City, State Pension Woes Hit Home for Us All
06/22/2009 12:01 am EST
You may not want to add this to the long list of financial issues that keep you up at night, but here’s a follow-up to my posting in early January, warning that there would soon be a war between state taxpayers and their municipal employees—and it could mean a hit to your wallet, too.
The public pension crisis is hitting home everywhere. Every state must deal with the impact of investment losses and long-term underfunding of their state’s pension plan. Those secure jobs that promised to pay big retirement benefits are now about to cost almost every state more in contributions—just when the recession has caused tax revenues to slow.
I live in Illinois, where the current governor (Pat Quinn, who replaced the impeached Rod Blagojovich of the “big hair”), is now calling for a big increase in the state income tax. That doesn’t sit well with the legislators in the state capital, and a battle is brewing as the fiscal-year deadline for a balanced budget looms in just two weeks.
By the way, Blago was creative fiscally as well as politically. When hit with that same pension contribution problem four years ago, he simply sold bonds to raise money to make the required pension contribution that year. He then “invested” the balance of the bond sale money in the stock market, expecting the stock gains to outpace the required interest payments.
Obviously, that hasn’t happened, and the state is stuck paying interest on the bonds—and owing this year’s pension contributions. Without a tax increase, the various proposed cuts include preschool programs, senior citizens’ health care and low income health care funds. (Of course, they can’t cut the promised retirement benefits; those are guaranteed by law!)
But scary as the implications are for Illinois, the state that’s hurting most is California. The same sort of silly bet on the stock market has come back to hit that struggling state. A decade ago, CALPERS (the state’s pension management company) convinced legislators that they could cut required contributions to the fund nearly in half, because the difference would be made up by investment growth! (That move came at the peak of the dot-com boom, of course.)
CALPERS’ $185-billion fund is down about 20%. Actuaries said that state and city contributions to the huge pension should rise by nearly 25% this year! But just this past week, the pension fund’s board found a new actuary—and announced they’d found a way to “spread the losses” over the next 30 years, thus reducing this year’s contribution requirements from hard-hit cities and the state.
They call it “smoothing.” California’s governor Arnold Schwarzenegger says it’s just a devious way to shift the burden to future generations. He favors pension reform. But city and state workers comprise a big voting block in California—and in your state.
(For more details on the pension problems of every state from New Jersey to California, and in between, go to www.PensionTsunami.com.)
So, how do you think these state pension woes will hit home for you? Where do you think the money will come from to fill the gap?
- Increase state taxes?
- Cut state, municipal services—roads, garbage, police, prisons?
- Eliminate day care for poor kids or state-funded nursing home care for the elderly poor?
- Impose higher fees—tolls, license plates, dog registration?
Or do you think that your state is ready to freeze benefits now and move workers into defined-contributions plans, just as companies switched people into 40l(k) plans. I know it didn’t work well to give individuals the money management task. But all the “experts” at CALPERS did an equally bad job.
What do you think? Has the pension crisis hit home for you? What do you think should be done? Please join the conversation and have your say.