I found Steve Malanga’s post on Seattle’s public pension problems, echoing as it does Chicago’s public pension problems and, I presume, the problems of most large cities very interesting. Here’s a snippet:
A study earlier this year by Stanford University finance professor Joshua Rauh ranked Seattle as having the ninth worst funded system among the nation’s 40 largest cities. Though Seattle says that today it owes about $1.2 billion, Rauh says the bill could be as high as $3.2 billion.
A decade ago Seattle contributed about $40 million a year to pensions, but the city has been forced to increase the amount over time and this year put $108 million into the system. And that tab will keep growing.
I think this highlights a number of important topics. First, public pensions have been organized under assumptions that are unrealistic in the extreme. Who can really believe that 7%+ annual returns on a fund are possible year in, year out forever?
Second, the compensation of public employees is limited by what the jurisdictions they serve are able to pay. It doesn’t make a bit of difference if people in other jurisdictions or doing other things earn more. If Seattle can’t pay what its public employees are demanding, it can’t pay it. Which brings us to the third point.
Cities aren’t sovereign. They operate under the control of and at the pleasure of states. If the state says a city can’t do something, it can’t do it. Chicago has the power to impose fees, it has the power within limits to raise property taxes, and it has the power to raise sales taxes. It doesn’t have the power to levy an income tax and, importantly, it doesn’t have the power to impose a graduated income tax.
The reckless promises of past or present politicians are not constitute exigent circumstances that entitle cities to do anything they care to.
Given how many places underpay pension funds, I question why people take jobs that have pensions. Corporate America has dumped pensions, and pensioners; local and state governments are going in the same direction. Apparently, a contract is only enforceable when it isn’t made with workers.
I also don’t understand why public servants in, say New Jersey, did not go on strike when the government cut their pensions. It’s deferred income, and if the employer cannot be trusted to pay in the future, they should pay up now.
I can’t answer that question for everywhere but I can answer it for Illinois. They take the jobs because
Gustopher:
One thing to keep in mind with private pensions is that they used to have long vesting periods: 15-20 years. So when people complain about getting screwed its usually because something happened before vesting (the company closed the local shop and the employee couldn’t relocate; employee fired; company goes bankrupt). ERISA lowered the vesting period, but that was either too late to be relevant or contributed to the decline of private pensions.
Public pensions tend to vest quickly and increase gradually. Also, states cannot go bankrupt and employees have civil service, Constitutional and in some cases union protections. About 20 years ago or so, government did not compete with the private sector in salary, it was the benefits (retirement, healthcare and job security), but stagnating private sector wages have meant that government jobs might have higher total compensation.
I don’t know what New Jersey, but typically what is done is new hires are given a lower tier of pension benefits. In effect, the lower tier is paying for the earlier tier, something which critics complain violates ERISA. But public unions generally don’t represent new hires anyway.
Let me quantify that. In Chicago public school teachers with bachelors in education only from a third rate school start at $50,000 for a nine month position plus health care and extremely generous pension plan. The average pay for those teachers is over $80,000 and many earn more than $100,000 (add a few years of experience and a masters in education or school administration). Police officers and firefighters have average incomes (base + overtime) of over $1`00,000. That isn’t bad for high school only.