How do we fix state, local and union pensions?

a777pilot · Oct 31, 2018

Neomalthusian said:
State, local and union pensions are failing. Many of those with bad under-funding problems have not made up any significant ground on their unfunded liabilities despite the longest stock market bull run in modern history. This should be a warning sign to us that one more significant recession can very easily trigger a cascade of pension failures over the next 10-20 years.

Public Pension Crisis: Who Will Cover the $4 Trillion Shortfall?

There are basically two overarching options:

1) Do nothing, basically. Let states with failing pensions fend for themselves. Law generally does not allow states to cut pension benefits, nor does it allow them to declare bankruptcy in any official sense, but just let states fight it out as to whether they can agree to reform their own pension systems to allow for benefit cuts. If they can't agree to benefit cuts, or courts prohibit them from doing so, then their only other choice is to try to extract all of it (the unfunded liabilities) out of their residents. This risks exodus and inexorable decline as tax increases and service cuts are required to cover the liabilities, which encourages further exodus, making tax increases ineffective at raising the required revenue. This is how non-monetarily-sovereign governments fail. They batter their tax base into oblivion and then have zero means to raise the revenue required to pay the debts. This option is basically continue as-is and let entire states fail and become economic wastelands for potentially decades.

2) Sweeping federal reform. The federal government (including by its ability to borrow and print fiat money in virtually unlimited fashion) bails out failed and failing pensions. Theoretically this could involve benefit cuts, or not involve benefit cuts. If no benefit cuts are included, then it creates the mother of all moral hazards, because no pension managers anywhere would have the appropriate incentives to fully fund their own pensions, because the feds can be trusted to step in with a bailout in the end. It also would dramatically reward states that managed pensions extremely badly, and by comparison would penalize states that managed their pensions well. To avoid the moral hazard/reward for only the worst-managed states, there has to be some sort of pain or penalty administered against those states that sabotaged their own pension funds and necessitated this bailout, and there may even have to be a comprehensive federal take-over of state pension systems, whether they're in good shape or failing. Again, if the feds were to selectively bail out only those states that sabotaged themselves with bad pension policy, who systematically under-taxed themselves while over-rewarding themselves and their employees, that would be an enormous reward for only the worst state leadership.

What do we do?

What do we do?

A good first start is to ban ALL public sector unions and/or eliminate their ability to collective margin for wages, benefits and retirement. These employees are paid with taxpayer's money therefore only the taxpayers ought have the right to set wages, benefits and retirement.

Neomalthusian · Oct 31, 2018

a777pilot said:
What do we do?

A good first start is to ban ALL public sector unions and/or eliminate their ability to collective margin for wages, benefits and retirement. These employees are paid with taxpayer's money therefore only the taxpayers ought have the right to set wages, benefits and retirement.

They already do have that "right," if you will. No legislature has to ratify or fund a collective bargaining agreement reached between the union representatives and government management. Any legislative body (even a small city council) could simply vote to not ratify or fund the bargaining agreement. They could also pass an employee relations ordinance or state law that completely de-fangs and de-claws all public sector unions operating in that state.

Elected legislative bodies have practically absolute power over this.

They typically choose not to express this power, even in predominantly Republican-voting jurisdictions, for many reasons. They want to try to keep the peace. They perceive the legal risks (lawsuits and unfair labor practice claims) as costlier than the incremental things unions are demanding. Or they don't want unions to put up money drawing attention to them to defeat them in the next election. Maybe they have pro-union friends, families or allies. Or other reasons.

Vadinho · Oct 31, 2018

Neomalthusian said:
How Public Pension Boards Are Making a Crisis Worse

Then perhaps they should be forced to invest only in bonds or tbills, nothing else.

Neomalthusian · Oct 31, 2018

Vadinho said:
Then perhaps they should be forced to invest only in bonds or tbills, nothing else.

Yikes. That would magnify the crisis, as all of these plans would have to decrease their AROR by 2-3% at least, which would change the calculation of the unfunded pension liabilities enormously, affecting the credit ratings of numerous states and pushing at least a dozen more of them into "critically underfunded" status.

Vadinho · Oct 31, 2018

Neomalthusian said:
Yikes. That would magnify the crisis, as all of these plans would have to decrease their AROR by 2-3% at least, which would change the calculation of the unfunded pension liabilities enormously, affecting the credit ratings of numerous states and pushing at least a dozen more of them into "critically underfunded" status.

But it would stop the boards from expecting large returns and force them to deal with reality. Reality says either the contracts are renegotiated downwards or contributions by members increase or the federal government bails them out. Am I wrong?

Neomalthusian · Oct 31, 2018

Vadinho said:
But it would stop the boards from expecting large returns and force them to deal with reality.

Knee-capping the potential returns on pension fund assets by forcing them into bonds/treasuries would create an overnight financial catastrophe, frankly. The bleak future we are facing right now already nevertheless assumes they can still invest heavily in stocks and average better returns (although typically not as good of returns as what they project/assume). Forcing them to earn drastically lower returns would create a financial crisis instantly.

Reality says either the contracts are renegotiated downwards or contributions by members increase or the federal government bails them out. Am I wrong?

There's no contract to negotiate downwards concerning DB pension benefits, but yes, benefits have to be cut and/or contributions have to be increased (drastically in some cases). If this doesn't happen, the entity responsible for paying them could easily end up in a state of default, at which point benefits are going to be cut all the same.

The last theoretical stopgap is the feds who would just bail out the pension funds, guaranteeing the benefits while allowing states to continue underfunding them from contributions. But this would be an epic moral hazard, as only the worst-managed pensions would be rewarded with this assurance...

...unless the feds confiscate all state pensions and administer them centrally, including those already well-funded, which would be a mind-bending proposition.

a777pilot · Oct 31, 2018

Neomalthusian said:
They already do have that "right," if you will. No legislature has to ratify or fund a collective bargaining agreement reached between the union representatives and government management. Any legislative body (even a small city council) could simply vote to not ratify or fund the bargaining agreement. They could also pass an employee relations ordinance or state law that completely de-fangs and de-claws all public sector unions operating in that state.

Elected legislative bodies have practically absolute power over this.

They typically choose not to express this power, even in predominantly Republican-voting jurisdictions, for many reasons. They want to try to keep the peace. They perceive the legal risks (lawsuits and unfair labor practice claims) as costlier than the incremental things unions are demanding. Or they don't want unions to put up money drawing attention to them to defeat them in the next election. Maybe they have pro-union friends, families or allies. Or other reasons.

The sole propose of these public sector unions is to turn taxpayer's money into campaign contributions to the Democrats.

Vadinho · Oct 31, 2018

Neomalthusian said:
Knee-capping the potential returns on pension fund assets by forcing them into bonds/treasuries would create an overnight financial catastrophe, frankly. The bleak future we are facing right now already nevertheless assumes they can still invest heavily in stocks and average better returns (although typically not as good of returns as what they project/assume). Forcing them to earn drastically lower returns would create a financial crisis instantly.

There's no contract to negotiate downwards concerning DB pension benefits, but yes, benefits have to be cut and/or contributions have to be increased (drastically in some cases). If this doesn't happen, the entity responsible for paying them could easily end up in a state of default, at which point benefits are going to be cut all the same.

The last theoretical stopgap is the feds who would just bail out the pension funds, guaranteeing the benefits while allowing states to continue underfunding them from contributions. But this would be an epic moral hazard, as only the worst-managed pensions would be rewarded with this assurance...

...unless the feds confiscate all state pensions and administer them centrally, including those already well-funded, which would be a mind-bending proposition.

Not too many good choices are there? I say when you are in a hole, stop digging. States cannot tax their way into solvency in some of these cases so they can only hope for very high returns (CALPERS in the 90s) or default by bankruptcy or some other means. At the end of the day though, new hires have to be put on different plans. As for existing contracts, the FEDs can fund them but that will end up being a political nightmare for which ever party does it.

Neomalthusian · Oct 31, 2018

a777pilot said:
The sole propose of these public sector unions is to turn taxpayer's money into campaign contributions to the Democrats.

Ok, but I'm just saying convincing Congress to pass a new law to "ban public sector unions" is a pretty far-fetched idea. Congress is more likely to do the opposite, and actually bail out unions with taxpayer dollars when their pensions fail (most recently, the Butch Lewis Act, which is a Teamsters proposal to get the Feds to pay for their failed promises). There are other ways, including within the current legal framework we have, to disembowel public sector unions if we wanted, starting with our city councils and state legislatures and what they're allowed to do legislatively.

Vadinho said:
Not too many good choices are there? I say when you are in a hole, stop digging. States cannot tax their way into solvency in some of these cases so they can only hope for very high returns (CALPERS in the 90s) or default by bankruptcy or some other means. At the end of the day though, new hires have to be put on different plans. As for existing contracts, the FEDs can fund them but that will end up being a political nightmare for which ever party does it.

Hence why the aforementioned Butch Lewis Act calls these bailouts "loans." Issuing debt to pay debt you cannot remotely afford to pay doesn't change anything. You're just trading a liability for a liability. For a program like this to fix the problem, the loans would have to be written off by the feds, which is a simple little accounting function that amounts to a bailout. But because they call it a loan program, they can play pretend that this wouldn't be a bailout.

Vadinho · Oct 31, 2018

Neomalthusian said:
Ok, but I'm just saying convincing Congress to pass a new law to "ban public sector unions" is a pretty far-fetched idea. Congress is more likely to do the opposite, and actually bail out unions with taxpayer dollars when their pensions fail (most recently, the Butch Lewis Act, which is a Teamsters proposal to get the Feds to pay for their failed promises). There are other ways, including within the current legal framework we have, to disembowel public sector unions if we wanted, starting with our city councils and state legislatures and what they're allowed to do legislatively.

Hence why the aforementioned Butch Lewis Act calls these bailouts "loans." Issuing debt to pay debt you cannot remotely afford to pay doesn't change anything. You're just trading a liability for a liability. For a program like this to fix the problem, the loans would have to be written off by the feds, which is a simple little accounting function that amounts to a bailout. But because they call it a loan program, they can play pretend that this wouldn't be a bailout.

Yep. The Fed can always bail them out but that would take political courage, not too much of it around. Now if they were banks, no problem. But people and states? Why that's socialism! We are doomed as long as we let dogma prevent us from solving problems.

Neomalthusian · Oct 31, 2018

Vadinho said:
Yep. The Fed can always bail them out but that would take political courage, not too much of it around. Now if they were banks, no problem. But people and states? Why that's socialism! We are doomed as long as we let dogma prevent us from solving problems.

It's not a problem of it being socialism or not-socialism, nor is it a problem of courage. That makes it sound like bailouts are the simple right moral thing to do but politicians just lack courage.

But no. It's a problem of a moral hazard. If states can still manage their own pensions but have no risk of failure for bad management because the feds will always guarantee the benefits because they control the currency, then there is no reason to manage pensions responsibly, in fact it arguably becomes bad policy to manage them responsibly.

Vadinho · Nov 1, 2018

Neomalthusian said:
It's not a problem of it being socialism or not-socialism, nor is it a problem of courage. That makes it sound like bailouts are the simple right moral thing to do but politicians just lack courage.

But no. It's a problem of a moral hazard. If states can still manage their own pensions but have no risk of failure for bad management because the feds will always guarantee the benefits because they control the currency, then there is no reason to manage pensions responsibly, in fact it arguably becomes bad policy to manage them responsibly.

The moral hazard argument seems reasonable until you consider that the fear of moral hazard affecting individual choices seems to be directed at only one sector of the populace, the poor or minorities. Trump just gave the super wealthy the freedom to pass on wealth with no taxation. The moral hazard argument here is very valid yet it passed.

No one used the moral hazard argument establishing the FDIC or any number of banking regulations, they just seemed to be common sense means of controlling human behavior using the power of the Federal Government. If moral hazard logic had been applied to Wall Street in 2009, they would have all been jailed or worse, we would have been in a depression. In the 80s, the Savings and Loan debacle did result in some criminal prosecutions but the government still bailed them out because they had no choice. If one is afraid that bailing out pensions will create new liabilities in the future that will demand even more bail outs then regulate them so it does not happen again.

Neomalthusian · Nov 1, 2018

Vadinho said:
The moral hazard argument seems reasonable until you consider that the fear of moral hazard affecting individual choices seems to be directed at only one sector of the populace, the poor or minorities.

No, the moral hazard is for governors, state legislators, state divisions of retirement and benefits, and state labor relations professionals, union leaders, and of course, state and local voters/taxpayers themselves.

No one used the moral hazard argument establishing the FDIC or any number of banking regulations, they just seemed to be common sense means of controlling human behavior using the power of the Federal Government. If moral hazard logic had been applied to Wall Street in 2009, they would have all been jailed or worse, we would have been in a depression. In the 80s, the Savings and Loan debacle did result in some criminal prosecutions but the government still bailed them out because they had no choice. If one is afraid that bailing out pensions will create new liabilities in the future that will demand even more bail outs then regulate them so it does not happen again.

It's easy to say the words "regulate them," but what does that mean in this case? At some point when you are compelled to regulate something so closely and aggressively, it ceases to make sense that they continue administering it, and you might as well be the one administering it. Hence the idea of a complete federal takeover of management of all pension funds and administration (nuts as that sounds and is).

There are difficulties relating investment banks to state-managed pensions, but sure, anyone, banking or state government or anything else, that the federal government displays it will bail out needs to fear pain if it comes to that. Because if they don't, then it's a clear signal that mismanagement is the best management. If an entity knows the federal government will bail out an all of its debts and pay every penny due to all the creditors, that completely negates the way debt is supposed to work. Lenders need to fear financial pain in the event of default on a loan they approved/created, and borrowers need to fear financial pain if there is default. That's the way debt fundamentally works. Both the creditor and debtor need to be averse to default. That cannot be achieved with a carte blanche federal bailout and guarantee of all previously entitled pension benefits. There would have to be pension benefit cuts as well as painful consequences for state government stakeholders and taxpayers. Ideally as much pain as possible without creating a humanitarian crisis or prolonged statewide economic catastrophe.

Vadinho · Nov 1, 2018

Neomalthusian said:
No, the moral hazard is for governors, state legislators, state divisions of retirement and benefits, and state labor relations professionals, union leaders, and of course, state and local voters/taxpayers themselves.

It's easy to say the words "regulate them," but what does that mean in this case? At some point when you are compelled to regulate something so closely and aggressively, it ceases to make sense that they continue administering it, and you might as well be the one administering it. Hence the idea of a complete federal takeover of management of all pension funds and administration (nuts as that sounds and is).

There are difficulties relating investment banks to state-managed pensions, but sure, anyone, banking or state government or anything else, that the federal government displays it will bail out needs to fear pain if it comes to that. Because if they don't, then it's a clear signal that mismanagement is the best management. If an entity knows the federal government will bail out an all of its debts and pay every penny due to all the creditors, that completely negates the way debt is supposed to work. Lenders need to fear financial pain in the event of default on a loan they approved/created, and borrowers need to fear financial pain if there is default. That's the way debt fundamentally works. Both the creditor and debtor need to be averse to default. That cannot be achieved with a carte blanche federal bailout and guarantee of all previously entitled pension benefits. There would have to be pension benefit cuts as well as painful consequences for state government stakeholders and taxpayers. Ideally as much pain as possible without creating a humanitarian crisis or prolonged statewide economic catastrophe.

If the moral hazard argument is applied it must be applied everywhere or it creates another moral hazard. Since some debts are so large that if they are not paid it creates a cascade, those debts must be paid regardless of the moral hazard. Moral hazard is another way of saying "I believe that if you spare the rod you spoil the child". I understand your point. It is true that if you keep bailing bad actors out, they will continue to do the same thing over and over again. Witness the concept of personal bankruptcy or corporate bankruptcy, are they not bail outs? Should we return to debtors prisons to avoid moral hazards? Your warning about moral hazards is fine when applied to a lazy brother who keeps borrowing money and never pays it back. But when applied to massive debts or debts that cannot be paid whose impact upon the greater social bargain is too great to ignore, you have no choice but to find a way to pay them. Like I said earlier, regulations can avoid these problems in the future. When I was a kid, personal debt was limited to a mortgage or maybe a car loan. Now due to lax regulations which started in the 80s, personal credit exploded and debt came along with it. This was all a function of lenders doing everything they could to lend more money. Our POTUS is the very poster child for debt. Remember this, a lesson from Quark:

Treat people in your debt like family... exploit them.

That in essence is the basic truth about debt in America today. If you are in debt, you are the mark unless you can run from it legally. We have many ways for the rich and powerful to run from debt and do it legally. What we seem to do is assign more responsibility to the lower classes then we do the upper classes. Yes, administrators are at fault but once that deal is done, it must be honored or the moral hazard you fear is worse then the act of forgiveness of debt. My point is not that we disagree, it is that if one looks at this issue dispassionately there really are very few options, all of them bad. So which bad outcome is worse? Millions of pensioners out of income or bail outs and regulations to prevent future similar situations?

Neomalthusian · Nov 1, 2018

Vadinho said:
If the moral hazard argument is applied it must be applied everywhere or it creates another moral hazard. Since some debts are so large that if they are not paid it creates a cascade, those debts must be paid regardless of the moral hazard. Moral hazard is another way of saying "I believe that if you spare the rod you spoil the child". I understand your point. It is true that if you keep bailing bad actors out, they will continue to do the same thing over and over again.

Even worse, it could signal to good actors that they are giving their states a worse deal by being responsible than those that irresponsible create bad debt and get injections of federal money.

Witness the concept of personal bankruptcy or corporate bankruptcy, are they not bail outs?

Not really, because they end up paying back only part of what they owe. The consequences to a person/thing that declares bankruptcy can be harsh, and the consequences to creditors who only get some of their money back are also harsh. These harsh consequences should typically make both lenders and borrowers averse to bankruptcy, making them disinclined to create bad debt.

So in the case of state pensions, the best possible way to do this is to federally guarantee only some of the benefits to pensioners, allowing the difference to be extinguished, written off, and never paid. Harsh as this is, it signals to everyone else that you had better make sure your state is managing its pensions for long-term sustainability, or else you might not get your full pension. Taxpayers and their governments should experience some adverse consequences as well, which could take many forms. But they probably shouldn't be so harsh as to cripple the state economically for a long period of time.

Your warning about moral hazards is fine when applied to a lazy brother who keeps borrowing money and never pays it back. But when applied to massive debts or debts that cannot be paid whose impact upon the greater social bargain is too great to ignore, you have no choice but to find a way to pay them.

Not 100% of them. If you're (meaning federal government with its unlimited ability to spend) going to guarantee all benefits 100%, there basically has to be a complete takeover of how these things are administered. Politically this would also be extremely difficult because the 10-20 states that have very strong pension financial condition would be furious, possibly sue the federal government, because of the disproportionate boon that policy would be to the worst states with the worst management relative to the best states with the best management.

My point is not that we disagree, it is that if one looks at this issue dispassionately there really are very few options, all of them bad. So which bad outcome is worse? Millions of pensioners out of income or bail outs and regulations to prevent future similar situations?

I don't see how any regulations can necessarily prevent this going forward. What are those regulations going to say? "Do it right this time?" At what point does a bail out even happen? Do we just arbitrarily pick a point in time?

I think if there is no sort of "bail-out" of any kind ever for these things, that entire states are going to fail financially and become economically devastated for possibly decades or even generations. Something probably needs to be done to address that before it gets really bad. But there is no good reason to federally guarantee 100% of all pension benefits while still letting states manage their own pension rules. The "regulating" that would need to be done on state pensions by the feds to prevent bad behavior going forward in the free federal bailout era would have to be so absolute and authoritarian that the feds themselves might as well take the whole thing over and fund retiree benefits from federal taxes.

ludin · Nov 6, 2018

MrWonka said:
Well, then it sounds like the solution is to keep Republicans out of office to prevent them from doing anything stupid that ravages our economy again.

which has nothing to do with the topic.
They are so out of whack because they unions hold government hostage when they shouldn't be allowed to.

what is worse is you have politicians the continue to increase their plans without approval from the public.
it is easy to promise other peoples money.

states have promised more than they can afford.

ludin · Nov 6, 2018

Lord Tammerlain said:
Freeze current defined benefit pension plans. Then switch over to defined contribution plans. It will not help with the past pension programs but will regarding future ones.

Only allow cuts if the the specific government goes bankrupt and all creditors take a hit to what they are owed

This makes logical sense but will never be done.