend with workers in China, Brazil, etc., so it makes sense that pensions in the private sector for USA workers are no long possible (its the double edge sword of a capitalistic economy). In other words it was inevitable that living standards of people around the world would rise, but since the USA was no longer the only game in town for manufacturing, the standard of living for those with more brawn than brain would fall.

Was reading someone mentioned the dangers of the military industrial complex, actually the concept should be updated IMHO.

Specifically what was once the danger of nepotism w/ the military and their contractors, is paralleled all around the nation (not just here in CA WRT pensions), I just think its going to hit SD first because it has all the right conditions for an economic implosion of biblical proportions!!

The entrenched problem is the “political-legal welfare system” which is the tendency of politicians to pander to public employee unions for political support in a bid to get into or retain an office. The “Quid pro quo” in this instance is a literal “sweet heart deal” payoff when it comes time labor talks. In economic terms, the idea of a public employees union is bad because the interests of politicians and public employees is the same (they are seeking shelter form the “real world” where global competition is now the norm, and DP in the private sector are history)

FDR long ago recognized the problem w/ public employee unions when he said:

“The very nature and purposes of Government make it impossible for administrative officials to represent fully or to bind the employer in mutual discussions with Government employee organizations.”

http://www.politifact.com/wisconsin/statements/2013/aug/13/scott-walker/Did-FDR-oppose-collective-bargaining-for-governmen/

From what I understand of economic, unions in the private sector work because there is alternatives which over the long run makes the product better and lowers the cost (i.e. products like cars and computers).

Now consider what has happened to public services here in SD, have the roads been kept up or are they in disrepair? WRT public schools, what I’ve read is the traditional “factory” one size all school is giving way to new “organic” centers of learning, like high tech high in point loma, albert einstein charter school in golden hill, etc.

[quote=CA renter]The worst employees tend to leave before benefits vest to any large extent. That doesn’t mean that some dead wood isn’t hanging around after too many years — and I absolutely support making it easier to fire truly bad employees.[/quote]

could not agree more, and think this concept should be extended to entrenched politicians (both on the left and right) because it seem they enable lots of the problems:

http://patrick.net/forum/?p=1247288&c=1114955#comment-1114955%5B/quote%5D

You are totally wrong about politicians and unions being on the same side of the table. Nothing could be further from the truth. Some politicians are labor-friendly, and others have a vitriolic hatred for unions. I have personal experience with contract negotiations, and there is NO truth to your statement that politicians automatically pander to unions.

Unions are no different from any other group that supports politicians who will further their particular interests. That goes for public contractors (or those who hope to be public contractors); businesses who want special infrastructure that will benefit their businesses or who want special tax breaks or financial incentives; “taxpayer advocates” who are looking to reduce taxes for special interests (think Prop 13); interest groups who push for things that will place a heavier burden on public agencies without a commensurate benefit to the population at large (immigration reformers; citizens who want special projects, infrastructure, tax breaks/credits; landowners who want roads, bridges and other infrastructure specifically built to increase the value of their holdings, etc.). The list goes on and on. Every one of these groups cost taxpayers money. Every single one. Again, public employees are one piece of the puzzle (and a very small one in some instances).

And unions work because they allow employees to bargain collectively. Public unions benefit private employees, too, because private employers have to compete for the same pool of candidates.

Right now, corporate tax revenues, as a percentage of GDP, are near an all-time low, and profits are at an all time high. At the same time, labor participation rates, and all other metrics used to determine the well-being of labor are at or near all-time lows. Coincidence? Not at all. Again, we desperately need unions for ALL workers, and very politically active ones at that.

http://research.stlouisfed.org/fred2/graph/?g=cSh

——-

Regarding the charter movement? That began in public schools, and it was supported by unions.

The charter school idea in the United States was originated in 1974 by Ray Budde,[10] a professor at the University of Massachusetts Amherst. Albert Shanker, President of the American Federation of Teachers, embraced the concept in 1988, when he called for the reform of the public schools by establishing “charter schools” or “schools of choice.”[11] Gloria Ladson-Billings called him “the first person to publicly propose charter schools”.[12] At the time, a few schools already existed that were not called charter schools but embodied some of their principles, such as H-B Woodlawn.

http://en.wikipedia.org/wiki/Charter_schools_in_the_United_States

————-

But before you get too excited about charter schools, most of which are now publicly-funded private schools, you should look at how they compare to traditional public schools.

http://credo.stanford.edu/documents/NCSS%202013%20Final%20Draft.pdf

[Anonymous]

[quote=CA renter]
And talk about a lack of compassion. You think nothing at all about taking away someone’s compensation that was already earned over many years. If you think that’s a good idea, great; you can step up to the plate and reduce your own pay and donate that to a public agency of your choice…you know, to help out the poor taxpayers and all. That’s what you’re asking these public employees to do, so you should be happy to serve as a role model, right? IIRC, you didn’t favor clawing back compensation of the people who caused the mess in the first place — the Wall Street scum who’ve made *far more* than any cop, firefighter, or teacher in the U.S.[/quote]

I’ve never said that public employee compensation should be reduced. Never.

There you go again, just plain tellin’ lies.

BTW: Our new friend phaster gets it. Welcome to Piggington!

[CA renter]

[quote=harvey][quote=CA renter]
And talk about a lack of compassion. You think nothing at all about taking away someone’s compensation that was already earned over many years. If you think that’s a good idea, great; you can step up to the plate and reduce your own pay and donate that to a public agency of your choice…you know, to help out the poor taxpayers and all. That’s what you’re asking these public employees to do, so you should be happy to serve as a role model, right? IIRC, you didn’t favor clawing back compensation of the people who caused the mess in the first place — the Wall Street scum who’ve made *far more* than any cop, firefighter, or teacher in the U.S.[/quote]

I’ve never said that public employee compensation should be reduced. Never.

There you go again, just plain tellin’ lies.

BTW: Our new friend phaster gets it. Welcome to Piggington![/quote]

Oh hell yes you have, ad nauseam. When you suggest that public sector employees should have their vested benefits reduced, you are saying that their compensation should be reduced. Defined benefit pensions are a form of deferred compensation. You should know that since you claim to be a financial expert.

So, not only have you repeatedly advocated for reduced compensation for public employees, you’ve suggested that we should reduce the compensation *that they have already earned.*

Just keep on lying…as always.

And I can show post after post where you’ve lied your ass off. If you’re going to call me a liar, you’d better be able to find ONE post where I’ve lied. Go ahead and try to find one.

[CA renter]

As for globalization? Yes, that’s a huge problem for U.S. workers. IMO, we need to enact tariffs to offset any discrepancies between labor and environmental protection in the U.S. and other countries. Additionally, if a corporation is making most of their profits overseas and doing most/all of their production overseas, then they aren’t U.S. companies, and they shouldn’t be entitled to the protections and benefits (military protection of sea lanes, infrastructure, IP/private property protection, legal, etc.) provided by U.S. taxpayers.

[spdrun]

Their pensions should be capped at their salary upon retirement, adjusted for inflation. I might feel sorry for teachers and firefighters, a bit. Cops. Nah, not really.

[Anonymous]

[quote=CA renter]Oh hell yes you have, ad nauseam. When you suggest that public sector employees should have their vested benefits reduced […][/quote]

I have never suggested that anyone’s compensation should be reduced.

Can you provide proof of your claim?

[livinincali]

[quote=CA renter]
When you suggest that public sector employees should have their vested benefits reduced, you are saying that their compensation should be reduced. Defined benefit pensions are a form of deferred compensation. You should know that since you claim to be a financial expert.
[/quote]

I would consider reduced deferred compensation as a cut in total compensation, but I realize that’s the inevitable outcome. The math says it’s pretty much impossible for that deferred compensation to be paid in full. Whether you want to blame wall street, politicians, unions, tax payers, the fed, demographics or whatever it doesn’t change the mathematical equation.

Essentially it’s just far to risky to offer guaranteed deferred compensation that will be paid out 40, 50 60 years after a person starts working based on events that are unknown. When that police officer started 30 years ago making $20K and 30 year treasury rates where over 10% did the actuaries have any idea that the officer was going to work a ton of overtime those last couple of years earn $150K/year and get a defined benefit of $100K year with 30 year interest rates at 3.5%. People couldn’t believe 30 years interest rates would get to to 4% 5 years ago, let alone 30 years ago.

The one benefit of defined benefit contribution plans, retention, isn’t worth the risks, the frauds, the vote buying, and everything else it enables. That’s the bottom line. The rewards (reduced training costs retention, etc.) don’t outweigh the risks and therefore they should be scrapped. They were lies to the employees receiving them. The private sector came to this conclusion a long time ago. Private sector pension plans went bust all the time. The benefits were renegotiated all the time. Most businesses don’t last 50-60 years, even fewer grow and thrive for 50-60 years.

There was a very small period in history where defined benefit retirement plans were offered and many of them failed to deliver. Public sector plans are no different, they will fail to deliver as promised even with laws and implied tax payer backstops. The money isn’t there.

[CA renter]

[quote=livinincali][quote=CA renter]
When you suggest that public sector employees should have their vested benefits reduced, you are saying that their compensation should be reduced. Defined benefit pensions are a form of deferred compensation. You should know that since you claim to be a financial expert.
[/quote]

I would consider reduced deferred compensation as a cut in total compensation, but I realize that’s the inevitable outcome. The math says it’s pretty much impossible for that deferred compensation to be paid in full. Whether you want to blame wall street, politicians, unions, tax payers, the fed, demographics or whatever it doesn’t change the mathematical equation.

Essentially it’s just far to risky to offer guaranteed deferred compensation that will be paid out 40, 50 60 years after a person starts working based on events that are unknown. When that police officer started 30 years ago making $20K and 30 year treasury rates where over 10% did the actuaries have any idea that the officer was going to work a ton of overtime those last couple of years earn $150K/year and get a defined benefit of $100K year with 30 year interest rates at 3.5%. People couldn’t believe 30 years interest rates would get to to 4% 5 years ago, let alone 30 years ago.

The one benefit of defined benefit contribution plans, retention, isn’t worth the risks, the frauds, the vote buying, and everything else it enables. That’s the bottom line. The rewards (reduced training costs retention, etc.) don’t outweigh the risks and therefore they should be scrapped. They were lies to the employees receiving them. The private sector came to this conclusion a long time ago. Private sector pension plans went bust all the time. The benefits were renegotiated all the time. Most businesses don’t last 50-60 years, even fewer grow and thrive for 50-60 years.

There was a very small period in history where defined benefit retirement plans were offered and many of them failed to deliver. Public sector plans are no different, they will fail to deliver as promised even with laws and implied tax payer backstops. The money isn’t there.[/quote]

Many of those private pension funds went bust because of reasons completely unrelated to the pension funds’ ability to pay out the promised benefits. Funds were mismanaged and used as piggy-banks for corporations, bloated executive pensions, and the way they intermingled funds between the funds of regular employees and executives blew many of them out of the water. UCGal has recommended a book a few times here:

I highly recommend it.

—————–

As for the retention issue, San Diego is dealing with this problem right now.

San Diego’s police force faces an uncertain future, with about half of its officers eligible for retirement in the next few years and younger officers leaving for other agencies that have better pay and benefits. San Diego officers have seen their healthcare costs soar and are paying more into their pensions than officers from most other police agencies.

“We can’t ignore the market,” said Carol Kim. “How can we expect to retain our officers when they can go to other law enforcement agencies in the area and get considerably better compensation packages?”

Kim is particularly troubled by the millions of dollars the City spends to train officers, who leave for other agencies. “It’s a bad deal for taxpayers,” she said. “We need to be competitive if we want to reap the benefits of our investment.”

Kim proposes re-investing one-third of the projected budget surplus that was identified in Mayor Kevin Faulconer’s most recent budget into increased police salaries; her plan calls for a 5% raise in salaries per year for each of the next four years, resulting in a 20% increase in police salary.

Councilmember Ed Harris, who represents District 2, attended the forum and was extremely supportive of the plan. “It’s refreshing to see a candidate who is ready to tackle this crisis and offer concrete, fiscally responsible solutions,” he said.

“We can’t afford to be paying $190,000 to train police officers, only to have them leave for other departments,” said Kim. “It’s time we start re-investing this money into the SDPD to protect both our officers and our communities.”

—————-

Also, there are a number of things that can be changed that would make the public pension funds completely, or nearly, whole. Many of these fixes are already law; they include changes (reductions) to benefit formulas, hybrid pension plans for new hires, increased employee contributions, capping benefit amounts, redefining (reducing) pensionable compensation, eliminating spiking, etc. Also want to clarify that overtime is not usually used to calculate pensions, though you’ll see claims of this in various blogs and forums. Each agency has it’s own agreement with different employee groups, but most municipal employers do use O/T in their formulas.

The point is that ALL stakeholders need to come to the table to fix the problems that were created — and are still being created — by the Federal Reserve and Wall Street. The burden should not be born entirely by public sector employees.

[Anonymous]

Good research CAR! Some hard “facts” from Carol Kim!

Yes, the Carol Kim!

Uh … who is Carol Kim?

She’s a city council candidate endorsed by – surprise – public sector unions!

http://www.carolkimd6.com/endorsements

And what about her budget numbers?

[…] these statements are misleading.

We fact checked the union’s claim that each new officer requires a $190,000 investment last March. The association relied on the Police Department’s cost analysis for that number, as did Kim’s campaign. Cate’s campaign couldn’t be reached for comment.

A Questionable Price Tag for Departing Cops

Yup, an independent fact check concluded the numbers were “Misleading”:

Keeping Cops on the Job: Mega Fact Check

But the fact checking above is just an article from the Voice of San Diego … what do those guys know about the economy?

http://voiceofsandiego.org/author/richtoscano/

The real problem here is that we have politicians who are so cozy with the people they pay. It’s an incestuous relationship that encourages the downward spiral: Unions support politicians, politicians get elected, politicians give union members raises (hiding the true cost in the form of deferred benefits) and the unions have more money to support politicians.

Carol Kim has chosen to play right along, using the police department’s propaganda word-for-word in her platform.

CAR, you need to step out of the echo chamber, or just admit you’re just a shill for the unions.

(BTW, we are still waiting for an example where I said public-sector compensation should be reduced … or at least the name of one socialist country in Europe!)

[NotCranky]

Why does it take 190k to make a basic cop who can then relocate?
If that number is legit….there’s your compensation. What other ordinary person get’s their career prep paid for to the tune of 190k?

[Author]

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