The Financial Times runs a story today by Francesco Guerrera and Nicole Bullock on the looming problems of underfunded public pensions at the state and local level in the United States. The news story cites a new study by Orin Kramer, chairman of New Jersey’s pension fund:
The estimate by Orin Kramer will fuel investors’ concerns over the deteriorating financial health of US states after the recession. “State and local governments are correctly perceived to be in serious difficulty,” Mr Kramer told the Financial Times.
“If you factor in the reality of these unfunded promises, their deficits will rise exponentially.”
Estimates of aggregate funding requirement of the US pension system have ranged between $400bn and $500bn, but Mr Kramer’s analysis concluded that public funds would need to find more than $2,000bn to meet future pension obligations.
Two trillion dollars? One question about these obligations is whether taxpayers will stick around to pay them, or instead will vote with their feet. (“Vote with their feet” is something that has been discussed in various ways at VC — as an aspect of a federal system and states with their own laws.) Many of these pension obligations have been incurred by municipalities and others by states, and in some cases the obligations are intertwined. But what happens if voters-taxpayers move out?
The assumption has long been that taxpayers are stuck, on account of jobs and other circumstance. But query whether that is necessarily true as the baby boom generation retires. In that case, it might find itself far more mobile, in circumstances where rising taxes at every level make relocation a more valuable decision at the margin. For that matter, if otherwise desirable locales manage to tax their businesses away, will the baby boomers’ kids and grandkids have reason ever to locate in places that lack jobs? They might have been raised there — but would they go back?
Would people leave California? They are leaving now, true, but would they leave in the future specifically for this reason or generally on account of the tax burden, particularly as retirees? Or New Jersey? What about the city of Oakland? Or even smaller cities, such as the towns in California — not large at all, small towns, that have already declared bankruptcy over pension obligations? It’s easy to move out of those towns. For that matter, what about a municipality declaring bankruptcy in anticipation of un-meetable pension burdens down the road — in other words, you know it can’t be met, you know that your tax base will move out, and even though you are solvent now, you see that you won’t be down the road — and if you restructure now, you can save a much worse situation by not driving out your taxpayers. But is that available under bankruptcy? I’m not a bankruptcy specialist — it might not be possible to do so as a matter of law; someone can tell me in the comments.
In theory, all parties should be able to see the train wreck coming and renegotiate now, but the reality is, parties won’t do that, because they will lock horns over how much of promised benefits can get paid by increased taxation, and many other things. That’s why bankruptcy judges have much of their discretionary power to impose things on parties nearly all of whom have varying degrees of hold-up. Query too whether less heavily obligated jurisdictions might woo people to come, and perhaps pass measures as part of state constitutions limiting levels of indebtedness and writing in provisions that would cover future contingent pension payments.
How might the heavily indebted jurisdictions respond to taxpayer exit? (Their position becomes a little like the position of utilities with “stranded” costs — and presumably that is how they would present their case, not as having profligately promised benefits as politicians to favored public employee constituencies, but instead as having provided services to taxpayers over decades but now getting stuck with the check.) One way would be to try and impose taxes (and perhaps “fees”) that “follow” people who leave the jurisdiction. More likely, I would think, would be an effort to federalize the pension bill. Alternative one would simply have the federal government assume the burdens, and presumably set the rules for future pensions. Alternative two would be to leave the debts where they are, but have series of federal transfers to state and local jurisdictions to cover them, the unending bailout-stimulus.
The alternative to all of these, of course, would be for states and localities to declare bankruptcy and have a judge restructure the obligations and, one assumes, lower the obligations and the benefits. It is an alternative often touted. I worry, however, that people who call for it assume that the bankruptcy system, which was created to deal with mostly manageable private bankruptcies and the occasional huge corporate wipeout and the occasional public finance disaster, would somehow stay above politics and remain the same essentially apolitical system it is now. That, after all, is what people who look to the bankruptcy system to resolve all these public finance messes seek — a set of neutral, apolitical rules of the kinds that govern private bankruptcy.
When relatively apolitical systems of these kinds are asked to take on, however, not just the occasional role in deeply politicized issues, but instead to take them on as a whole endemic category, now and into the future — it is very hard to see that the apolitical nature of the system is not inevitably changed. How could it not be, over time? (The same is true of the Fed, I would think.) A bankruptcy system that contains, for good reasons, much discretionary authority on the part of the judge, and the ability of Congress to revise the rules, and then gradually takes on as its most visible and public function the resolution of public (and hence political) finance questions, it seems to me, will sooner or later lose the elements of neutral, apolitical decision-making arising from a system fundamentally about private bankruptcy and corporate restructuring. It will become something else. Institutions and systems of governance are not static.
(Realistically, however, what happens regarding public pensions is a political function of the political power of the public employee unions, at all levels of government, as highly organized, interested, focused political groups — as against disorganized publics as taxpayers, represented in theory, but often not in fact, by politicians in state and local government.)
Rich says:
I live in New Jersey and have read in local papers that there are more people moving out than coming to the state. I have no verification of this but given the increasingly anti-business climate I have no doubt this is true. I know of several people personally whose companies built new facilities out of the state rather than contend with the process, often described as corrupt and very time consuming with permits taking years. A small bakery wanted to open in my town and originally had intended to open in September. They were moving into store front that had been a working bakery that closed. By the time they got done with everything the town throw in their way they opened in late December. People say that was quick for this town. When my daughter graduates I probably will leave. Rich(Quote)
A modest Proposal says:
Here’s an idea to solve the problem. It’s inspired by congressional calls for 90% tax rates on banker bonuses.
What if states initiated a tax on public sector pensions that would bring the benefits in line with what would be reasonable (or perhaps with what’s in the kitty)? It’s no more unreasonable than special banker taxes, would not require abrogating union contracts, and would not be susceptible to people voting with their feet as other taxes would be, since the money is earned in state regardless of where the person lives, as the payer is in state (certainly could be defined that way in the tax code if it isn’t so defined now).
Any problems with this scheme I haven’t thought of yet? A modest Proposal(Quote)
Widmerpool says:
I live in Texas and am quite happy with the underfunded pension problem. Indeed, I think the underfunded pension problem is, well, not underfunded enough. It’s time that California showed some courage and set the red-ink standard by allowing quadruple-dipping and maybe even quintuple-dipping for state employees. California, you have nothing to lose but your high-income generating citizens! And where might those poor, huddled masses go? Hmmm, there seems to be a bunch of odd license plates on my daily commute–something written on the top in red-ink cursive writing, starts with a “c”; can someone help me out here? Widmerpool(Quote)
Mark Field says:
I’m not sure what this means. The official census numbers show CA gained population through 2008. I can’t find a number for 2009, but Wikipedia gives a number which is higher than 2008. Do you have another source?
Plural? Is there a city other than Vallejo which has declared bankruptcy due to pension obligations? Mark Field(Quote)
PeteP says:
‘2 trillion’ ... over what time frame ? I see no reference to that in the underlying article. It makes all the difference to the discussion ! PeteP(Quote)
DjDiverDan says:
To answer your question about Bankruptcy for Municipalities, while there is no general requirement of insolvency for individuals or corporations seeking relief under the Bankruptcy Code, Section 109(c) of the Bankruptcy Code does in fact require that a municipality filing for relief under Chapter 9 of the Bankruptcy Code must be insolvent. 11 U.S.C. Sec. 109(c)(3). DjDiverDan(Quote)
PQuincy says:
There are some serious questions here, and there is no doubt that unreasonable pension contracts were entered into. But I also wonder about an issue not addressed by the article: the role of actuarial rules. These, too, are supposed to be ‘neutral’ and independently guarantee the stability of pension obligations, but have become (and may become more) politicized.
I write, by the way, as a member of a public entity pension fund that for the last 20 years has been ‘actuarially’ OVERfunded (the University of California pension plan), so that the system didn’t collect contributions either from workers or employer, and in fact had to find ways (I was told) to SPEND more money so that they would not be penalized by Federal law for being overfunded. I understand the rules against overfunding (because companies sometimes find it smart for tax or other reasons to stick money into the pension fund rather than elsewhere). But the upshot was we didn’t contribute for years, and now the pension fund shows a shortfall going forward.
This wasn’t, therefore, a case of profligate promises, per se, but that the rules for determining whether future promises were tenable were themselves distorted by extraneous factors.
I also don’t know whether this scenario played any role at all in the explosion of generous new promises in the 1990s and early aughts: did the illusory “well-fundedness” of various local and regional pension plans, owing to the tech bubble and the real estate bubble with its various nefarious ‘bond’ products, make it too easy for public officials to promise juicy pension benefits when negotiating with public service unions?
Regulatory capture of financial rules by the financial industry played a major role in the current crisis, and I’ve read a number of hair-raising stories about complex financial deals engineered by financial services companies that have gone spectacularly bad for government entities that went into them. (A notable one is New Jersey’s having to pay Goldman Sachs a million dollars a month on swaps issued for bonds that have been entirely redeemed [http://www.bloomberg.com/apps/news?pid=20601087&sid=aufmSRtDn0gg]). In Germany and the United States, municipalities went into various leaseback and swap arrangements that are now costing huge amounts. In Germany, municipal officers received thousands of pages of contractual material sometimes only hours before the closing of such deals. They may have been fools to sign, but those setting up the deals are scarcely innocent).
Was there some regulatory capture of the pension accounting rules, as well, that rewarded public entities by allowing them to make juicy future promises, and rewarded the financial-industrial complex by allowing pensions to buy more exotic products and to invest in higher-risk ways, perhaps? PQuincy(Quote)
Soronel Haetir says:
In regard to the question posed in the OP: I know people (mid-to-late boomers mostly) who are in fact already planning their retirement around this issue. Whether it is a concern for more than the few I’ve talked with I can’t really say, but at least one couple has been talking about it for at least five years now. Soronel Haetir(Quote)
Peter says:
I am an Illinois resident. Recently I an employee of Cook County, brag about taking early retirement at 51. As I am not enthused about paying for his retirment, or that of the other dregs on the public payroll in this state, I pose the following question:
New York’s state const. has a provision barring the state from reducing pensions of public employees. Illinois pols were smart enough to add the same clause to the state constitution in 1970. My question is this–are these clauses binding and enforceable? Can they be overcome via bankruptcy proceedings?
I doubt it matters, as the most profligate sts such as NJ, NY, IL, and CA will never do it–their public employees have too much power.
My guess is we would actually need to amend the fed const to provide that no st or fed law, or st or fed const clause, or any judic doctrine can be used to prevent sts from reducing pension payments to public employees. For good measure, we ought to throw in a clause prohibiting defined benefit pension plans, pensions for persons under 65, and collective bargaining for public employees.
A more likely scenario is that Congress just bails out the profligate sts. There is a reason after all that one third of the stimulus went to st govts.
Personally, I think we need about ten amendments limiting the power of the sts and the fed govt across a variety of areas.
While the odds are long, the way to do it is to have the sts demand a const conv–that way it only takes a maj in Congress to go along, instead of two thirds (the const seems to make it mandatory for Congress to call a const conv when sts ask for it, but I wouldnt trust a Dem Congress to obey the letter of the Const in such a case). Peter(Quote)
Soronel Haetir says:
I don’t see a need for special public pension rules, the general pension finance rules have been quite enough to allow problems, mostly it seems by not requiring anywhere near enough cash set aside to meet known obligations. Given that nearly every major private employer with a pension plan has underfunded it, why would public employers be any different? Soronel Haetir(Quote)
larry says:
I agree that the federal government will probably assume some responsibility for underfunded state and local pension obligations. The states and localities won’t cut benefits or raise taxes sufficiently to fully fund pensions. And their ability to borrow will become increasingly constrained because investors won’t be stupid enough to buy their bonds. And they can’t (legally) run deficits.
That leaves the federal government as the only entity that can borrow enough to bail them out. My children and I will pay for the profligacy of these state and local governments. We couldn’t vote these politicians out because we didn’t live in their districts. But we can be forced to pay for their spending.
You raised a fascinating question as to whether states can levy taxes or fees on people after they move out of state. I don’t know of any case law on this question, but I wonder whether courts would use the due process and commerce clauses to strike down such taxes and fees because the taxpayers no longer have any connection with the state. Is anyone else familiar with case law on this question? larry(Quote)
Sun Tzu's Nephew says:
I left California (where I was born, raised, and lived most of my adult life) five years ago, in part because of this coming storm.
I never voted for it, but as long as the idiots in Sacramento keep voting away my money, I’m not going to stick around for it.
Fortunately my profession is very portable. I found a delightful community in a state that has some freedoms left, and we’ve made a new home. Sun Tzu’s Nephew(Quote)
MartyA says:
“...a political function of the political power of the public employee unions...”
Well, yes, but more important is the inherent weakness of the bargainers on the other side of the table. This is the reason that public sector employees should never have been allowed to bargain collectively for pay and benefits and, especially, benefits that don’t have to be funded or paid within the tenure of the pol representing the taxpayers.
Very, very few pols are willing to risk their comfort and well being to resist a union’s unreasonable demands. There is no win in risking a work stoppage, especially, if he can bury language to be effect five years hence in an obscure paragraph. Name one pol who is willing to tackle the issue of public sector employees qualifying for disability pensions. MartyA(Quote)
veteran says:
Mark Field says:
Would people leave California? They are leaving now, true
I read an article over the weekend indicating that while large numbers of people are leaving California that the overall population did grow but growth was attributed to increased births in the state. When I find the link to the article I will post it. veteran(Quote)
iconoclast says:
One future scenario left out of your analysis is the possibility of inflating out from under the crisis. I believe that this is the strategy intended to deal with much of the current debt–borrow high-value dollars and repay with low value dollars.
So while each public entity–municipality, state, and federal–and their unions will appeal to the next higher level of government for bailout money, everyone knows that the coming high inflation will drive down actual costs.
Of course, high inflation ruins economies but that is the price of spending money a nation does not have. Just a reprise of the late ‘70s. iconoclast(Quote)
EvilDave says:
The problem with “voting with your feet” is that you can’t vote with your feet when it comes to the US.
At the Federal level you are taxed on your worldwide income, not just the income you made in the US. The US is odd in taxing based upon citizenship not residence. And, giving up your US citizenship isn’t a good option as the US then levies a net worth tax on you.
Also the US greatly increased how US ex-pats are taxed.
So, when the Federal finances go all pear shaped, you won’t be able to move to Canada and just forget about it (like so many did when they left England during the pre-Thatcher 70s).
The coming US taxation system may be bad, but your only options are (a) live with it, (b) live in a foreign country and be double taxed (US & foreign) or (c) move to a foreign country and stop paying US taxes, effectively banning yourself from re-entering the US. EvilDave(Quote)
Abdul Abulbul Amir says:
Caliifornia is had more out migration to other states than immigration from other states. However, it still has a large immigration from other countries. The problem lies in the fact that those moving out tend to produce higher income than those moving in. Abdul Abulbul Amir(Quote)
Abdul Abulbul Amir says:
Intercity one way 16 foot moving truck rental rate from Budget:
San Diego to Houston $1,343.40
Houston to San Diego $627.90
Note this is the same class truck for the same days 15 to 25 January. Abdul Abulbul Amir(Quote)
ADF Alliance Alert » Underfunded Public Pensions as “Stranded” Costs? Two Trillion Dollars? says:
Connecticut Lawyer says:
Unfortunately, there is no provision in the Bankruptcy Code covering bankruptcies by states. The Code only covers municipal bankruptcies. So a state bankruptcy could only happen by virtue of a new federal statute. In the wake of the Administration’s response to the GM bankruptcy (i.e., steal from senior creditors and give to the unions) what do you think a statute covering California’s bankruptcy would look like?
An alternative would be a receivership under the applicable state law. I have no idea how that would work out, or even if it would be possible in any state.
In short, there is no alternative to the political process for cutting existing pension obligations. Connecticut Lawyer(Quote)
siskiyou says:
Abdul is correct. There is also another Californian peculiarity. As I recall, although I am not entirely up to date on the subject of local agency taxes in California, since the adoption of Proposition 13 the rule has been that cities have not had the power to increase real property taxes. Nor, to the best of my recollection, do they (with the possible exception of a few charter cities) have the power to impose income taxes.
There is a bankrukptcy-related question that I did not see mentioned above. Can we expect to see bankruptcy judges ruling on the day to day operations of cities and counties? Perhaps someone skilled in bankruptcy practice can answer. Given the federal courts’ history running school districts, that would be a chilling prospect. siskiyou(Quote)
SW says:
I left California for family reasons a few years ago, but when I was there, I and others often felt it would be a better place to live if more people left. SW(Quote)
Oren says:
It’s interesting that the States must balance their budgets (through bond offers) yet can create unfunded obligations of this sort. Good loophole, actually. Oren(Quote)
Abdul Abulbul Amir says:
A very good reform would be to move to defined contribution retirement plans. The cost and political accountability would be visible right up front. Abdul Abulbul Amir(Quote)
Oren says:
AAA, I have no theoretical problem with defined-benefits plans, so long as they are administered impartially and do not accrue unfunded obligations. In practice, political influence and other dishonesty might make that impossible. Oren(Quote)
Mark Field says:
This makes sense. The post made it sound like the net population was declining, which didn’t seem right. Of course, people are always leaving CA as well as coming in, but the net flow there is important. I doubt it has much to do with state pensions specifically, but more likely the fiscal problems generally.
This is a problem in the short run, but immigration has long term benefits which lead me to support it. Mark Field(Quote)
wws says:
“Caliifornia is had more out migration to other states than immigration from other states. However, it still has a large immigration from other countries. The problem lies in the fact that those moving out tend to produce higher income than those moving in.”
To put this in much more prosaic terms, California is trading relatively high-income native born citizens for low-to-no-income central americans and Mexicans. It’s easy to decide if California is making a financially wise trade.
Here’s the way out of the pension problem I see for California — at some point, all state and municipal pensions will be paid in state issued scrip, rather than US currency. If this only sells at 30 or 40 cents on the dollar, well that won’t be the State’s fault, will it?
And the reason why the US treasury very well may refuse to bail California out is that there are 49 other states who are all eager to see once proud California fall flat on it’s economic face. No one will say that openly, of course, but less jobs for California means more jobs for everyone else as those jobs move.
California is about to find out just how few friends it has in this country. wws(Quote)
orca says:
So much gloom and gloom.
It’s not politically motivated, is it?
Given that Hollywood just had a record year and Google and Apple are both poised to release home run products. orca(Quote)
Instapundit » Blog Archive » UH OH: Underfunded Public Pensions as “Stranded” Costs? Two Trillion Dollars? “One question ab… says:
alex says:
“I left California for family reasons a few years ago, but when I was there, I and others often felt it would be a better place to live if more people left.”
Did you feel that the solution to that problem was exporting as many middle to upper class US citizens as possible and replacing them with larger quantities of poorly educated illegal immigrants? If so, you must be so happy you’re about ready to move back.
More on topic, the proper debate here should be the legitimacy of public pensions as currently devised. The two trillion number is useful in that calculation. If a spineless politician agrees to pay a public employee union a million dollars a person ten years after the agreement goes into force and this bankrupts the municipality, what is the proper response? Is it that higher levels of government ought to be left holding the bag? Or is it that ridiculous benefit levels simply ought to be regarded as illegitimate results of special interest capture of the government?
It’s worth remembering that government pay is supposed to be markedly LESS than comparable private jobs in light of vastly better job security, health care, pensions and (ha) the spiritual rewards of public service versus making someone else wealthier. How far we’ve come from that. alex(Quote)
Mark Buehner says:
So why is the governator begging the feds for (more) cash? If things are booming why is the rest of the country paying Cali’s bills? Mark Buehner(Quote)
SW says:
Are there studies that support this assertion? Given that the premise of the OP is that people would leave because California is too expensive, then people who stay would be wealthy. SW(Quote)
Blue says:
Iconoclast is right...devalue the currency while holding the pension obligations steady and the crisis goes away. That’s exactly what happened in the USSR to Soviet-era pensions and it will happen to us as well.
Retirees in states that planned well (e.g., Texas) will be better off because those states will be able to protect against the rises in inflation. Retirees in profligate states (e.g., California, New York) will be worse off. Blue(Quote)
orca says:
What a laugh.
Every single Red State receives far more in federal monies than they pay in. California and New York are lucky to get get 40 cents on the dollar back from all the federal tax money they pay. orca(Quote)
Mark Buehner says:
No, its expensive for wealthy people because they are being taxed. Its a question of how much people putting in vs taking out. The premise (and it seems impossible to deny) is that those taking more out of the system are going to stay (and attract the likeminded) while those putting more in are more likely to leave (and see fewer wealthy moving into the state). This creates a feedback loop if you keep increasing taxes on the producers as opposed to cutting benefits. Like the famous Thatcher quip says, the problem with socialism is that sooner or later you run out of other peoples money to spend. Mark Buehner(Quote)
wws says:
google, apple, and hollywood are 3 great examples of companies that could leave California overnight if financial conditions dictated it. In fact Hollywood has already outsourced much of it’s production to places such as Louisiana and Canada because the so-cal cost structure is prohibitive — and with the actual production go the jobs. Cutting edge movies such as “Avatar” with virtual sets are proving that movies can be easily made anywhere in the world, and there is no longer any value in a single physical location. Remember, socal was originally favored because of it’s good year round weather — that is no longer a factor.
Same thing goes for Google and Apple — how would either of those companies react if a place like Austin, Texas, were to offer them a guarantee of NO State taxes and no local property taxes for 20 years if they were to relocate?
Don’t scoff, that’s a lot more possible than you may realize, and I imagine most people would be surprised at some of the deals that have already been cut.
Maybe not today, but if California gets any more confiscatory — kiss that high tech industry goodbye. wws(Quote)
Mark Buehner says:
Talk to your senators, but this isn’t about federal pork and who gets to line up at the trough first. Its about state spending, of which California is spending far more than it takes in and, being unwilling to do anything about that, is begging the feds for a bailout. Mark Buehner(Quote)
masstexodus says:
Some state constitutions bar cutting of retiree pensions. This shows the priorities of government — it is less concerned with the general welfare and more concerned with the welfare of a connected few. masstexodus(Quote)
Mr L says:
I don’t see a need for special public pension rules, the general pension finance rules have been quite enough to allow problems, mostly it seems by not requiring anywhere near enough cash set aside to meet known obligations. Given that nearly every major private employer with a pension plan has underfunded it, why would public employers be any different?
IIRC, private employers are considered ‘underfunded’ at 80% funding, while public entities face a much lower standard (60%) and are generally less accountable. Mr L(Quote)
Soronel Haetir says:
The real problem I have with people who leave CA is that many of them want to impose CA style governance on the places they move to. They moved to get away from such governance but evidently think the problems are in execution rather than design. Soronel Haetir(Quote)
theobromophile says:
Seems like the biggest problem would be that some people would be taxed twice: once to fund their own state’s solvent pension programme, and another time to fund an insolvent state’s pensions. Alternatively, people who live with fewer government services but lower taxes will find that they can get the former, but not the latter. States and municipalities will then have no incentives to cut back on pensions (or other services), since they can get someone else to pay for them.
The ideal situation would be that states and municipalities would have to account for future pension payments in their annual balancing of the budget. Aside from avoiding these problems, it would force politicians to make tough choices with their constituent’s money, not the money that will come from whomever happens to be living there twenty years from now. theobromophile(Quote)
Mark Buehner says:
Thats funny (and true)- look at New Hampshire. The Don’t Tread on Me state has gone very blue recently, due much to the influx of Massachusetts folks escaping taxation. Ironic. Mark Buehner(Quote)
guy in the veal calf office says:
Reason Magazine recently devoted a cover article to the California public pension situation, including how public employees game it, anecdotes of its piecemeal enactment, and the prospects for reform. It mentions that after Vallejo tried to get out from unfunded pension obligations, the state passed a law requiring future municipal bankruptcies get approved by a state commission (you can guess on who was appointed).
I highly recommend the article (and Reason has been covering the issue for a while) but I’m not sure they’ve posted it on their site yet (but really, why don’t you subscribe?).
City Journal also had an article that was blogged about here concerning the growth of public sector obligations. The author mentions that Maryland lost 1/3 of its Millionaires when it imposed a millionaire tax. Its easier to vote with your feet in the smaller states of the eastern seaboard. guy in the veal calf office(Quote)
M. Gross says:
Every single Red State receives far more in federal monies than they pay in.
This is factually incorrect. Several of the largest “red” states pay out more than they take in. M. Gross(Quote)
John Skookum says:
That is a function of the higher incomes at the top end of the scale in the bicoastal blue states. Last I knew, liberals thought progressive taxation was a good thing, but if you feel like changing the rules that would be fine with me. I’m for a flat tax on all income, constitutionally limited to 20%, to be paid by Bill Gates and garbagemen alike, and no voting franchise for non-taxpayers.
Oh, and you should keep in mind that the figures you cite date back to the frothiest boom times of the mid-2000s. With top-quintile incomes falling faster than any others, and top-quintile earners increasingly fleeing confiscatory tax regimes in mismanaged hellholes like New York and California, those ratios are bound to fall and in many cases reverse. John Skookum(Quote)
orca says:
Um, if the people of California and New York didn’t have to send so much of their income to the federal government (because their higher salaries are taxed at the higher rates) they would be in a lot better financial shape.
But then states run by Southern fiscal “conservatives” that depend so much on federal handouts (like DeMint’s South Carolina) would soon look like Gaza. orca(Quote)
Mike W says:
Taxpayer flight from high taxation is happpening now and has been for a long time. My mother moved from high-tax Maryland to lower-tax Pennsylvania after her retirement.
A few years ago, I sat between two businessmen on a flight from Baltimore to Los Angeles. Each had moved his business from Maryland — One to Pennsylvania, the other to Delaware, to flee Maryland’s high taxes.
I’m one of the lucky few TV engineers still working in TV production in Los Angeles. Every person I know in this hard-hit industry is either planning to exit California after retirement or is paying their homes off early, preparing to retire on extremely small taxable incomes.
Even Gov. Schwarzenegger acknowledged the problem. Last month he said that California is losing about 3500 people each week–taxpayers and their families. Immigration is offsetting the population loss, but how many of them pay taxes?
Our freedom to relocate within the US provides a check on government greed at the state and local levels. God help us if that freedom is ever abridged. Mike W(Quote)
Blue says:
Sure, for Blue State programs they’re strongarmed into. Blue(Quote)
Mark Buehner says:
“Have to”? This isn’t Russia, is this Russia? Funny, I don’t see Barb Boxer or Chucky Schumer standing up against Ag subsidies in Iowa or multi-million dollar Byrd Memorial Parking Garages in West Virginia. Quite the opposite. Mark Buehner(Quote)
Mark Buehner says:
How big of bribes did Landreua and Nelson get to vote for healthcare again by the way? Mark Buehner(Quote)
masstexodus says:
Texas receives 94 cents back for every dollar in federal tax I believe (so it fares better than CA and NY, but is still a donor state). masstexodus(Quote)
Luke says:
I was born and raised in San Diego, 10 minutes from the beach. Then I went to law school, passed the CA Bar and worked as a lawyer in California, until it became abundantly clear that governments — at all levels — in California were doing their best to make make life easier for illegals and underperformers, at the expense of those who make the State run. The result is that the super-rich are untouched, but the vast middle are squeezed harder and harder, until they leave.
California’s public schools are abysmal, so you have to send your kids to private school (while still paying for public schools). Housing is (still) outrageously overpriced, and crime in the urban areas (unless you’re super rich) is rampant, so you move further and further into the suburbs to afford a “decent” house. Except the infrastructure is crumbling, and traffic is horrendous, so you spend more waking hours with your windshield than you do with family.
So, when I looked elsewhere and realized I could live in a 4,000 sq. foot house, on 1 wooded acre, with a pond and a 10 minute commute (no freeway), I left. And I won’t return until California hits bottom. And, no, not like right now. When it really hits bottom. When the municipal pension problems explode and when Sacramento is forced to cut 200,000 state employees. And even then, I’ll buy a small condo near the beach as a second home, to minimize the tax liability.
I turned down a VERY lucrative position in LA just last year. Even though the salary was enough to live on, it wasn’t enough to thoroughly insulate one’s family from the madhouse environment California has created for itself. Luke(Quote)
CatoRenasci says:
One of the greatest benefits of electing a Republican/tea party Congress would be the Federal Government refusing to bail out the profligate states like California and New York, and passing a state bankruptcy statute that allow for the orderly rejection of burdensome contracts, including union contracts and pension obligations. CatoRenasci(Quote)
buffpilot says:
As a note. A large part of the dollars going to Red States from the Fed are for military bases (and production: ex. F-35 is being built in Texas)and for the large amount of Federal land held in Red States — see Alaska for a good example.
Subtract that out and Blue states actually get more. buffpilot(Quote)
Mark Buehner says:
‘A modest proposal’ did make an interesting proposal above– just tax away any benefits over a certain threshold. Of course the political will would be necessary and we would probably end up with a French style riot of employee unions on our hands, so its not really tenable, but it is nice to see the shoe on the other hand now and again.
That being said– all of these ideas (especially the pro hyper-inflationaries, yikes!) are a net drag on the only thing likely to dig us out of this hole, the economy itself. The more uncertainty we create in the future with massive unfunded liabilities and untested schemes to deal with them, the worse the business environment and the less likely people invest and take chances. That’s something Krugman and the Keynesian disciplines never account for. These unprecedented levels of debt are scaring investors into rolling over and playing dead. Commerce requires security and some stability, we are quickly finding out that all these kings horses and men in government can’t do much positive for the macro-economy, but can SURE do tremendous damage in a short time. Mark Buehner(Quote)
billylauderdale says:
Ironicly, the pensioners may be the ones who move out.
Draw you pension from New Jersey Fire dept but move to Florida.
Do pensioners need to live in US? Why not costa Rica etc.? billylauderdale(Quote)
JMA says:
I really wouldn’t mind if my state got back 100 cents for every dollar donated. The fact that we lose six out of every dollar tells me that my representatives need to twist someone’s arm a little harder to get a fair shake. ;) JMA(Quote)
JIMV says:
I am living the question. I lived and worked in Maine for 14 years beginning in the 90’s. It was my plan to retire there BUT, the state reached such a high level of taxation and regulation that it became a stupid idea. Instead I retired, moved to Idaho and cut my tax and other costs of living by over $500 a month...As Maine taxes everything exorbitantly while Idaho is less greedy, that $500 a month is the difference between eating in retirement and not.
Only idiots stay in places that treat their residents like cash cows for government schemes. JIMV(Quote)
agmartin says:
2004 must have been a lucky year for them as they received 79 cents on the dollar back. Don’t like the situation, then quit supporting tax increases focused on the rich, who are concentrated in blue states. agmartin(Quote)
CatoRenasci says:
No matter — the checks are cut in state, so the state could withhold whatever taxes it imposed.... CatoRenasci(Quote)
Tweets that mention The Volokh Conspiracy » Blog Archive » Underfunded Public Pensions as “Stranded” Costs? Two Trillion Dollars? -- Topsy.com says:
JToTheC says:
How will bankruptcy judges be able to adjudicate, as presumably many of the municipalities that employ them are the ones in pension trouble? JToTheC(Quote)
Barry D says:
As a native of the Southern California beach area like Luke, now living in another state by choice, I have to say that those who think California isn’t losing people are high.
The population may be rising. If you trade, say, a two-income upper-middle-class family made up of a marketing exec and an IT project manager raising two children, for a two-income non-English-speaking family made up of a construction laborer and a hotel maid raising four children, you have increased the population by 50%. You’ve also reduced your tax revenue from tens of thousands of dollars to a net negative, considering under-the-table income, free school lunches for the kids, tax credits, medical clinics, etc.
The most obvious problems this poses for California are an enormous drop in net tax revenue, and a drop in real estate prices (leading to additional drops in tax revenue). Family 1 could afford a nice house in Rancho Bernardo, and helped provide an income for a large number of other people in services, retail, restaurants, etc. Family 2 can’t afford that house, and houses without buyers go down in value, leaving the remaining Family 1 residents “upside down” and unlikely to spend. Family 2 does not go to expensive restaurants or keep Nordstrom in business. They don’t hire gardeners, nor do they send their kids to private schools and free up public funds thereby. Finally, California’s greatest product has always been ITSELF. Real estate values dropping are devastating in California, in ways they aren’t in other places. Barry D(Quote)
JIMV says:
Yet who actually pays those high taxes in Blue states, the center city blue victim minorities or the red folk living in those states? JIMV(Quote)
Squid says:
It’s easy to move out of those towns.
Only if you’re a renter. If you own property, you’ll need to be wealthy enough to walk away from significant real estate losses. Squid(Quote)
Concerned Citizen says:
A couple billion in revenue from these blockbuster products is a drop in the bucket. There is a $21 billion shortfall over the next 18 months. Even if you jacked up state taxes to double where they are now, all you would do is drive out the remaining productive citizens.
The problem is one of spending too much. You could fire half the state employees, keeping just the teachers, firefighters and police, CalTrans and DMV and 80% of the taxpayers would never notice the difference. The Beast is being starved, like it or not. Concerned Citizen(Quote)
Nationalization of private and state obligations | Ken Nelson says:
Larry J says:
The real problem I have with people who leave CA is that many of them want to impose CA style governance on the places they move to. They moved to get away from such governance but evidently think the problems are in execution rather than design.
Back in the 1980s, I used to see bumper stickers that read, “Don’t Californicate Colorado” because of this very issue. Unfortunately, the state was effectively Californicated years ago.
As to the claim that New York and California only get back 40 cents of every tax dollar sent to Washington, I wonder how that number was affected by all of the multi-billion dollar bailouts last year. A lot of that money went to New York (bankers and Wall Street) and likely to California, too.
In the end, those of us without any pension and who have only our retirement savings will be taxed into poverty so the public employees can retire in comfort. The public employee unions have political power and we individuals don’t. Larry J(Quote)
Abdul Abulbul Amir says:
Many do. Mexico also. Abdul Abulbul Amir(Quote)
Perseus says:
That presupposes that California & NY wouldn’t simply ratchet up their taxing & spending by a commensurate amount. Perseus(Quote)
A. Zarkov says:
But can the feds borrow enough? The US Treasury has to rollover old debt and borrow something like $2–3 trillion in short term this year. I have not checked these figures yet, but they seem about right considering the debt the feds originated over the last two years. I’m skeptical that Treasury can attract that much money at current interest rates which are near zero. In other words, governments at all levels are about out of bullets. That leaves money printing and inflation as the only way out. The total debt to GDP ratio is currently about 4 and that needs to come down to something like 2. Running about 20% per year inflation for 5 years should do it. Now can the Federal Reserve do that without triggering hyperinflation? A. Zarkov(Quote)
ECW says:
For all the carping about Red States getting more funding — I’d submit that the money entering those states goes almost exclusively to the impoverished and also to subsidize cities like Houston, New Orleans, Atlanta, St. Louis, Little Rock and others — you know — urban areas that vote almost exclusively Democrat and are led by Democratic politicians. I’m all for making all politics local. So, here’s an idea. We in the backwards red states will gladly send you your rather expensive democrat voters and give them over to the blue states. You can keep your money in state and dole it out exclusively to blue citizens. In exchange, we’ll take all those idiot right-wing nuts off your hands. The north east can be strictly blue and a happy Neverland. While the South-east can turn into the idiot-haven we know it surely would. Ten years after the experiment we’ll both take stock of how the exchange went. I’m most certain the blue states will fare quite well. :) ECW(Quote)
Dan Weber says:
Employers, both private and public, can purchase defined benefit plans with dollars today from the private market. Unfunded liabilities go away because they pay for future benefits right now. The company or municipality or state government can go out of business tomorrow but their employees’ benefits are completely funded at all times.
“Defined-benefit” doesn’t have to mean “we don’t pay until later.” Dan Weber(Quote)
A. Zarkov says:
I don’t think the pols in Sacramento believe that.
After it hits bottom, you won’t want to come back to what’s effectively northern Mexico.
You were wise to turn down the offer. Fortunately for me I sold my house in 2005 at the peak of the bubble, and I am now a happy renter. I can leave CA any time I want. A. Zarkov(Quote)
Garrett says:
The biggest anchor is the ability tosell one’s property for a reasonable profit, or at last resort, without paying the balence out of pocket. This will trap hundredsof thousands in insolvent cities with high taxes and fees. Garrett(Quote)
A. Zarkov says:
Most people don’t work for either Hollywood, Google or Apple. You just cherry picked a few profitable firms. What does that prove? Try getting a professional level job these days– it’s not easy. A. Zarkov(Quote)
Larry J says:
The biggest anchor is the ability tosell one’s property for a reasonable profit, or at last resort, without paying the balence out of pocket. This will trap hundredsof thousands in insolvent cities with high taxes and fees.
If the taxes and fees become too high, businesses will leave. When the jobs leave, so will the wage earners (see Detroit). As real estate prices decline and taxes increase, people will be tempted to just walk away.
We lived through an extreme case of this here in Colorado Springs back in the late 1980s. The city had forced developers to float a bond for a major highway improvement. The housing market here tanked in 1987 and many of the developers went out of business, so the bonds reverted to the property owners in a couple (then small) developments near that highway. Overnight, people saw their property taxes increase by an average of $1,000 to service the bond debt. This was at a time when the average home in those developments cost well under $100,000. Many people in those developments just walked away from their homes, losing everything they’d put into the properties and trashing their credit records. The taxes were simply so high that they couldn’t afford to live there any more and they determined it better to just walk away. In the end, the city ended up having to pay for the bond debt. Larry J(Quote)
glenn says:
Couple of points,
First, while it’s true that the population of California is growing the people who are coming are takers and the people who are leaving are makers, or at worst retirees who are taking generous (mostly public) pensions and moving to states where the tax structure is rational and adults are making the policy decisions.
Second, If you don’t have the money you can’t pay the benefits. I learnd this the hard way when the California company where I worked dissolved a defined benefit pension plan.
By the way, California used to tax the total earnings of individuals and companies headquarted in Cal and operating in other states. The Clinton admin ended that in 1996 (I think) glenn(Quote)
orca says:
It’s not easy anywhere.
But the states that exist on primitive resource extraction, farm subsidies and military spending would go to just about any length to get an Apple or a Google to relocate from California. orca(Quote)
Mike M. says:
It seems to me that what is required is a procedure for government bankruptcy.
This should be Extremely Painful.
If I were making the law, the rules would be:
1. Dissolution of the government. Cities become unincorporated, states become Federal territories.
2. The next higher level of government appoints a Governor for the area. That individual is responsible for getting the debts paid offf.
3. Current and former elected officials are personally bankrupt. All excess wealth goes to pay government debts. “Excess” being defined very severely...as in the Pauper’s Oath. There must be personal responsibility for misgovernment. Any attempt to conceal wealth would be a capital crime.
4. Current and former elected officials are proscribed. They may not hold elected office ever again.
5. Retirees take a place in line with every other creditor.
I’m hard-nosed, yes...but I’m also aware of the fact that the Federal Government was NEVER this generous.
The OLD Civil Service Retirement System requires 30 years of service, and 55 years of age, to retire on half-pay. You can crawl up to 80% pay...with 42 years of service. No double-dipping, either.
And that system was closed off 25 years ago. The Federal Government saw this coming, headed it off at the pass. Since 1984, every new hire has been signed up for an IRA-like system.
If state and local governments could not see the writing so blazingly written on the wall, and take the obvious measures to counter it...well, I have no pity whatsoever. Strip them. Mike M.(Quote)
michael freeman says:
Thanks for setting that knucklehead straight. michael freeman(Quote)
Happy Not To Be In California says:
I’m one they never got. I semi-retired in 2003. We are more or less financially independent, and could have lived pretty much anywhere. We looked systematically.
Never even really considered California because of housing prices, taxes, and overall poor government. Looked in some detail at Oregon and Washington, and concluded they were both headed the same way. So no West Coast. Too bad — the weather is nice right on the coast, and some places are beautiful (I used to run at Torrey Pines when in La Jolla on business years ago).
We chose a state with no income tax, a more rational government, and bought a nice new home that backs onto on a small man-made lake, for $220K, in a small town that ranks in the Top 25 best places to live. Life is pretty good.
Rather than South Carolina turning into Gaza, as someone mentioned above, I think its a good bit more likely to be LA’s fate. The liberals should be ashamed of this, but they don’t even admit (or maybe even see) the problem. Happy Not To Be In California(Quote)
ShelbyC says:
Well, since the one making the law is the bankrupt states, it’s likely to be less painful than you might hope. ShelbyC(Quote)
matt says:
My wife and I are in our mid-30’s, both attended University — wife has an MBA too. We have 2 kids and live here in CA. We both work in the private sector and make in relative non wall street terms, great money. I guess we’re part of the “productive” class that is starting to realize this is F’ing crazy! We’ll be packing up in late 2010/early 2011 and leaving CA. We’ve made 3 scouting trips to TX and NC already. A good % of our friends are seriously considering moving too. High taxes, awful schools, decaying infrastructure, and sky high housing prices in the few neighborhoods that still have good public schools is a losing proposition. matt(Quote)
Mike G in Corvallis says:
Hollywood? You’re confusing gross profits with net profits. Ask any studio accountant — no movie studio has turned a net profit on any movie in the past fifty years. They’ve even been trained to say that and keep a straight face, which is no small feat. Mike G in Corvallis(Quote)
Blue says:
I just want to point out that predicting hyper-inflation as a solution is not the same was believing it should occur. It’s simply the only possible option I see.
And as an aside, pension obligations are small potaties compared to the future obligations imposed due to retiree health care benefits. Those are an order of magnitude more onerous. Blue(Quote)
orca says:
With the highest violent crime rate in the nation, South Carolina is already our Gaza:
http://www.ors2.state.sc.us/abstract/chapter1/staterank11.php orca(Quote)
A. Zarkov says:
Apple has outsourced almost everything. I ordered a Apple router, and it was mailed directly from China right to my home address. Both Apple and Google could move to a more business frienly state, but they might have trouble attracting top talent. Eventually both companies will move offshore completely because India, China, Korea will be able to provide all the talent they need. A. Zarkov(Quote)
Mark Buehner says:
Or triggering a shooting war with China?
We can’t inflate our way to solvency. Inflation is not our friend. That’s a perpetual motion argument. Mark Buehner(Quote)
Mark Buehner says:
I wasn’t aware that everyone in California was a high priced employee of Google or Apple. I was under the impression they employed less than 50,000 each, total, which is about 2% of what Wal-mart alone employs. Is the new Central Plan that these guys employ .3% of the population and everyone else lives off their tax dollars? That should work. Mark Buehner(Quote)
A. Zarkov says:
We sure can inflate our way to solvency, if solvency means the ability to service debt.
Most people live from paycheck to paycheck. In other words, they have few financial assets and would be little affected by a hyperinflation as long as they were still working. The victims would be rich people with lots of financial assets and the retired living off pensions and savings. They will just get sacrificed. A. Zarkov(Quote)
Pixelkiller in Doity Joisey says:
Three years ago I sent for and received a concealed-carry permit out of Florida. It works in about 35 states, but not here in Doity Joisey where I am considered just a Subject and not capable or worthy of self-defense. So, could I change my place of residence simply by moving my address and not me? Shouldn’t be too hard; vehicle registrations, voter registration, drivers license. What-the-hell, no one come around and checks. All you need is a mailbox and a friend to foreward the important stuff.
Just thinking.
Er, maybe I’ve lived in Joisey too long. I’m thinking like one of the Sopranos. Pixelkiller in Doity Joisey(Quote)
Mark Buehner says:
Aren’t those the people that, you know, own businesses? How are those paycheck to paycheck folks gonna survive when their employers shutter their offices? Mark Buehner(Quote)
A. Zarkov says:
Apple has 34,300 full-time employees, Google has 19,665 and Walmart has 2,100,000. Apple and Google combined has about 3% of Walmart employees. I not sure what that means because all three are very different companies. A. Zarkov(Quote)
A. Zarkov says:
That’s a good question. Hyperinflation does not necessarily destroy a business. In fact the business sector is so heavily in debt they might welcome inflation. Right now the US is awash in debt and we have reached the point where serving that debt is becoming harder and harder. Inflation is the only way out. A. Zarkov(Quote)
Marty says:
1. The “red-state” bias toward getting more Fed $s is largely tied to direct Federal spending like military bases, NASA, TVA and the like, and helps state/local budgets only indirectly if at all. It can hurt, esp local govts where federal facilities are exempt from local propery tax but still burden local budgets fro services. Blue states like CA and esp NY (champion Medicaid gamesmanship) do just fine with Fed aid as a share of State and local govt spending.
2. Abruptly going to a DC plan with an underfunded DB makes it that much harder to bail out the DB because there are now fewer members paying in. It’s great in 30 years but you don’t survive that long because your cash flow gives out.
3. Inflation only works if you keep public sector salaries, esp. of the senior people nearing retirement, well under the rate of inflation. If they get salary adjustments that track inflation you just make it worse because their pensions go up proportionately but teh investment pool has a hard time growing that fast. the first wave of big pension funding problems developed in teh inflationary 1970s. Marty(Quote)
A. Zarkov says:
How many people have pensions fully indexed for inflation? I think very few. Then we know that the CPI understates inflation. It’s been carefully jiggered to do that. A. Zarkov(Quote)
Marty says:
Dan Weber at 3:34 pm
you can only buy an annuity and get out whole, and meet your liabilities, if your DB plan is 100% funded. In that case you might do it to get out of the pension business, but you don’t really have a current problem, you’re fully funded anyway.
The problem is if you’re only 60% funded, or worse, and then the annuity you buy will NOT discharge your statutory responsibility to the pension plan and its members so you’re back where you started. Marty(Quote)
A. Zarkov says:
Indeed it does. I would have guessed Louisiana. Of course one does not live in state the way one lives in his city or town. Living in New Orleans or Detroit is much more dangerous than living anywhere in SC. A. Zarkov(Quote)
Marty says:
A Zarkov
indexing has nothing to do with it. A DB pension is based on multiplying late career salary by a factor driven by years of service. If the salary goes up, the annuity goes up, but career-long contributions and earnings thereon are relatively fixed. So you lose ground UNLESS you can restrain those salaries for the 20+ year employees.
Everybody—I’ve been working on pension issues for a large and very insolvent govt entity for 2 years and I marvel at how much I’ve learned, and how little I knew when I started. I wonder why people with no experience in a field assume the answers are all so easy. Are the answers in your field so easy that people with no specialized knowledge or experience can tell you how to run your business or do your job better than you already are? I doubt it.
If it was easy it would already have been done. This is a terrible mess, should never have happened, some people should (but won’t) go to jail for causing it.
But it isn’t easy. Marty(Quote)
cubanbob says:
States are sovereign, they cannot go bankrupt. They can however repudiate debt. Sovereign immunity. As for Congress bailing out California and the like, not a chance in hell. If a in theory bullet proof democrat congress cannot pass health care ‘reform’, cap and trade and card check it’s delusional to think that a new congress will bailout the bankrupt democrat states.
More likely scenario is under the threat of losing even more net taxpayers those states will repudiate the exorbitant pensions as an odious debt and reschedule them in a more financially realistic manner. Indeed they may even make an end run around the unions attempt to force the local governments to pay the pensions by assuming their debt followed by a repudiation of the debt and rescheduling a financially realistic amount to be paid by the local governments to the state and the state paying those pensions.
The blue states are completely reliant on a very small percentage of their population to cover the bulk of their income taxes. That base can with relative ease move to tax friendly states, especially if the combined state/local/federal burden gets too high. Next year the burden in Manhattan for the ‘wealthy’ will hit 60% combined on ordinary income. It may be cheaper to take the hit on unmovable assets and move on. And that is just with the Bush tax cuts expiring. Add the planned Obama/New Communist party proposed taxes and it becomes even worse. The money is simply not there and the cuts are going to happen not only to the public sector pensions to but to the LBJ entitlement state. It is only a question of when and to what extent and which party will be the knife wielder. As for the courts, forget that as well. They have neither the effective power or the will to rule on imposing massive tax hikes on the portion of the population necessary to even begin to fund these entitlement and pension schemes. They won’t risk a revolt of a number of states refusing to comply and can’t force Congress to raise the tax burden nationally. The writting is on the wall. cubanbob(Quote)
Mark Buehner says:
Any business that depends on cash flow, which is basically everybody, would be devastated by that level of inflation. The number of broken contracts would be immense. How can you honor a contract made even 6 months ago under those conditions when you have to buy material and pay overhead at today’s prices? Unless you’ve got big margins, you’re better off bailing. The domino effect would be awful. Everybody would be running for shelter which would mean just closing the doors of a lot of businesses and hoping for better times. Ironically the most advantageous thing you might do is turn the lights off, shut the doors, and just hold on to your capital assets. Mark Buehner(Quote)
Marty says:
Mark Buehner is right, I think. the only way to survive hyperinflation is for everything to be indexed and it’s pretty late to start. And even if you could survive by doing that, the economic distortions and losses would be tremendous.
I think (not 100% sure) cubanbob is right about state’s repudiating debt—the question becomes when can they issue debt again? they would have to write the old debt down and settle with all the debt holders, most of whom are probably banks and investment firms that will fight tenaciously to NOT take those write-downs, so you’re probably talking quite a few years frozen out of the debt market. Maybe possible but a grim prospect. Marty(Quote)
JIMV says:
Amen, the biggest pejorative one can use is Idaho is to accuse someone of being from California, and look what happened to Colorado!
Yea Gods!! JIMV(Quote)
Blue says:
Not necessarily. It takes care of the totally underfunded Boomer and Silent cohorts and buys time to transition to a DC plan for new hires (or at least change a lot of the pension calculations). Blue(Quote)
A. Zarkov says:
Let’s look at UCRS. It has a defined benefits plan for faculty and staff. In the late 1970s and early 1980s we had significant inflation. The UC retirees at that time suffered because their pensions were essentially not indexed. As long as the return on UC’s tracks inflation they come out ahead because the bulk of retirees have benefits denominated in old dollars. A. Zarkov(Quote)
Blue says:
Exactly right, Zarkov. Once the employee is retired they can no longer game the system by replacing lower wage years in the calculation by higher wage years. Blue(Quote)
Dan Weber says:
I didn’t mean buying annuities as the way to solve the current problem. It’s how, going forward, we can take away the grand incentive to short-change the retirement funding. We can stop the problem from becoming (much) worse.
Check his source. DC out-crimes SC. Dan Weber(Quote)
A. Zarkov says:
“The real problem I have with people who leave CA is that many of them want to impose CA style governance on the places they move to. They moved to get away from such governance but evidently think the problems are in execution rather than design.”
This is what happened in Bend Oregon. This NYT article describes Bend’s Californication. They are not welcome because they bid up the price of housing to insane levels because Californians believe they must max out their real estate purchase. Then they vote for all kinds of expensive projects and services which causes taxes to go up. A. Zarkov(Quote)
A. Zarkov says:
Oh yes, I knew that. I don’t consider DC a state. The DC murder rate hit an all time peak of about 60/100,000 in the early 1990s. But New Orleans has that level now. A. Zarkov(Quote)
CaRon says:
I have 2 years until I can retire at age 62, then I am out of California for good! Can’t wait and I am planning for it in advance. I have the type of job that allows me to make more if I work more. I’m tired of putting in 10–12 hour days and weekends so the state and can take more of it away. I’m cutting back on my earnings to a comfortable level to minimize taxes. Feels pretty good too! More time at home tinkering in the garage etc. Can’t wait to become a dependent of the Federal Government (after all that’s what they want right?) and to move to a state with less restrictive gun laws. CaRon(Quote)
orca says:
I hear there’s some nice places in Gaza to live, too.
Perhaps oddballs like DeMint are formed by places like South Carolina with its violent crimes and heavy dependence on welfare from the federal government?
What some people would call conservatism is really just self-loathing... orca(Quote)
Marty says:
Dan Weber—Sorry, I misunderstood. But, then you have the same problem as setting up a DC; when you close the old DB plan which is way underfunded, you’re gonna run out of cash before you run out of legal liability to your DB annuitants. Then what?
Peter 10:34am—My state has that same constitutional provision. It declares a Fund member to have an enforceable, contractual right to their benefits, which may not be reduced. It’s never been tested in court, but there are 3 extant interpretations:
1. Centrist–Once someone is hired, or in a variation, becomes a Member of a Pension Plan if that happens after a probationary period, their benefit package cannot be decreased; i.e., the rules under which they accrue benefits must stay constant or can be changed in their favor, never to their disadvantage.
2. Softer interpretation– the guarantee applies only to benefits already accrued; future benefits can be earned under new rules that are less beneficial to the member.
3. Hard line– not only does #1, above, apply to bebefits, but you cannot increase the member’s requird contribution (usually a 5 of his pay) because that reduces the net value (after contributions) of his membership in teh pension fund.
1 or 2 strike me as reasonable readings, 3 seems crazy but I understand several unions in my area have legal opinions to that effect and an attorney of my acquaintance who strongly believes # 2 should apply, said he can see how one could come to #3, although he disagrees with it.
The political possibility of the State legislature taking on the unions even in legislation (i.e., # 2), let alone constitutionally, is a whole ‘nother thing, of course. Marty(Quote)
Marty says:
Sorry–in the above, “usually a % of his pay” Marty(Quote)
Fat Man says:
Problems with Ohio Public Employee Pensions.
Noted by Nick Gillespie, Editor in Chief, Reason.com and Reason.tv Fat Man(Quote)
Marty says:
Dan Weber–
I should enlarge on what I wrote above.
In the time I’ve been working on the problem of underfunded pensions I’ve come to believe the DB structure is simply unworkable in our culture... the actuarial math can work, but leadership types whether in government or private sector just cannot resist the urge to raid the kitty. And it’s a VERY big kitty.
Corporate shenanigans led to ERISA and creation of the Pension Benefit Guaranty Corp (PBGC) and the IRS had to get increasingly tough in dealing with firms that kept raiding their funds and abusing the intent of the tax preferences such funds had been granted. The upshot of all that was that most private-sector DB plans have closed—the steps the Feds took to make them honest made them unattractive to the sponsors... what does that tell you about the sponsors?
The Feds stayed away from public sector Funds as a matter of federalism—no PBGC insurance but also little oversight, and the freedom to get into really serious trouble. Public agency sponsors are non-taxpayers, so IRS issues are much less. But the urge to short-change the Funds and use the money for short-term things, to play games in naming investment managers and advisers (e.g., Obama’s car task force guy, Ratner, indicted or facing indictment for steering pension investment business), directing investment assets to favored recipients, and to buy labor support by sweetening benefits, are just irresistable. Not to mention the junkets for pension board members.
Originally, DB plans were supposed to invest in only govt bonds and maybe top-rated corporates; it was safe, steady, not volatile, and not a lot of room for crookedness. But in the late 1970s they couldn’t keep up with inflation, so the investment rules were gradually loosened until by ca. 1990 pension funds were going into derivative pools and all sorts of crazy speculative things, and politicians all over the country directed their Funds to hire certain investment managers or invest in certain corporations or real estate. And the Funds could make up fairy tales about what their assets would earn (higher earnings mean lower direct contributions from employees and governments), and assets meant to fund people’s retirements bounced up and down with the stock market. At this point the whole thing stinks.
BUT, there are still millions of employees and retirees who, despite what some posters here have written, did their jobs honestly and as well as they could, in expectation of receiving a pension annuity when they reached the eligible age, and they have to be treated fairly. “Fairly” may require a haircut to their expectations, given everything, but the idea that they’re all useless, toss ‘em on the street and the problem goes away (you didn’t write that, Dan, but some others pretty much did) is just not reasonable. Marty(Quote)
Blue says:
Not just that. Politicians chose to underfund pensions in favor of current spending and used market-based returns as a justification. Blue(Quote)
Peter says:
It has been suggested that because blue sts generate so much tax revenue for the fed govt, it would not be inequitable to bail them out. The wealth of the blue sts actually supports the contrary argument: places such as NYC, Chicago, San Fran and LA generate so much wealth that they are important economic resources to the nation–therefore people in other sts have a very strong interest in preventing the public emp unions in these places from running them into the ground with high taxes. That is why missourians need to stop illinoians from giving their st away to public employee unions. reducing pension payments will have to happen–the only admin that would bail out these sts only has twelve months left to do it, and I am pretty sure they wont succeed before the most liberal congress in history is history. two sts apparently dont bestow collective bargaining rts on their employees–one of them is, apparently, Va–and all of the sts should be banned from recognizing public employee unions. another president can call out the army to operate NYC subways when the overpaid people who do it now go on strike. Peter(Quote)
Peter says:
in sum, dont bail out profligate sts–authorize them to cut their pension obligations via amendment if necessary–and abolish public employee unions across the country. Peter(Quote)
Elliot says:
How about simply dropping pensions for new government employees? Use 401Ks. If prospective employees don’t like it, I presume they will find other employment. Elliot(Quote)
public_defender says:
Pensions are payments that taxpayers bargained for. Taxpayers got work and services from employees, and the employees got salaries and a pension. Taxpayers may want to renegotiate going forward, but they should not be allowed to escape their contract by refusing to exercise their taxing authority or by choosing to use the tax money they have on other things. If you want to get out of paying the pensions you promised, you shouldn’t be allowed to spend current money on roads, cops or the like.
Of course, you can raise taxes so high that they start to recover less money, but that’s not always the case. A 2% income tax will bring in roughly twice as much as 1%. Where’s the point that taxes become revenue reducers? What about a one-time levy on incomes and homes in the state? That would be a burden on all taxpayers, but why should people who provided services to the State bear a disproportionate share of the cost? Impose that in December on that year’s income and property, and it’s effect on future behavior will be limited. Give people the right to pay over time, and it will have the effect of spreading the pain evenly. That also prevents people from leaving the state to avoid payment. IF they leave the state, they still have the debt to pay.
Here’s a legal question not a policy question. Does a bankruptcy court have authority to order a state to raise taxes? What if those tax increases would violate the state constitution? Does the court have authority to force a state to stop spending on things that state statutory or constitutional provisions require the state to spend money on?
To avoid pension debts, the state should have to prove that they are maximizing tax revenues and that any additional taxes would bring in less revenue. A private company would not be allowed to use bankruptcy if it were voluntarily leaving its prices below what the market would accept. “We know the market would let us charge twice as much for our widgets, but we think it’s just bad policy to charge that much, so please let us refuse to pay our creditors.” State governments and state taxpayers shouldn’t get any special treatment. public_defender(Quote)
Peter says:
The pension payments are not debts that taxpayers bargained for–they constitute abuses that were perpetrated at the taxpayers’ expense by agents of the taxpayers–state legislatures. There is nothing wrong with modifying these egregious ‘contracts.’ Taxpayers didnt agree to these contracts anymore than they agreed to pay the average social security recipient three to five times what the average retiree paid into it. Peter(Quote)
public_defender says:
Another key question is whether bankruptcy law treats state taxpayers as shareholders of a corporation, general partners, customers, or some combination of those.
Another question is whether a bankruptcy judge basically a super-legislator with the power to repeal, amend, and enact legislation? A state constitutional convention of one with the power to effectively amend the state constitution? Or something else? That would affect the extent to which the judge could overcome other state obligations on both the spending and taxing side. If state law limits income and property taxes, must a bankruptcy judge respect those limits? If state law mandates spending on something, must a bankruptcy judge respect that?
Could a bankruptcy judge say that state spending on prisons is too high? A lot of research shows that prison is a waste of money for a lot of offenders. If the bankruptcy judge finds that the state would save money imposing shorter prison terms, could the judge order the early release of prisoners? Could the judge force the state to close a few prisons, fire a bunch of guards, and hire probation officers (who, overall, would be less expensive)? Could a bankruptcy judge effectively re-write a state’s criminal code to make it more cost-effective? If not, could the judge limit prosecutions of minor offenses?
I’m lucky in one sense. Under the US Constitution, the state can’t send people to prison without me. The state can’t even pursue charges that MIGHT lead to more than a short jail term without paying someone like me. When workloads get too high, public defenders can point to ethical rules about accepting more cases than we can handle competently. And since the state can’t prosecute without us, that means that they can prosecute fewer people, and the state generally doesn’t like that result, so they work hard to avoid it.
That raises the question of whether a bankruptcy judge could override state ethical requirements and require that states only pay for counsel that meets the minimal federal constitutional standard for the effective assistance of counsel. Could a bankruptcy judge bar disciplinary authorities from enforcing disciplinary codes? If so, would state disciplinary authorities have authority to decide when counsel was constitutionally ineffective, or would those cases go to the bankruptcy judge? public_defender(Quote)
public_defender says:
What’s your evidence of that? I provide honest work for my pay and pension. Part of the reason I have not sought jobs with higher paying base pay rates is the pension. Many others have made similar decisions. How is that contract an “abuse”? I worked. I didn’t pursue other options in reliance on the contract. Now I want paid? Could I unilaterally decide that I’m being underpaid so I’m entitled to use my government office as a base for a private business on government time? After all, under your logic, if I think my contract is an “abuse,” I can just refuse to honor my part of it. public_defender(Quote)
public_defender says:
Many of the comments have said that pensions should be cut because the commentator thinks state wages are too high. That’s a fair argument prospectively, but I think it’s still flawed for a couple of reasons.
First, state wages have been on autopilot for years. That means we have some grossly underpaid and overpaid employees. What’s the problem with “underpaid” employees? Can’t they just leave? Well, many do. We could probably fill every attorney opening in our office for $30K a year and no benefits, but the attorneys who would work for that can’t do the job, won’t do the job, would quit soon after they got up to speed, or a combination of all of those.
Another impact of below-market compensation is that employees who remain are often the employees you least want or the ones with their own agendas. You take pretty much all power away from managers (and the political leaders) if they can’t hire and retain replacements (and the “retain” part is key) for the same money. For an employee, it’s pretty darned empowering to figure out that your bosses can’t effectively replace you.
On that note, every ten years or so, government needs to take an across-the-board look at compensation. Compensation for positions with excessive turnover should be increased. Compensation for positions that people never leave should be frozen or cut. Union contracts are a big impediment to this, but so are efforts of anti-government types who don’t want any government employee’s pay to go up. So we get the status quo.
Second, my experience is that less skilled employees are overpaid in state government, and higher skilled employees are underpaid. That’s partly because state compensation is highly weighted with fixed benefits. It’s also partly because in lean year after lean year, government puts a wage cut off–people below that point get raise X, people above that point get no raise or a fraction of X. Year after year that over weighs salaries at the bottom. It’s politically difficult to cut pay for lower wages for lower-paid workers and raise them for higher-paid workers.
Third, often at the demand of newspapers and the public, governments insist on paying all workers wages, not salaries for “accountability” purposes. That hamstrings the ability of government to demand more time from employees. WalMart can demand that its salaried workers put in 80 hour weeks, but public accountability zealots want to make sure we government workers are paid hour for hour. Well, you get what you ask for. public_defender(Quote)
Marty says:
Blue at 1–5-10 8:54 pm—You’re right. But it was loosening the investment rules that let them follow their base inclinations. My larger point, with which you might agree, was the original concept was better attuned to limiting those tendencies, but it required a stable inflation and investment environment, and when that was lost the whole house of cards was threatened but the threat wasn’t recognized.
Peter,
If the lawful actions of the elected legislatures and executives (Governors, Mayors) don’t constitute obligations of those units of government, what does? You’re hair-splitting trying to distinguish “the people” from those the voters have elected to act on their behalf.
The real inequity is the shifting of costs from one generation on to the next. People in the 1990s and 2000s got the benefit of govt services they did not fully pay for because their governments did not fund the pension liabilities that were accruing, and people in the 2010s and beyond are going to be asked to either pay the bill (with interest), renounce the obligations or most likely some mix of the two. Many of those are different individuals. Plus, future employees will receive lower pensions for higher contributions, helping pay annuities to their predecessors.
If I could change one thing in the US and State Constitutions, I think I would require all units of government to use accrual accounting. Governments typically use a version of cash accounting where unfunded liabilities (pensions, Social Security, Medicare, loan guarantees) are invisible. On an accrual basis, many “balanced” state and local budgets actually had/have large, persistent deficits even during the good years, and the Federal deficits have been several hundred billion $$$/year worse than anyone officially recognized. Marty(Quote)
Marty says:
public_defender–you make many excellent points. Ever consider running for office? Marty(Quote)
egd says:
Why does it matter? Bankruptcy judges cannot touch shareholders, general partners, or customers to pay for debts of the corporation, general partnership, or business. The only assets the judge can touch are those belonging to the business entity which is the subject of bankruptcy. Any debts which cannot be paid out of the assets are discharged.
Under no theory of business would a bankruptcy judge be empowered to decree tax increases to pay for acquired but unfunded debt.
You appear to take the position that certain liabilities acquired by the state are unable to be discharged. I’m not sure of what your basis for this position is, because it’s at odds with bankruptcy law.
Pensions are a contract entered into between the employee and (in this case) the state. The employee took the risk upon entering into the agreement that the state would be solvent and able to pay when the pension comes due. It is a risk that the employee took, and I don’t see why other citizens should be obliged to guarantee that risk.
If I invest all of my retirement savings in the stock market, I’m taking the risk that the companies I choose to invest in will have value when it comes time to retire. If they aren’t solvent, then I have to accept that my money is gone.
If you don’t want risk, or want to minimize risk, then take part of your salary and place yourself as a secured creditor or bondholder. At least that way if the investment tanks, you’ll be first in line to get paid. egd(Quote)
ShelbyC says:
I’m a little confused. Folks are talking as if states are going to be parties to a bankruptcy proceeding run by a judge. Why do states need bankruptcy judges? Can’t they simply disavow their debts? ShelbyC(Quote)
public_defender says:
I’m not sure partners are as immune from personal liability as you say, but as to customers, my point was that a business or government is not insolvant if it has untapped revenue sources, and that includes taxes.
But it seems that this whole point is moot. From what I’ve read, federal law does not permit states to file bankruptcy. States might try to “repudiate” debt unilaterally, but that would probably be both a Fifth Amendment taking and a Fourteenth Amendment deprivaton of property without due process. public_defender(Quote)
public_defender says:
And if bankruptcy isn’t possible, doesn’t that mean that if California failed to pay its debts, its creditors could get judgments and become judgment creditors by filing and and winning a Takings claim in federal court? Then, what assets could they take? Bridges? Roads? Public buildings? State parks? Police cars? Would taxing authority be an asset? Could creditors garnish tax collections? What about taking over state prisons and running them as private prisons. The guard’s union basically owns the California criminal justice system now. Why not make it official?
If creditors could garnish taxes, could they also prohibit the State from continuing to pay current employees? Obviously, state employees would get paid for current work, but the state doesn’t have to keep them on staff. What if that meant firing all prosecutors or cops?
A state default could help enact a libertarians dream, but it would not likely hurt state pensioners, who could continue to take state property and assets to cover the debts they are owed. public_defender(Quote)
Tough Love says:
Quoting ...“For that matter, what about a municipality declaring bankruptcy in anticipation of un-meetable pension burdens down the road — in other words, you know it can’t be met, you know that your tax base will move out, and even though you are solvent now, you see that you won’t be down the road — and if you restructure now, you can save a much worse situation by not driving out your taxpayers. ”
Wow ..... just what I’ve been saying for years .... that these promises simply can NEVER be met, but since politicians never address anything until its a true crisis, under the current structure, public service (recreation, transportation, libraries, infrastructure, etc.) will suffer tremendously until TAXPAYERS DEMAND change. Soooooo ... isn’t it a BETTER idea to address it NOW (even if through a preemptive bankruptcy) to prevent this crisis scenario ? Tough Love(Quote)
Tough Love says:
Quoting ...“One way would be to try and impose taxes (and perhaps “fees”) that “follow” people who leave the jurisdiction.”
Interesting, in the past year, I had been JOKING around that NJ passed a law that no resident could move their legal residence from the state without paying his/her share (about $3,000 per person if I recall correctly) of the public debt (debt, plus unfunded pension & retiree healthcare for Civil Servants).
Personally, I don’t believe this to be legal, but its scary that the situation is SO desperate that such possibilities are now seriously being put on the table.
Of course the BETTER answer is to reduce pensions for FUTURE years of service for CURRENT (not just NEW) employees. This is routinely done in the Private Sector and should one of the fist (serious) options to pursue. Tough Love(Quote)
Captain Ramen says:
Emphasis mine.
Any taxpayer who has driven over 30 potholes to get to work, sent their kids to public school, waited in line at the DMV for hours or had their dog executed by the police know that they are not getting the services they paid for.
In fact I submit that a large factor in the declining value of state services is that the states are directing a larger portion of the budget to supporting the pension system. Captain Ramen(Quote)
kilgore says:
Mark,
I read a story recently that said that the population of California increased in 2008 and 2009 due largely to the influx of foreign immigrants and due to the fact that some specific ethnic minorities have higher birth rates, but that the white population is leaving at a rate of around 800,000 per year.
I have to admit, I’m one of the 800,000 who left recently and moved to Texas as I sincerely believe that Los Angeles county and the state of California have no possible way of avoiding bankruptcy. Before they do, taxes will go way up (on a temporary basis — ha ha ha) and the unions will make minor concessions. But in the end, bankruptcy is the only way out for California because it’s the only way that the union contracts will be torn up.
kilgore(Quote)
BizzyBlog says:
sardonic_sob says:
As I understand it, it’s not that the Bankruptcy Code “forbids” states to declare bankruptcy, it’s that they are not currently included in the list of debtor types that the Code is set up to handle. It would be as if a Martian showed up at the State department and requested a visa: the USG doesn’t have diplomatic relations with Mars, nor recognize the Martian government, but if Mars does in fact have a government, it wouldn’t really be proper to process the Martian as a stateless individual. So really there might not be any current way forward even though it’s not the case that Martians are “forbidden” to get visas.
Your takings argument is interesting, but I don’t see it working because this particular “property” is one the state has the power to define away legally. If the state provides a benefit, it must do so within the Constitution’s framework, but IIRC no state can create an entitlement it can’t later take away. The fact that this entitlement is framed within a contract of employment is a sound point upon which to attack, but given the reality of the situation and the cost to the general public, to whom the state bears the highest responsibility, I think it would fail even if it were found that sovereignty were not a good defense generally. Likewise the due process argument — if the state can legislatively repudiate the debt, there can be no failure of due process. If they can’t, it doesn’t matter anyway. sardonic_sob(Quote)
Chris says:
Not true. CA and NY get $.79 for every dollar they send to the feds. Also, Texas (Red State) only gets $.94 for every dollar and yet NM (Blue State) gets $2.00 for every dollar they send. Vermont, Maine, Penn. and Iowa (all blue states) also receive more than they give and Indiana, Georgia and Colorado (all red states) give more than they receive.
Next time, check your facts before spewing your B.S.
http://www.trackforum.com/forums/printthread.php?t=115285
http://en.wikipedia.org/wiki/File:Red_state,_blue_state.svg Chris(Quote)
BettyO says:
I live in California. I see the retired ex public workers drawing $80K a year and the benefits are generous. But now, the funnel of funds is reversed. Bankruptcy is the only answer. For those whose pensions are going to be gone... sorry, hope you had a few IRA’a. BettyO(Quote)
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