In this post, two reports are summarized. One describes some recent developments in San Francisco regarding negotiations over its public pensions. The other is a report looking at the public pension nationwide.
San Francisco has been wrestling with its local pension issues, a process that includes a failed ballot initiative and now some ongoing negotiations with municipal unions. Below are excerpts from an article describing what has been occurring. If some agreement comes out of that process, it could set a pattern that would spread. The process is worth following because of its possible precedent-setting nature. Whatever might come out of the process would involve liberal Democrats and labor unions, clearly an influential combination when it comes to the legislature.
Pressures Build to Slash Costs of City Employees: If an agreement can be reached, it could set a precedent for other cities (excerpts)
Elizabeth Lesly Stevens, Bay Area Citizen, 2-12-11
Shortly after the November elections, an unusual band of labor leaders, along with Ben Rosenfield, the city controller, and Sean Elsbernd, the most fiscally conservative city supervisor, met in the posh offices of Warren Hellman, a San Francisco investor and philanthropist, with one goal in mind: Cutting a deal to slash the ballooning public employee costs weighing heavily on the city's financial crisis. Hellman (who is the chairman of The Bay Citizen but plays no role in editorial operations) became a hero to the city's labor unions last year when he disavowed his earlier support for the ballot measure that would have forced city employees to contribute more toward their benefit and pension costs.
A few weeks before the election, two labor leaders, accompanied by Joseph D. Driscoll, an old friend of Hellman's who is also a fire captain and a member of the city's pension fund board, persuaded Mr. Hellman that the city's unions could come up with a better plan to slash the city's pension and benefits costs, rather than have one foisted upon them. The ballot measure, Proposition B, which had been promoted by Jeff Adachi, the city's public defender, lost by a wide margin. And the emboldened unions and the City Hall politicians who had lobbied against it had won the tough task of coming up with an alternative solution.
…If the group can pull it off, however, it would be a notable, perhaps precedent-setting, achievement as governments across the country grapple with many of the same issues. “This is the public labor movement's Nixon-to-China moment,” said David Crane, a Proposition B backer who served as Gov. Arnold Schwarzenegger's special economic adviser and who now lectures on public policy at Stanford University. “They are the ones who should propose and make it all happen.” (Editor's Note: Crane was nominated to the Regents but has not been confirmed.)
Thomas P. O'Connor, president of the San Francisco firefighters union, said, “Everything is on the table, everything. We cannot put our heads in the sand anymore.”
…The issues are complicated. The laundry list of possible pension fixes the group is contemplating, for example, includes such bold measures as essentially capping pension payouts at $100,000 a year, stripping some retirees of their supplemental cost-of-living raises, and greatly increasing the amount that existing employees must contribute to the pension fund.
A list of eight possible reforms was completed at a meeting Wednesday, and it will take the controller's office several weeks to estimate savings for each idea.
The group has not yet begun to tackle changes to the health care system, which is considerably more complicated than the pension system.
…Because any proposal would almost certainly require a measure on the November ballot, crucial deadlines are on the horizon. Within two weeks, the city must meet and confer with its unions to discuss the changes, even though no one yet knows what will actually be proposed…Nationwide
An interesting study was just made available by the Center for Economic and Policy Research. I reproduce the executive summary below and provide a link to the full report.
There has been considerable attention given in recent months to the shortfalls faced by state and local pension funds. Using the current methodology of assessing pension obligations, the shortfalls sum to nearly $1 trillion. Some analysts have argued that by using what they consider to be a more accurate methodology, the shortfalls could be more than three times this size. Based on these projections, many political figures have argued the need to drastically reduce the generosity of public sector pensions, and possibly to default on pension obligations already incurred.
This paper shows:
•Most of the pension shortfall using the current methodology is attributable to the plunge in the stock market in the years 2007-2009. If pension funds had earned returns just equal to the interest rate on 30-year Treasury bonds in the three years since 2007, their assets would be more than $850 billion greater than they are today. This is by far the major cause of pension funding shortfalls. While there are certainly cases of pensions that had been under-funded even before the market plunge, prior years of under-funding is not the main reason that pensions face difficulties now. Another $80 billion of the shortfall is the result of the fact that states have cutback their contributions as a result of the downturn.
•The argument that pension funds should only assume a risk-free rate of return in assessing pension fund adequacy ignores the distinction between governmental units, which need be little concerned over the timing of market fluctuations, and individual investors, who must be very sensitive to market timing. This argument also fails to recognize the fact that over a long period, future stock returns are inversely related to current price-to-earnings (PE) ratios. If the current PE ratio is relatively low, as is now the case, then the assumption that the market will provide below average returns implies a further decline in the PE ratio, given the generally accepted growth projections for the economy. As a practical matter, the stock market has provided an average real return of more than 8 percent for 30-year periods when the PE ratio at the start was under 15 to 1. It is worth noting that if pension funds stop investing in equities, as some have advocated, this would imply higher taxes and/or lower benefits for public employees. It would also mean that other investors could expect to see higher future returns on their stock holdings.
•The size of the projected state and local government shortfalls measured as a share of future gross state products appear manageable. The total shortfall for the pension funds is less than 0.2 percent of projected gross state product over the next 30 years for most states. Even in the cases of the states with the largest shortfalls, the gap is less than 0.5 percent of projected state product. It is also worth noting that some of this shortfall has likely already disappeared as a result of the recent rise in the stock market. If this rise is not subsequently reversed, then a substantial portion of the funding shortfall has already been eliminated.
In sum, most states face pension shortfalls that are manageable, especially if the stock market does not face another sudden reversal. The major reason that shortfalls exist at all was the downturn in the stock market following the collapse of the housing bubble, not inadequate contributions to pension funds.
Full report at http://www.cepr.net/documents/publications/pensions-2011-02.pdf
It Ain't Over 'Til It's Over