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Blue Model Goes Belly-Up
Fire Alarm for Public Pensions

The sanctity of public pensions is looking ever more in doubt. Last year was particularly harsh: Detroit was permitted to impair pensions in its bankruptcy proceedings, while a judge in California said the city of Stockton had every right to do the same, though it didn’t. Now, as an excellent overview in the NYT‘s Dealbook suggests, 2015 looks to be much more of the same. New Jersey Governor Chris Christie is proposing a pension freeze, a move very uncommon for a state but typical for a business. It’s even possible that New Jersey’s teachers’ union, a longtime enemy of the governor, might be seeing things more his way:

For months, a pension commission formed by Governor Christie has been working quietly with the New Jersey Education Association, normally one of the state’s most litigious pension adversaries. By talking to each other instead of battling in court again, the two groups managed to find enough common ground to issue what they called a “road map” toward solving New Jersey’s daunting pension problems.

Many details remain in flux, and the union took pains on Tuesday to say it was not endorsing Mr. Christie’s full proposal and might never do so. But the road map identifies certain issues that are so important to New Jersey’s teachers that the union is willing to consider a pension freeze if that is what it takes to fully protect its members from the state’s looming pension collapse.

To say that this would represent a change in public unions’ attitudes would be an understatement, though it’s not yet clear to what extent the union is on board. Still, soon public unions may find themselves facing hard bargains all around the country, with taxpayers less sympathetic and reformers more empowered. As the NYT puts it:

In some places, it is increasingly clear that reducing benefits only for future hires does not save enough money to preserve overstretched pension plans, especially in places where retirees outnumber current workers.

You can say that again. Today Illinois and New Jersey are in the midst of big pension fights, but other states, like Kansas and Kentucky, are eyeing the same risky strategy that their predecessors tried to use to escape this problem: issuing bonds as quick fixes for their ill-funded pensions. It’s a gamble, but not one a cash-strapped government can easily resist.

Detroit was just the beginning.

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  • Anthony

    On the pension crisis, nobody wants responsibility. That is, this did not happen randomly; many people (policemen, firemen, tradesmen [at prevailing wages], other municipal employees, Governors, legislators, voters, etc.) have culpability. A consequence is that “actuaries estimate public sector pension plans could be underfunded up to $4 trillion dollars. This means that many state and local governments may not have enough money to fund government employees pension benefits. This could also mean that governments raise taxes or cut services to pay promised pension benefits – thereby holding taxpayers responsible, or cut pension benefits and thereby holding government workers responsible.”

    Essentially, tough choices and tradeoffs are inescapable if actual pension reform (public) starts with the “math” (not scoop and shovel bond debt).

    • Curious Mayhem

      Of the many culprits, we must list the Fed, as it drove two asset bubbles in the 1990s and 2000s (and perhaps a third one now?) that seriously warped everyone’s perception of risk and return. It made ultra-rosy return assumptions look “safe.” Now the piper must be paid.

      • Anthony

        You refer no doubt to Alan Greenspan’s irrational exuberance (lower risk premiums = higher prices of stocks/earning assets, etc.). Warped perceptions??? (human greed/self interest ???).

        • Curious Mayhem

          Yes, the whole crazy Fed policies that started in the late 90s. It gave people a warped picture of returns, then led to crashes that time to recover from. It’s thrown a generation of pension calculations off into unreality, leading to a savings rate that’s too low (from assuming abnormally high returns will persist forever).

          • FriendlyGoat

            The problem you have now is a risk of abnormally low rates persisting forever, because no one will ever think the time is “right” to stop engineering them with printed money.

          • Curious Mayhem

            If I understand what you’re saying, yes — it’s holding short rates at zero and having a very large Fed balance sheet. These can hold asset prices up for some time, but there’s no reason for outsized returns in the future.

            To do that, you need to let asset prices fall to where they should be, extinguish the extraordinary excess debt we have (by paying it off, restructuring, or writing it off, as appropriate), and get household and government balance sheets back to something sane.

          • FriendlyGoat

            We understand that “the crisis” was extraordinary, but zero short rates is a ridiculous answer except for a very short period of time.

            Six years now is already about four years too long to be giving banks free use of everyone else’s money. I understand that Yellen is a liberal who thinks she is spurring job creation, but the problem is she and Bernanke have now bubbled the stock market, and are having a hard time unwinding that situation. The problem we have with jobs was caused, in part, by too many high-end tax cuts and cannot be fixed with zero rates. NO ONE could possibly make a long-term financial plan 10 or 20 years ago and cope with this artificial rate situation. Our CONSERVATIVE forefathers would have been saying, whaddaya mean they killed a 5% five-year CD return?
            That’s impossible! (Well, it should have been impossible.)

          • Curious Mayhem

            I agree with you, except for your strange assertion about high-end tax cuts.

            Yellen is a neo-Keynesian, like all the most important people at the Fed. This in spite of the fact that such theories were discredited in the 1960s and 70s. Even Keynes started to back away from it before his death in 1946.

            The policy of zero interest rates and QE, after the crisis was over, have mainly accomplished one thing: reflate asset prices. They’ve reflated so much and provided so much cheap short-term credit that extreme wealth inequality is one of the main results. The Fed rationalizes this with its theory of the “wealth effect,” which the Fed’s own economists have repeatedly shown is small. Meanwhile, ZIRP suppresses bank lending, which impacts small- and medium-size business and consumers. Large corporations and governments can issue bonds. The rest of us can’t. And ZIRP steals income from savers and massively subsidizes the large banks.

            Central banks today operate in service of large debtors, starting with governments, and moving on to indebted corporations and leveraged financial firms, as well as the speculator classes. They operate against creditors, including savers, pension funds, insurance companies, and so on.

    • CaliforniaStark

      Your forgot to mention another responsible group — the American taxpayer. They let the pension mess happen by not exercising appropriate supervision of their elected officials during the speculative 1990s, and are going to have to bear some of the financial pain required to resolve the problem. My suggestion is any tax or revenue increase be entitled a “pension surcharge” on people’s tax bills. Hopefully, it will be a lesson in fiscal responsibility, and cause taxpayers to realize how badly elected officials in many states and municipalities have mismanaged their money.

  • FriendlyGoat

    The best “road” to a “road map” for scaling back public pensions STARTS——STARTS——with unionized police officers, incarceration workers, judges and anyone else with a public-sector job in law enforcement. You go to THAT group of workers FIRST and announce what you wish to do to balance your budgets. Once you have settled a way forward with THEM—–reducing benefits or whatever——THEN you use the same precepts on all the other workers.

    You will find every Republican in the United States wanting to do exactly the opposite—–as Scott Walker did in Wisconsin when he politically attacked all the public sector unions except the police and firefighters—–largely sparing them in Act 10 of 2011.

    This is just another little reason why I won’t ever agree with Republicans. They know they cannot risk flipping every law enforcement officer in the country leftward and still get away with their shtick. Sooooooo, they set out to bully the teachers and AFSCME people—-naturally a lot of women, instead.

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