States in Peril Must Cut to the Bone?

Leo Kolivakis's picture

Via Pension Pulse.

WSJ reports that U.S. House Republicans said Wednesday they are
concerned about a "looming fiscal crisis" in state and local finances
but ruled out any federal bailouts for states. This is placing pressure on states to introduce tough budget measures, pitting states against public unions:

around the country are looking at new ways to prevent budget disasters
by changing the rules for overburdened state employee pension funds.
But they are meeting stiff resistance from public employee unions.


Arizona state lawmakers this week, including the speaker of the House,
introduced their plan to salvage the state's budget by significantly
changing the public retirement system.


Following the lead of Gov. Chris Christie,
R-N.J., a pair of New Jersey assemblymen on Monday put forth their
legislative solution to make solvent a fund that's $54 billion in the


Also on Monday, in his first budget address as governor, Florida's Rick Scott announced his effort to "stabilize and secure" government employee pensions.


moves are part of a larger battle over pension reform between
conservative budget hawks and government worker unions. And the
public-sector employees are fighting back hard.


working in partnership with affiliates around the country to wage
full-scale battleground campaigns -- to defend our pensions, to fight
budget cuts and privatization, to protect collective bargaining and our
political power," said American Federation of State, County and
Municipal Employees Secretary-Treasurer Lee Saunders at a public
pension leadership meeting in Washington late last year.


union, a vocal and powerful political force, often in support of
Democrats, represents more than 1.6 million state, county and municipal
workers who will be directly affected by the reforms proposed


The fight for pension reform was certainly a political winner in 2010 for Wisconsin's Scott Walker
and Ohio's John Kasich. The Republicans each championed the cause on
the way to becoming governor of their respective states.


On his first
day in office, Kasich sent a letter to state employees explaining how
"like any organization, state government has, over time, slowly become
too bureaucratic. Together we'll recharge it, reform it, modernize it
and, yes, in some cases, make it smaller."


Snell, who keeps track of pension legislation for the National
Conference of State Legislatures, said lawmakers are motivated by a
double squeeze on pension systems -- the investment market collapse of
2008 and a glut of retirements as Baby Boomers move into their 60's.


economic difficulty of finding solutions to balance the ledger is
matched by the hard political effort that will be needed to take away
or curtail benefits for state union employees. Lawmakers who support
such plans risk the label of "anti-worker politician" from labor
leaders like AFSCME President Gerry McEntee -- a sobriquet often
matched with big campaign spending.


think what you were hearing from President McEntee was a very
legitimate concern that the problems that public employee pensions are
facing because of the economic downturn are really being exploited by
some politicians who want to use this as an opportunity to attack
working families in this country," Scott Wasserman, political director
of Colorado WINS, which represents public employees, told Fox News.


also attended the December union summit and says states can look to
what Colorado accomplished in 2010 as a model for success. "I think
there was universal recognition on both sides of the aisle that this
was an important problem to fix, " Wasserman said. "And that if we all
work together and if there was shared sacrifice from employees and from
taxpayers and from retirees that we could actually put out fund on the
track to solvency."


lawmakers passed a plan that increased the employee contribution rate
while the state share of retirement contributions decreased. The deal
also increased age and service requirements especially for younger and
future state workers.


But not
everyone in Colorado thinks the deal is a swell compromise.
Approximately 100,000 retirees are asking a state court to invalidate
the law claiming that another part of the plan illegally lowers future
cost of living adjustments.


Florida, Scott said the hard decisions that have been made in the
private sector must be made in his state. He's asking workers to
contribute 5 percent of their income toward the retirement fund.


cannot ask Florida taxpayers, most of whom have no pension at all, to
bear all the costs of pensions for government employees," Scott said.
"By modernizing the Florida Retirement System, we will save taxpayers
$2.8 billion over two years."


if states are able to solve the political problems with employee
pensions and pass reform legislation, the actual economic benefit from
their hard work will not be readily seen.


time, the systems will cost the public substantially less. It won't
show up quickly, but it will certainly take care of the problem in the
long run," Snell said.

is no question that state pensions need to be reformed. The question is
what type of reforms and how will they benefit all stakeholders? I
think there needs to be some give and take from all sides. The fact
remains that state pension funds used rosy investment projections and
have been neglected for far too long. Nobody bothered putting money in
them, and their governance model left them vulnerable to fraud and

And now states are getting squeezed by the credit
agencies. CNN reports that Standard & Poor's lowered its credit
rating on New Jersey's debt to AA- from AA, citing concerns about its massive retirement obligations:

lower rating reflects our concern regarding the stresses from the
state's poorly funded pension system, substantial post-employment
benefit obligations, and above-average debt levels," said Standard &
Poor's Credit Analyst Jeffrey Panger.

The state has nearly $33
billion in debt, among the highest in the nation, according to S&P,
which rates the state's outlook as stable because it believes it will
"continue to manage its structural budget imbalances proactively."


New Jersey has long skimped on funding its pension, leaving it with a current unfunded liability of $54 billion.


Chris Christie, who took office in 2010, has taken an aggressive
approach to handling the Garden State's financial problems. He closed a
fiscal 2011 deficit of $11 billion, which was equal to 37% of the
budget, by deeply cutting spending and suspending a property tax rebate.
He also deferred $3.1 billion in pension funding.


The state
faces a budget gap of $10.5 billion for fiscal 2012, which starts July
1, according to the Center on Budget and Policy Priorities. The
governor is expected to release his budget in coming weeks.


to the S&P downgrade, Christie called on lawmakers to overhaul the
state's retirement system. He wants to raise the retirement age,
require workers to contribute to their pensions and curb the annual
cost-of-living increases that retirees receive.

"Governor Christie's
pension and benefit reforms are necessary to manage the state's
pension liability and ensure long-term stability," said Press Secretary
Michael Drewniak in a statement responding to the downgrade.

have no problem with Governor Christie's recommendations but they're
missing something important. Reforms are also needed in the governance
of the state pension plan. Get rid of rosy investment projections,
appoint an independent board, hire seasoned money managers and
compensate them properly, aligning their interests with stakeholders'
interests. And for Pete's sake, stop skimping on funding your pension!

easy to cut, cut, cut and demonize public pensions. Much harder to
build and improve on the current retirement system. That's why I get so
annoyed with rating agencies and what looks to me like an obvious
ideological war on public unions/ pensions (to weaken them so private
sector interests can benefit). All these angry people in the US who
attack public employees and their "generous benefits" should ask
themselves what will happen to their vital services when states cut to
the bone.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
sudzee's picture

I don't at all, at this time, appreciate the greedy, lazy, overpaid freeloading public sector unions just like most of us on this site.

I will though appreciate them when the rioting in the streets begins. I have always beleived that it is they, who have everything to loose, will be maning the front row of demonstators. Promised a retirement of ease for mearly showing up for a meaninless "job" for 20 or so years.

Thirty million strong including 2 million trained and armed cops, about to loose their cushy retirement dreams, will be a force to be reckoned with.

I wish them luck. May they find happiness in finally doing something productive for the taxpayers they have been financially rapping for all of their none working lives.  

dxj's picture

It will be the unemployed public sector doing the rioting. That sense of entitlement goes deep. They certainly haven't given a damn (up to now) what is happeing to the private sector. The cops will have more important things to do than answer your frantic 911 call  as the angry/hungry horde come to loot.

The Alarmist's picture

Dude, who do you think will be doing the rioting? There will be a few cops there, but it will be teachers, bureaucrats and other public-sector union members on the other side of the shields, and the "enforcement" you will see from the "forces of good" will be tepid at best.  Al theatre to shake a few more protection-dollars out of your next paycheck.


Tic tock's picture

It makes no sense - States are pretty huge - if they simply created their own state coporations to provide themselves with the goods they need, like paving, books, pencils, they could save billions in costs. It wouldn't be deflationary, even though the prices of goods would go down.

The real problem is food and utilities inflation v. wage deflation. If the states want to handle a transition in absolute terms to a lower pension pot, then quid pro quo, they require deflation in those prices. The states badly need to improvise agricultural projects and some sort of in-state energy supply. 

The Alarmist's picture

You obviously have never used a government-issue Skilcraft pen ....


Watauga's picture

The "pension wedge" is the greatest propaganda tool the political/financial/cultural elite have at their disposal to finally crush America's Middle Class/Working Class.  First, they create pension plans in an ever-expanding government (at all levels), then they create the wedge by destroying the economy/jobs while boosting government spending (at all levels), then they tell the angry jobless how government employees are the root of the problem. . .   Pretty easy to see that all of your attacks on the government employee and his pension are playing right into their hands.  Perhaps the discussion should not be against one another, but should be about which "leaders" we elect to office?

nmewn's picture

I will say again Leo.

They will shrink government, cut taxes and allow the people to prosper one way or the other.

And yes, some amputations will be involved.

Where was the hand wringing by public sector workers and their unions when the private sector was being destroyed?

I'll tell you Leo...they were chanting gimme gimme gimme.

Look at the money that could have been saved just on T-shirts and signs alone...not to mention the massive "carbon footprint" of busing these people around for photo ops...LOL.

Seasmoke's picture

nice to see a horse racing guy here

Gromit's picture

Simple solution really.

For funded programs calculate shortfall on a sensible actuarial basis (maybe 30 year bond yield rather than 8% whatever) then reduce all benefits by percentage of shortfall. 

For unfunded programs use same percentage. 

There is no fundamental problem with the concept of a defined benefit pension - so long as the benefits are not higher than incoming payments can sustain.

dxj's picture

"Simple solution really ..."  What you're advocating is not a defined benefit program, but one that pays out according to the assets available. This is more like a 401K, which the rest of us mooks in the private sector live with.

Zero Govt's picture


All these angry people in the US who attack public employees and their "generous benefits" should ask themselves what will happen to their vital services when states cut to the bone.

Answer: Nothing. Nothing will happen. Life will go on as normal free of the feeding, snorting pigs of society, the public sector. Go to any US town where the Govt has gone bankrupt and these "vital" services (police, education, firemen etc) have all been laid off. Life goes on better than normal, free of the States expensive, tawdry, wasteful calamity clown show.

Anything the Govt supplies is 2nd or 3rd rate dross. Let the free competitive market supply it, it could hardly do worse, it will without shadow of a doubt be much (much) better. 


johnQpublic's picture

zero govt, you are correct sir


up at my 'camp'  there is a volunteer fire department, and there are two paid "govt" employees

they also collect the garbage, and do the snow plowing

no police

no crime(that i've seen)

and a single room post office with one woman working there

taxes are way up...almost 50% in last 8 stand at 300/yr property and school combined

the average income is 22k a year

very mellow,relaxed,happy place with zero crime

5 street lights(one of 'em is broken going on ten years now)

35 miles to nearest wal-mart so local businesses get all the business

co-op bill is 16-35 bucks a month and i have electric everything, no gas or propane, but i have a wood burner. and electric heat backup

the less government, the lower the cost of living

its in the largest county in new york state

our local government officials are UNPAID

they do the job as a public service

as far as i know , there is only a town supervisor and a building inspector

once again...

the less government, the lower the cost of living

mad props to charlie-johns grocery,stephensons lumber, and all the other little businesses who keep prices low, and provide much better service than anywhere else i've ever shopped

and thanks to the building inspector who certified my foundation work by phone

and Dawn who let me use her phone, and Harry for throwing the best damn parties i've ever stumbled home from down the middle of the road

sethstorm's picture

All the junk and shoddy services that's come from Third World countries provide a nice counter-example. 

Government provides scale and uniformly applied service where the private sector won't.  Try that in anything more than a small town, and chaos happens - just not that the kind of chaos that you may prefer.

10kby2k's picture

Unions built this country and now unions are destoying it.

Freddie's picture

No Leo there is no give and take.  Cut cut cut.  Thank liberalism for causing the state bankruptcies.  Odd how all these little leftist like Leo, "George Washington" never mention their union heroes or their idol Obama.

Triggernometry's picture

I guess your selective memory overlooked the fact it was "conservatives" who came up with the idea od "starve the beast." For the record, I'm no "liberal," I'm just frequently disgusted to hear people gush about Reagan when they have no clue as to the extent of damage done to our country under his watch.

Btw, I didn't junk you but I can see how somebody felt it was deserved.

plata pura's picture

End corporate personhood!

Triggernometry's picture

Bingo! Then we might not need unions.

Thalamus's picture

Stop the unions...stop organized crime!  Kill two birds with one stone.  

sethstorm's picture

Except that you create more thuggery due to cutting only part of of the organized crime.  Killing unions won't stop organized crime, it'll only move it to more acceptable settings.



SoccerDad's picture

I, for one, would like to finally see the States cut to the bone.  Government has gotten so big and out of control, I don't even think we know what services are 'vital' anymore.  If forced to cut to the bone, at least we would find that equilibrium between what's vital and the minimum revenue required from tax payers.   If, tax payers don't like the cost/benefit of those services and feel they aren't receiving vital services then, they should move to a more rural location where a more realistic definition of 'vital services' can be learned, while there they may actually also learn to produce more than they consume and save more than they spend.

KickIce's picture

Our government:  Aligator mouth / hummingbird ass.

Promise, promise promise...


The line from Top Gun comes to mind as well....

Son, your ego is writing checks that your body can't cash.

boeing747's picture

Boomers suffered too. Life time savings earned 0.25 cent because of Ben. SSI can not catch up real CPI. Higher property tax will hit them hard because every one of them has a house or two. States cut budgets mean less money for MedCal and home cares.

KickIce's picture

The elderly/poor have suffered for years as we've deflated the value of the currency to keep the ponzi scheme alive.

topcallingtroll's picture

States should be allowed to go bankrupt. Why should younger workers have higher taxes fewer benefits and worse retirement plans than baby boomers? The baby boomers arent willing to sacrifice anything as they engage in the largest intergenerational transfer of wealth in history. Shameful and greedy. The boomer generation will be remembered as the selfish entitled generation. The retirement age is being raised for everyone who is not a boomer.

The Alarmist's picture

Why have the slaves and serfs toiled for millenia to build monuments and palaces for the kings and their vassals, keeping them in lifestyles far better than anything the slaves and serfs would themselves ever enjoy?

It's the natural way of man. 

Back to your work, serf! Your lords and masters must enjoy the comfort that the almighty himself has ordained to them.


Lord Koos's picture

You mean like the 60,000 boomers who died in Vietnam before their 30th birtdhday?  Yeah they didn't sacrifice too much.  Younger people have no idea what it was like to have a military draft.

Stop scapegoating the boomers, it's just more divisive bullshit.  Boomers worked all their lives, paid taxes (higher than anyone in the middle class is paying today), paid into social security, and now as they near retirement, the pensions are gone, there 401ks & IRAs in the stock marker are are being manipulated by fraudsters, politicians want to take away SS benefits that they already paid for, and the value of their homes has plummetted. And what makes you think that millions of boomers aren't going to have to work until they die of old age?

Huck T's picture

Nah - no idea what a draft was like.  Or how to avoid it - and then get elected by pretending how bad ass you are when it comes to "defense."  Maybe if more Boomers had enlisted, rather than figuring out ways to avoid it, they'd have won in Indochina. 

Maybe if more Boomers had embraced integration, rather than white flight, the country wouldn't be as badly split along racial lines.

Maybe if more Boomers had engaged in responsible politics, rather than the cultural wars, they wouldn't be taking it in the kiester from the pols they voted in again and again and again.  No - a lifetime of immaturity... and now they're out dressing up like the Founding fucking Fathers! 

Maybe if more Boomers had stayed married and raised their kids, instead of going off to "find themselves," their offspring might be willing to take them in and feed them something more than catfood.

Maybe if the Boomers hadn't wanted to retire at fifty and live to be a hundred, they wouldn't have let themselves get taken in by notions of 10% annual home appreciation and house-flipping.

Do you see what happens?  This is what happens.

Of course, you gotta look at the folks who raised up these these whiners.  Makes me wonder how great the so-called Greatest Generation really was...






Watauga's picture

You haven't a clue, child.

"Youth is wasted on the young."

nmewn's picture

Where's your pitchfork kid? there an app for that?...LOL.

Freddie's picture


However the young voted in large numbers for the Islamic messiah - who doubled the debt in 18 months.  I guess if they have the latest iGadget then all is well.

Trifecta Man's picture

Meredith Whitney will be vindicated soon enough.

Zero Govt's picture

Meredith is counting the beans, or lack thereof. What needs to be addressed more fundamentally is the system that brings about this insolvent clown show called "democratic Govt" always fails so time for a big systemic change this time  

RoRoTrader's picture

The probability that the following from Yves Smith's, naked capitalism is the model of what is to come as part of the social/economic paradigm shift which is surrepticiously already underway.......imho.

UK About To Impliment Massive Tax Breaks For Banks; Is The US Far Behind?