Brian Calle: Pension tsunami has reached shoreline

From: The Orange County Register

Pension expert Marcia Fritz of the California Foundation for Fiscal Responsibility had it right when she told me last week that states are "far beyond nibbling around the edges" on pension issues. Concerns over mounting unfunded public-employee retirement benefits confronting states and municipalities have been growing for years but the tidal wave is no longer on the horizon, it's at the shoreline. And the time has come to advance tough – even painful – workable solutions. Fortunately there are many remedies; it will just take the political will to take on the public-sector unions.

There is a scholarly consensus that governments in the U.S. face a $6 trillion shortfall in paying for their employees' retirements. A Stanford University study last year estimated California's potential pension liability makes up one sixth of the nationwide obligation, about $500 billion. That's six times the current state budget.
As David Skeel, a University of Pennsylvania law professor and author of "the New Financial Deal" said "states have two equally bad options: default or a federal bailout." Skeel has been a leading proponent of one of the better reform ideas: federal legislation allowing states to file bankruptcy. "Currently, cities, local municipalities, individuals and companies have the ability file bankruptcy and restructure debt but states do not," he said. "With the level of crisis states face, they need all options on the table."

Skeel rightly sees bankruptcy as a better alternative to defaulting or a federal bailout. Bankruptcy is a way states could avoid portions of existing pension promises. It has the added benefit of allowing state lawmakers more leverage when negotiating contracts with unions. Newt Gingrich, a former House speaker and 2012 Republican presidential candidate, has gotten behind the idea but even with his considerable clout among Republicans, the idea has run into major blowback.

House Majority Leader Eric Cantor, R-Va., said, "I don't think that [bankruptcies are] necessary because state governments have at their disposal the requisite tools to address their fiscal ills.

"They've got the ability to enter into new negotiations if there are any collective bargaining agreements in place" and states have the "ability to adjust levels of spending as well as revenues."

Essentially, Cantor says states can raise taxes, cut spending or renegotiate with their unions. Unfortunately, the tax increases needed to close the gap would be too large (and opposed by many voters), and the spending cuts required are politically unrealistic and would eviscerate many services. Furthermore, it's wishful thinking at best to assume unions will accept lower benefits already promised to them without states having some serious leverage (perhaps bankruptcy).

Some elected officials, like California Treasurer Bill Lockyer, say states don't need the ability to file bankruptcy because they have permanent revenue sources: taxpayers. Lockyer told Reuters that states "have the ability to enact a tax, and that's not the case of these private corporations that may have unfunded obligations that they can't deal with."

That seems to be the consensus among too many politicians: Just raise taxes to deal with our ill-advised promises to government workers.

It's unconscionable to saddle future generations with crushing debt to support a public working class because of poor decisions made by past elected officials and the unwillingness of current elected officials to act boldly and decisively.

State bankruptcies should be possible, but there are other strategies for pension reform.

States, by declaring fiscal emergencies, may be able to suspend current employee benefits and renegotiate existing contracts, said Ms. Fritz at the California Foundation for Fiscal Responsibility. "States should be no different than municipalities regarding contracts that are that fiscally burdensome," she argues.
She also is floating the idea of states capping employee contributions as a percentage of wages, exactly what General Motors did with autoworkers.

At a bare minimum, Ms. Fritz argues, public employees should be "required to pay half of their retirement costs, including heath care." Ideally, states would move their workers into 401(k)-style retirement investment plans like those for many private sector workers, which would remove from taxpayers the burden of funding a promised pension benefit even if investments fall short.

Of course, simply addressing the debt does little to protect from similar abuses in the future. Lawmakers must also take steps to curb the power of public employee unions. In the early 1900s, unions formed to protect workers from rampant abuses and exploitation. Today they have evolved into massive special interests intent on protecting and procuring greater pay and benefits funded with tax money. As Indiana Gov. Mitch Daniels put it: "We have a new privileged class in America."

To curb union influence and prevent future pension outrages, state lawmakers should begin limiting the role of unions in collective bargaining; change the way unions can collect and spend member dues on political causes, and alter laws to make contract negotiations public. In Indiana, for example, Gov. Daniels decertified unions so they no longer can represent government workers in contract negotiations.

While some want taxpayers to believe the only way to deal with the pension problem is to raise taxes or hope for a miraculous economic turnaround and a record-breaking rally in the markets, there are a plethora of real, workable solutions to address long-term and short-term challenges but "nibbling around the edges" won't cut it.
Contact the writer: bcalle@ocregister.com or 714-796-7823