As most of you know, I bitch about “taxeaters” a fair amount, and some of it is undeserved – I mean, the folks who work within our local government seem largely dedicated and competent.
That said, they do eat a lot of taxes and get paid really well and when you read about governments and corporations getting bankrupted all over the country by enormous pension obligations, well, you worry a little bit about your own backyard. You also realize that we’re all in trouble if the best career advice you can give a kid is to pursue a masters degree in public administration.
I just finished reading “While America Aged” by Roger Lowenstein. Great book. Explains the whole dynamic of how labor was exploited to such an extent that it had to unionize and lobby for basic rights and protections, and then how the pendulum just ended up swinging so wildly in the other direction.
The book tells three stories: the story of General Motors, the New York Metropolitan Transit Authority and the City of San Diego, ultimately dubbed Enron-By-The-Sea because of a pension fund that was underfunded
Each story follows a predictable pattern, which Lowenstein summarizes in a sentence: “Retirement systems fell prey to a basic part of our nature – the urge to delay what we find unpleasant now.”
For states and localities, however, the problem may prove even more difficult to get under control because we’re constitutionally obligated to pay the pensions.
Former General Motors President Charlie Wilson famously said, “What’s good for the country is good for GM, and vice-versa.”
Then, according to Lowenstein, a new mantra developed: “What’s good for GM is good for its retirees.”
Between 1991-2006, Lowenstein said GM paid out $55 billion in benefits to employees and retirees while only paying out $13 billion in dividends to its shareholders.
“GM invested so much in its pension fund in the mid-1990s that, with the same money, it could have acquired half of Toyota.”
By the late ‘90s, the company had 180,000 employees and 400,000 retirees. “That offset the positive impact of anything the company did right.”
By the end of 2005, GM had a market value of $15 billion and future pension obligations estimated at $195 billion.
Here’s the general narrative. When times were good, GM couldn’t risk work stoppages, so it was easier to maintain peace with the workforce by giving away the future obligations.
And when those obligations became a burden, then the actuaries start tinkering. Adjust the expected life of plants and depreciation charges are magically reduced and earnings increase. Assume people will die earlier. Assume the pension fund will earn a high rate of return.
“It was so much easier than selling cars,” wrote Lowenstein.
The most fascinating part of the New York and San Diego sections were the descriptions of how politicians would mortgage the future to satisfy constituents (unions) and pave the way for electoral bids.
In San Diego, promises of future pension largesse allowed the city to keep its tax rate artificially low.
As Lowenstein describes, San Diego was done in by a reluctance to tax combined with an ambitious wish-list of projects. Overall, the revenue collected by the city amounted to 2 percent of household income, the lowest of any big city in the state. The overall average was 3 percent. So San Diego’s tax rate was 33 percent below what it could have reasonably expected to collect.
The alarming part? Try these numbers. New York City’s pension bill in 2000 was $695 million. By 2005, $3.67 billion. By 2010, 7.5 billion.
So how are we doing locally?
Pretty well, said Mono County Finance Director Brian Muir. The County’s estimated liability to the PERS retirement system is $57 million. The current value of actuarial assets is $47 million. So we’re 79 percent funded.
However, the County had to contribute $4.3 million to the fund in the fiscal year that ended June 2009 as opposed to the $2.5 million contribution required in 2007. Muir, however, doesn’t expect this number to keep rising ad infinitum.
The County’s main issue is in regard to retirement health obligations. It offered full retirement health until 2002 (15 years of service got you medical benefits for life).
He said the Board of Supervisors had the foresight at that time to change the equation. Now, the County contributes up to 3 percent of an employee’s salary annually to a retirement health fund. Employees are then required to pay for their own health coverage upon retirement.
It’s the past liability of offering full retirement that the County will rue for years to come. As of two years ago, that future obligation was estimated at $26 million. The County will pay off that obligation by setting aside funds for the next 30 years.
“The truth is, we’re way ahead of most communities, which are still paying as they go,” Muir said.
Supervisor Byng Hunt said of union pension benefits that it would behoove the unions to “deal backwards on this thing or it will be worse for individual members. The unions recognize these issues. People are worried about their jobs.”
The Sheet will look at the Town’s pension funding and obligations next week.