Posted on March 25, 2014

Walter Mead On Public Pensions And Municipal Bankruptcies

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ADAM SHAPIRO: I’m going to quote something you wrote back in 2012 just to get this started. It was in regards to entitlements and pension benefits: “These costs are now exploding according to the immutable logic of demographic and actuarial facts. It is clear that the government can’t pay them into the future.” It sounds as if you believe that state and local governments may wind up going broke pretty soon.



WALTER MEAD: Well I think you can look at Puerto Rico as maybe coming close, but we’ve had the Detroit bankruptcy, serial municipal bankruptcies in California, I think there’s a city that is now working on its second bankruptcy. So, yeah. People say: A defined benefit pension from my employer, there’s no risk. A big risk is that your employer will go broke.



SHAPIRO: Well, in the case of public pensions, we’re seeing that happen. And yet, there’s a resistance to reform the process by which we fund these pensions, by which we set the actuarial standards for these pensions, and to have an honest discussion with taxpayers about these pensions, why?



MEAD: It is interesting, normally you think of liberals and Democrats as being people who really want to regulate, and particularly they want to regulate the financial markets, in order, as they say, to protect the “little guy.” Well here’s a case in which cities and states are not held to the same standards for their pension funds that any private employer is held to. If in fact, employers did what routinely a lot of cities and states do, they would go to jail.



SHAPIRO: So why is there no public outcry over this?



MEAD: There’s some public outcry. But, unfortunately there’s a kind of a conspiracy between government officials, politicians, and union leaders often. The deal is this: Union leader wants to show the union members, hey belonging to the union is a good thing, I get you benefits. You get more with me than you’d get on your own. So I go into the negotiations with management of the city or the state government and I come back so you’ll say, “wow he’s a great union leader, I don’t begrudge him a penny of his salary because this union is working for me.” Well here’s the problem: If you’re asking for a big raise for members this year, the politicians have to pay it this year. And that means they have to tax the voters, voters don’t like to be taxed to pay for your raise, or they got to cut spending on something else to get the money, well voters don’t like it when politicians cut spending on their favorite programs.



But if you say, go behind the scenes and the union leader says to the politician. I know you don’t have any money in the budget this year for a big raise, but how about this, how about a really big pension raise. And the politician knows, I don’t have to pay that this year, I can make the union leader happy, I can make all the members of the union happy, and they’re going to vote for me because I’m being so generous, plus I don’t have to spend anything on them.



SHAPIRO: So, you wrote an article two years ago, in which you brought up this issue, about the demise of the Blue Social Model, you call it. I just want you to explain a couple of things, including the blue social model, but first let me quote you, because you brought up the tax situation from that article. “Voters simply will not be taxed to cover the costs of blue government, and in most cases they will vote out of office anyone who suggests otherwise, voters with insecure job tenure and, at best, defined-contribution rather than defined-benefit pensions simply refuse to pay higher taxes so that bureaucrats can enjoy lifetime tenure and secure pensions.” This applies to conservatives and liberals, this isn’t one side.



MEAD: That’s exactly right, the politicians have said, promising a pension in the indefinite future is a way I can make the unions happy without making the voters angry. But the union leaders also understand that for this to work, they can’t go to the next step, which is saying to the politician, now that you’ve guaranteed this very large pension, you must start putting away enough money every year, so that my members will actually get this pension. Because then the politician actually has to pay the full price of assuring with conservative investments, and none of this hedge funds or swaps or derivatives, all this crazy razzle-dazzle stuff, but conservative investments in a well managed portfolio. They could pay the pension, then the deal is off, because the politician and union leader look good without having to actually take money from taxpayers.



SHAPIRO: The key is not taking money from taxpayers, taking over the annual required contribution, the ARC, and how much has to be put in, as long as that’s a small amount, that’s good for the politician.



MEAD: That’s right, so in that sense, the union leaders, if they really had the interests of their members at heart, should be arguing for very, very conservative calculations here, and forcing, they’re representing the workers, force those politicians to put enough money into the system so that the members’ pensions will be 100% secure. They don’t do it. They actually collude with this idea of assuming these very high rates of return, which then mean that the pensions actually turn out, in many cases, not to be adequately funded.



SHAPIRO: But, in places like Detroit you go bankrupt, and in places like San Jose, California, you exceed 20% of general fund moneys going to pay towards retirement benefits, and when we speak to different people, they tell us at 20%, once you cross that threshold, you get a voter rebellion. That happened in San Jose, but it seems to have stalled out, actually.



MEAD: Well look, the courts make these things difficult, but in San Jose, a lot of this pain takes place off camera. We had, for example, here in New York yesterday. We had that terrible explosion of a gas main, a lot of the reports since then have pointed to the fact that New York City infrastructure is very old. A lot of the gas mains, the water mains, we’re constantly having problems with these things breaking down, people get killed. But here’s the point: Differing pension costs and deferring infrastructure repairs are part of the same kind of: let’s make everything look bright and pretty today, let’s not worry about tomorrow, but also as time goes on and those large pension bills come due, and as the infrastructure is aging, politicians and voters are going to be looking at what do we do. Tax everybody enough to pay for all of this stuff, in which case you would basically destroy the city’s economy, and we destroy everybody’s standard of living, or do we sacrifice the pensions to the infrastructure or the infrastructure to the pensions? This is going to be very ugly.



SHAPIRO: No politician talks about this.



MEAD: Amazing isn't it?



SHAPIRO: Well they want to keep their jobs.



MEAD: Exactly.