The Coming AFSCME & Teacher Pension Storm

Today's Wall Street Journal featured an article in the Money & Investing section regarding US state and municipality pension-funding woes.

It is a topic for which I've been waiting to see become a mainstream media coverage.

Right after recounting some of the troubles various localities are having complying with pension funding for government and related workers, the article made a reference to voter outrage,

""It's going to be huge showdown" between taxpayers and public employees, said Susan Mangiero, president of Pension Governance Inc., a consulting and research firm in Trumbull, Conn. "The anger is more acute today when people are feeling economic hardship."

The specter of higher pension bills comes as many states and cities are struggling to balance their budgets or, in some cases, avoid drastic measures, such as filing for bankruptcy protection, amid falling tax revenue, foreclosures and rising unemployment costs."

I was discussing exactly this point with my business partner this weekend. I have friends who are teachers, and I firmly believe they are going to be in for a major disappointment by the end of twenty years. Especially the ones who are public school employees.

It won't be too long before a growing number of states' voters realize how much their governments have given away in unsustainable "30-and-out" or less packages to various governmental employees over the decades since WWII.

Side by side with unions such as the UAW, Teamsters and Steelworkers, AFSCME members reaped huge pension promises from governments during an era from the 1950s-1970s when the US experienced a temporary growth bubble resulting from the absence of competition from WWII losers Japan and Germany. Beginning in the early 1970s, American industry began to suffer from these competitors, but the prior decades' pension promises, made by dimwitted, myopic CEOs, governors and legislators, remained.

Now that global competition is a major force influencing the movement of industries among countries and the compensation of employees in many industries, many pension promises made long ago are simply unrealizable.

Some of the solutions being advocated by panicked governments are seen by AFSCME as extreme. To wit, from the Journal piece,

"Proposals pending elsewhere would move new public employees to a 401(k) plan. Some state lawmakers believe they would save money with a 401(k), which requires employees to pay a higher percentage of the contribution rate than they do under defined-benefit plans, said Alicia Munnell, director of the Center for Retirement Research at Boston College.

Municipal unions said they would oppose such a shift, and note that such efforts have failed in the past, including four years ago in California. "It's not a program that is attractive to state employees," said Richard Ferlauto, director of corporate governance at the American Federation of State, County and Municipal Employees. "It's doesn't work because you wouldn't be able to hire people."

But soaring pension costs are emboldening critics of public plans. They said local governments cannot afford to pay what are often perceived as generous benefits to government employees when the 401(k) plans held by others have shrunk, and as taxpayers already are looking at higher taxes and fewer services.

The pain is about to start in Wisconsin. The state has an unusual policy of adjusting the amount of benefits paid based on the pension fund's performance. Now, for the first time in 25 years, the majority of retirees will receive a benefit reduction.

Some states may decide it is easier to cut public employee benefits than it is to raise taxes, especially during hard economic times. In the Virginia General Assembly, a bill would freeze the current pension plan starting in July and replace it with a 401(k) plan for all future hires.
A state senator in Pennsylvania introduced a similar bill in 2007, and it went nowhere. But this year it is attracting attention.

If employer contribution rates in Pennsylvania jump as high as 28%, "the pension system is just not manageable," said Pat Browne, the Republican state senator who sponsored the bill. He said he expects it to be voted on this year.

"We need to get it passed quickly if we are to phase out the existing plan in time to make an impact.""

As long ago as the summer of 2006, my father, then residing in Illinois, told me that the state was already effectively bankrupt, if you put its total pension-related obligations up against the state's earning power for the foreseeable future.

My partner and I have debated for months what the implication of a California or Illinois bankruptcy would be. What happens when citizens leave a state in droves, while the state's obligations remain?

In one of the larger unintended consequences of federal mortgage policy mistakes of the past decade, the looming pension shortfalls at the state, county and municipal levels across America are going to pit voters against government employees.

Why should AFSCME members remain unaffected, while their private-sector union brethren have taken haircuts, both in and out of bankruptcy? They won't.

Do you think government union members will seriously risk striking, only to see their jobs given to new applicants during this recession, as state and local legislators move to either file bankruptcy and tear up the old contracts and pensions, or simply hire new replacements on the condition that they accept 401Ks in lieu of defined benefit pension plans?

That's really the rub, isn't it? With most of the US workforce losing defined benefit pensions, why should a select, privileged few enjoy such perks, amidst a nationwide asset-value meltdown?

Look for a struggle between state and local governments and AFSCME of epic proportions, beginning.....now.