The Santa Fe Reporter has had some interesting articles recently discussing the topic of government workers who are concerned that their pension investments are being invested in companies with which they disagree politically. The initial article framing the debate can be found here. The father of the editor! of the paper who happens to be a CPA had an insightful posting on the site recently as well in which he explains that pension funds are NOT really used to fund corporate speech and lobbying efforts, but then questions the very real impact of government unions on the political process.
I weighed in with my own letter to the editor on the topic which I have pasted in its entirety below:
Letters to the Editor
The Santa Fe ReporterI may not agree with the philosophical reasons that government employees may not want their pensions invested in corporations, but I cannot help to sympathize with their plight.
Whether the issue is truly one of “free speech” or not is a question for the courts, but the whole debate points to the outdated model upon which government employee pensions are based. After all, today’s workers, even in government, tend to change jobs more frequently, be more savvy when it comes to retirement planning, and demand more autonomy over how their money is spent and invested than prior generations.
Pensions are a classic “one-size-fits-all” model from a bygone era. In New Mexico, by the way, that model is massively underfunded and could leave today’s young workers – private and public sector alike – holding the bag.
New Mexico could avoid the free speech problem by embracing much-needed reforms that give individual workers the freedom and responsibility to plan for and invest for their retirement in 401k-style plans. States are increasingly looking at this model due to the massive underfunding of traditional pension plans, but these free speech questions and potential legal challenges will only hasten the switch.
The private sector converted from defined benefit pension plans because early on (1981-2, in my experience), the assumed rate of return on investments (ROI) by plans required by the Financial Accounting Standards Board was a “risk-free” rate, then about 3-4%. It was apparent that liabilities would escalate rapidly, as would the necessary contributions to keep plans from an unfunded condition.
This “risk-free” rate approximated the return on T-bills, which has in fact been negative at various points in the last year.
Finally, in the last year, the Governmental Accounting Standards Board is reluctantly requiring sort of the same responsibility out of government pension plans, some of which have been using assumed return rates as high as 8.5%.
The use of a very high ROI masks the financial impact of salary and pension benefit increases as a current expense. This has made it much easier for politicians to grant increases without much impact to state and local budgets.
Now that investment returns have collapsed, even with the Dow in its current state, the unfunded position of defined benefit pension and medical plans, private and public, have ballooned.
The increase in contributions to meet these obligations have pushed the CA cities of Vallejo, Stockton and San Bernardino to seek bankruptcy protection, as the cities cannot cut services fast enough to match revenue declines. The cities have become funding mechanisms for pension promises rather than service providers for residents.
The expectation that the taxpayer would pony up whatever it took to cover the promises to public employee unions has met reality. Politicians are running out of other people’s money.
Obviously, revenue shortfalls from collapsing property values and taxation and huge unemployment numbers have affected matters, but the vignette of CA Governor Jerry Brown and the Democrat leadership which set the state budget is telling.
CA is facing an estimated $16B deficit, as of June. The estimate doubled from that of January, 2012. The number is probably escalating further, because (depending on the source) counted as revenue is $2-4B from the Facebook IPO, in capital gains taxation. Some of that will happen anyway, but the collapse of Facebook stock to about 50% of its IPO value has eaten a huge amount of that boon up.
In plainer words, the expectation and budget planning of the reigning CA political class was counting on Facebook and its IPO as a major counterweight to their decision to INCREASE general fund spending 7% in the oncoming fiscal year. Jerry Brown handed out salary increases to his senior staff last week.
This in a state with functional unemployment of double the national average, 12% of the population and 33% of the US welfare cases, the worst business climate in the US for the fourth year running and significant tax and regulatory burdens already on the schedule. We have major infrastructure challenges in the electrical grid and other areas…but Brown and the Democrat legislature think we need a new rail line between nowhere and northeast of nowhere, and voted to issue new state debt of $2.3B to fund it…
This kind of “management” leads to ruin in the private sector. There is no alternative. I have been to that brink, and what is happening at the state level is hilariously unsustainable, completely in the opposite direction. One has to laugh, though, at the saying attributed to the Chinese. “A fish rots from the head down.”
Yes, Mr. Brown was elected, and I voted for neither him nor his Republican opponent. Brown was the more honest of the two about his intentions, though he hasn’t lived up to even those mild thoughts of fiscal probity and sense.
Various national poltical leaders cite CA as a leader, a model, a goal, for the country. This vision looks very dark to me, not being part of the poltical class.
Brown talked at one point about how CA “always comes back”. He relied on this past to absolve himself of making hard decisions and forcing change. He thought Zuckerman and others would make whatever decisions and compromises he made work out to provide cake and plenty to eat, continue the music. I believe Mr. Brown and his ilk are dancing to echoes. The music has stopped.
Note: Defined contribution plans like 401k’s replaced defined benefit plans because they are, essentially, always 100% funded. No surprised or delays in reckoning.
http://online.wsj.com/article/SB10001424052702303592404577361891800868180.html
This is particularly about IL, but is instructive for both the situation and how pension benefits are crowding out other expenditures, and for the dream of the political class that higher taxation is the solution of choice.
IL significantly hiked taxes last year, claiming the tax hike would close the deficit and enable the state to pay accumulated overdue bills. Well, no. The deficit has grown, bills remain unpaid. The Democrat/progressive/”liberal” solution is failing again.