The Public Pension Problem: Teachers

Josh Barro and Stuart Buck have produced a good backgrounder on the status of public pension funds for teachers on behalf of the Manhattan Institute for Policy Research, a conservative, market-oriented think tank. Among their findings are that the shortfall between promised benefits and actual assets in the plans is almost $1 trillion, declines in investments account for less than a quarter of that amount, and no reasonably foreseeable increase in investments will make up the shortfall. Only two relatively small states, Montana and North Dakota, have no deficit in teacher pension funds to make up while California, the most populous state, has a deficit of nearly $100 billion. That’s a lot larger than the official deficit of $42 billion because states aren’t required to follow generally accepted accounting principles as you or I would be.

The reason for this development is obviously the willingness of state and local politicians to make extravagant promises about future benefits coupled with a complete lack of willingness to fund these promises, a perfect example of the Wimpy strategy of public policy.

His willingness to underfund or even raid teacher pension funds to finance his new programs is one of the several reasons I opposed now-impeached Illinois Governor Rod Blagojevich. Illinois’s problem may not be unique but it is certainly distinctive. The state constitution of Illinois prohibits the state from reducing public pension benefits. Article XIII, Section 5:

Membership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an
enforceable contractual relationship, the benefits of which shall not be diminished or impaired.

That’s been fully litigated (the pensions of state supreme court justices are paid from a state retirement system, too) so that in Illinois the only way to change it is to amend the constitution, politically very difficult particularly in a state in which both houses of the state legislature and the governor’s mansion are held by Democrats beholden to public employees’ unions.

The only likely solution to the problem is a tiered system in which current teachers remain under the defined benefit program now in force and future teachers are enrolled in something more like a defined contributions plan. We’re still going to need to cough up what we’ve promised to today’s teachers and, in the absence of the political will to raise the state income tax, that means that every other government program in the state will suffer.

13 comments… add one
  • malthus Link

    No, the simple solution to Illinois’ problems is bankruptcy in which a court could rescind all those stupid retirement contracts.

  • steve Link

    According to the linked piece below, Illinois is 6th worst among the states when looking at debt as a percentage of GDP. Your solution is best, I believe. Bankruptcy may be emotionally appealing, but probably cost more in the long term with future costs of borrowing. Also, if their pensions are based on a percentage of income, future teacher contracts should be negotiated linking their salary increases to future economic conditions.

    Steve

  • steve Link
  • Bankruptcy won’t solve Illinois’s problems. Judges must follow the law just as the rest of us do. Besides, if teachers’ pension plans can be rewritten or set aside, it’s going to be darned hard to argue that judges’ can’t.

    The line for bailouts from the federal government is going to be long and, as usual, Illinois will have a low priority. I strongly suspect that no judge will throw out Illinois’s imprudent promises. Policy change is the only remedy left us.

  • That’s a lot larger than the official deficit of $42 billion because states aren’t required to follow generally accepted accounting principles as you or I would be.

    It is at this moment that I want to point out the naivete of the liberal progressives and their love of government programs.

    That’s been fully litigated (the pensions of state supreme court justices are paid from a state retirement system, too) so that in Illinois the only way to change it is to amend the constitution, politically very difficult particularly in a state in which both houses of the state legislature and the governor’s mansion are held by Democrats beholden to public employees’ unions.

    And I’ll point it out again here too.

    The only likely solution to the problem is a tiered system in which current teachers remain under the defined benefit program now in force and future teachers are enrolled in something more like a defined contributions plan. We’re still going to need to cough up what we’ve promised to today’s teachers and, in the absence of the political will to raise the state income tax, that means that every other government program in the state will suffer.

    And yet again. For you liberal progressives there is no pony in there anywhere, and if you do find a room full of money, its already been spent so don’t think that will help either.

    Change you can believe in….

  • PD Shaw Link

    Well, the Illinois Governor yesterday signed a law creating a two-tiered pension system. For new hires, lower benefits, longer time to qualify and reductions of the ability to game the system. Not a defined benefits program. Some observations:

    1. Bill essentially passed in secret to avoid union backlash. It appeared one morning and had passed both houses by the end of the day.

    2. Bill passed with something like 90% majorities in both houses. Very popular.

    3. Some pundits think it might cost Democrats the Governorship and Obama’s Senate seat. The Unions are outraged and are threatening to stay home in November.

    4. The change is supposed to save anywhere upwards to $100 billion over time, but other reports are showing the pension system still crashing in 10-15 years. The problems aren’t with the new hires, it’s with the existing hires and retirees.

    5. Republicans are campaigning for rollback of existing hires, resulting in dueling legal briefs from Chicago law firms about the constitutionality of doing so. I have no idea.

  • Ahhh change you can believe in….

  • I know, lets give these cretins even more power…surely that will fix it!

  • PD Shaw Link

    Slightly OT, Steve Verdon, but I don’t know if you’ve seen this story, but it screams your name:

    http://www.windsofchange.net/archives/so_a_man_in_plain_clothes_and_an_unmarked_car_cuts_you_off_and_pulls_a_gun.html

  • steve Link

    ” For you liberal progressives there is no pony in there anywhere, ”

    Click my link and then explain to me how this was a problem created only by those on the left. It may have been a problem that arose out of ideology, but when I look at the states affected, it looks to me more like bad management. The same thing happened with the steel companies and automakers. Living in Bethlehem, having met some of the steel guys, they were most definitely not a bunch of libs. Sometimes people are just dumb.

    Steve

  • Bad management doesn’t describe the defined benefits debacle. And I think that is more of a liberal/progressive thing than a conservative thing. How often do we hear about the right for health care, housing, a living wage? Defined “benefits” indeed.

  • steve Link

    Alaska, Mississipi and South Carolina have been liberal dominated? GM and Bethlehem steel were run by liberals? It seems to me like it was something started long ago by lots of people and companies. Private industry has shifted over to defined contributions, but government has lagged everywhere, even in conservative states. I guess maybe the whole idea of even having pensions could be laid at the feet of progressives.

    http://moneywatch.bnet.com/economic-news/blog/maximum-utility/how-mathematics-might-have-caused-the-financial-crisis/577/

    Steve

  • “The change is supposed to save anywhere upwards to $100 billion over time, but other reports are showing the pension system still crashing in 10-15 years”

    If you believe that Illinois politicians used this gambit to “save” money rather than spend it elsewhere on politically connected friends with no necks and pinky rings in the construction industry, then you are not living in Illinois. Springfield has been trying to raid the teacher’s pension system for years (beyond throwing in IOU’s which they have always done), this was a way to do it, not to economize on net state spending.

Leave a Comment