Even another stock market bubble, in fact an everything bubble that has temporarily inflated the price of every asset to historically high levels relative to income, has not been enough to get the average U.S. public employee pension fund out of the hole. But it has been enough to knock the public employee pension crisis out of the news, and give politicians an excuse to shift even more of the cost to the future. As I showed here…
When asset prices bubble up, future investment returns are going to be lower. If the bubble is big enough, future returns could be negative for decades, as they have been in aging countries like Japan, and countries that try to inflate away their debts like Argentina, two (hopefully but not necessarily extreme) versions of our own future. Predicted future return returns should be reduced as asset prices rise, as ERISA requires private pension funds to do by tying future returns to current interest rates. But in the public sector, which was exempted from ERISA, when asset prices bubble up public unions cut deals with the politicians they control to increase benefits in Blue States, and while anti-tax politicians slash pension contributions to cut taxes in Red States. (Actually, they do both things in both types of state). Then, when asset prices correct to normal, somehow it’s nobody’s fault. Wall Street stole the money!, PBS Frontline claimed in an investigation of the problem. That’s why nobody is talking about pensions now – that lie temporarily unavailable.
Thus far the federal government, at great cost to ordinary people in disadvantaged later-born generations, has managed to keep paper asset prices – and housing prices – inflated, to benefit the rich and seniors. Even so in FY 2019, despite sky-high asset prices and the passage of more than a decade since the problem was acknowledged (by some), my back-of-the-envelope estimate is that U.S. state and local government pension funds were $3.65 trillion in the hole, more than ever before. A more sophisticated analysis by the Bureau of Economic Analysis, using the assumptions private pension funds are required to use, put the hole at $4.54 trillion in 2018. But in which states is the problem the greatest? Read on and find out.
This is the third of four posts on the extent to which each state’s future has been sold out by state and local government debts, inadequate past infrastructure construction, and underfunded and retroactively enriched public employee pensions.
The first post, which takes a national perspective and describes the analysis, is here.
A very large spreadsheet with the data used in this analysis, a series of tables and charts is, once again, here, with a slight correction and some updated charts.
The prior post was on state and local debt, and past infrastructure and education building capital construction.
This one is on state and local government public employee pensions.
In order to have enough money to fund the extremely long and well compensated retirements most public employees receive, I argue that their pension funds ought to have enough in assets that benefit payments are only 4.0% of those assets. That, or at least something close to it, is what the ratio should be for “mature” pension funds in stable, built-out states and places where the population is growing slowly, if at all. Places where the ratio of retired to active public employees fully reflects the richness of the pension benefit, in terms of the ratio of life expectancy in retirement to required years worked.
In fast growing states and places, on the other hand, with relatively few retirees from a less populated past but many current employees earning future benefits, the ratio of today’s benefit payments to current assets should be even lower. Since those assets should be being accumulated to provide for the retirement of the much larger number of current workers, not the smaller number of past workers. Moreover, 4.0% is what the ratio should be in a typical economic year, not at the peak of one of our repeated bubbles, where the asset values of the pension funds far exceed what is justified by the investment income those assets are likely to produce over time. As in FY 2019, and today.
Just because stock prices have bubbled up doesn’t mean pension funding can be cut, or benefits can be retroactively increased, because those will eventually fall back to normal. Besides, if one sells off stocks and bonds to pay pension benefits today, regardless of how high a price is received, what assets will be used to pay the pension benefits of future retirees tomorrow? Public employee pension plans may sell some assets to buy others, but in reality they should never be net sellers unless the number of retired public employees is going to go down in the future. The assets have to keep increasing.
What is needed to pay pension benefits is actual income, not unrealized paper gains. But just as most stocks today don’t have enough earnings, or pay enough in dividends, to support current inflated stock prices, so most pension plans don’t have enough cash investment income to pay benefits.
Nationwide, state and local government public employee pension benefit payments were 7.3% of pension fund assets in FY 2019, not 4.0%. And some states had far less in assets, relative to benefits paid, than that.
New Jersey remains the worst-off state, with pension benefit payments equal to 14.4% of pension plan assets in FY 2019. That is worse than the 13.8% of pension fund assets in FY 2016, and the 11.8% in FY 2012. New Jersey only had enough pension fund assets to pay for 6.9 years of benefits. The next worst-off state was Kentucky, with benefit payments equal to 12.8% of pension fund assets, followed by Connecticut at 11.7%, Pennsylvania at 11.3%, Illinois at 10.9%, Louisiana at 10.7%, South Carolina at 10.6%, Michigan at 10.1%, Mississippi at 9.9%, Rhode Island at 9.8%, Alaska at 9.3%, and Vermont at 9.1%.
In these states, and others like them, future residents and businesses will be forced to pay higher taxes and receive diminished public services to pay for costs that belonged to past state residents. And/or current and future public employees will receive less in retirement benefits, and pay more for them, to help fund the sweeter deals those who came before promised themselves. Unless those who came before give something back.
Which never happens, because past self-dealing is kept under Omerta when future sacrifices are under discussion. Instead, many states exempt retirement income or (in New York) just public employee retirement income from state and local income taxes, to ensure those who paid less in the past will pay in nothing in the future. And benefit increases for those cashing in and moving out are later offset by cuts in pay and benefits for new hires, in a never ending “screw the newbie, flee to Florida” cycle. The result is a combination of resentful and entitled public employees claiming they are underpaid, bringing that attitude to work every day, and sky-high labor costs compared with the private sector.
Speaking of New York, the state has two pension systems. A state system that also includes local government employees in the portion of the state outside New York City. And a New York City system that includes employees of the City of New York and (for historical reasons) also includes New York City Transit.
You may have heard, because the politicians and media are willing to report it, that the New York State pension system is one of the best-funded in the country, with pension benefit payments equal to 6.0% of pension plan assets in FY 2019. That, however, is about the same as the 6.1% of assets in FY 2014, despite that new stock market bubble, and is far worse off than the 4.5% of assets in FY 2000, as the richest of the pension benefit increases were being passed. By my measure the New York State pension system still had only two-thirds as much money as it should have in FY 2019 – not including additional money that will be required for future pension benefit increases.
What you may not have heard is that New York City’s pension system, despite rules being set by the very same state legislature that controls the New York State pension system, is one of the worst funded in the country, with pension benefit payments at 8.9% of pension plan assets. With only enough assets for 11 years of benefits. Why the city system remains so much worse off is an open question that no one ever asks. We do know that with stock prices soaring in FY 2021, after the Federal Reserve cut interest rates to zero, New York’s public unions ordered their state legislators to enact another benefit increase in the form of an early retirement incentive. Former Governor Cuomo intervened, and cut a deal for that benefit increase to apply to New York City only.
Tucked deep into the 2022 state budget was an early retirement incentive exclusively for teachers and other public sector workers in New York City. A comprehensive incentive for employees statewide was introduced in the Assembly’s and the Senate’s one-house budgets, but kicked out of the final deal by Gov. Andrew Cuomo.
Public sector workers outside of New York City have few advocates to help them right this terrible wrong.
The level of pension plan assets relative to pension benefit payments is only one factor in how bad off the residents of each state are with regard to public employee pensions. Other factors include how many state and local government employees there were, compared with the current and future taxpayers who will have to pay for them, and how much they were paid, compared with today’s taxpayer incomes. The following chart shows how much additional money would have been required to get FY 2019 pension plan assets up to 25 times pension benefit payments, and thus benefit payments down to 4.0% of pension plan assets, with this pension funding shortage divided by the total income of all state residents. This shifts the order of the worst off.
The new worst-off state is Illinois, with a pension funding shortage equal to 41.7% of state residents’ 2019 total personal income. Today’s residents of that state would have to pay a special, additional tax equal to nearly half their income to cover the burden left to them by past and retired (since retirement income is exempt from state income taxes there) public employees and taxpayers. The next worst off is Alaska with a funding shortage of 39.4% of personal income, followed by Kentucky at (35.0%), Ohio at 33.3%, Mississippi at 31.7%, and Rhode Island at 31.6%. Though still deep in the hole, Rhode Island is not as bad off as it was when I first starting doing these analyses.
The public pension plans in New Jersey and Connecticut are bad off, but their residents’ relatively high average personal income reduces the burden relative to income. Getting them out of the hole would require an additional 31.4% of the 2019 personal income of New Jersey residents, and 30.2% for Connecticut. Although as though well-off residents retire or leave, the burden on those who remain could become greater. New Mexico at 29.1%, Louisiana at 28.6%, and Pennsylvania at 27.3% complete the chart.
If New York City were a separate state, and including an allocation of the funding shortage attributable to former state government employees, its public employee pension funding shortage would have equaled 43.9% of city residents’ 2019 personal income, worse than Illinois and worst in the country. That is more than the city’s official debt total at 36.0% of personal income, also the worst in the country. Moreover, NYC’s FY 2019 pension funding shortage was now higher than it had been the last time I did this analysis for FY 2016, when it was 38.5% of personal income. And worse that it had been in FY 2012, at 41.5% of personal income, before the latest asset price bubble really started inflating. In other words, during the DeBlasio Administration NYC has ended up worse off at the peak of a boom than it had been in FY 2012 during a bad economy. Instead of paying the debt off, it was just shifted forward. And all you have to do to avoid being made worse off to pay for it is to move away.
Even just to the Rest of New York State, where the public employee pension funding shortage equals 21.3% of the personal income of those living there. That is still worse than the national average of 18.6%, because past public employees are so numerous, and their pay was so high, compared with current taxpayers as a whole. All retirement income of past public employees is exempt from state and local income taxes in New York, even if (as is the case for many police officers and firefighters) they retire in their 40s. Former private sector workers receive a partial exemption after age 59 ½ (cut in the past decade or so from 62).
If your knowledge of state and local government policy is limited to what you hear on the national news, from outlets such as Fox News, you may be wondering “where is California?” Isn’t it one of the worst-off states for public pensions?
The public employee unions are pretty powerful there, too, and they pushed through a bunch of retroactive pension increases as well. State residents have suffered higher taxes, public service cuts, and low infrastructure investment for two decades to pay for this. Even so pension benefit payments equaled 6.7% of California’s public pension plan assets (vs. the U.S. 7.3%), and thanks to the tech boom, getting benefit payments down to 4.0% of that state’s pension assets would have only required an additional 18.2% of state residents’ 2019 personal income, less than the 18.6% nationwide average.
Three years ago, I found the only state or equivalent with public pension funds that had a benefits-to-assets ratio as it should be was the District of Columbia, and the District is in even better shape today. It’s pension benefit payments equaled just 3.9% of its pension plan assets in FY 2019. It owes its strong position to a federal bailout, and being put under a financial control board in the early 1990s just before the wave of retroactive pension increases and public employee pension underfunding hit. So those political deals didn’t happen in DC. In a backward way, by getting caught engaging in behavior that led to a financial control board takeover, former Mayor Marion Barry saved that city.
Assuming the data is correct, in FY 2019 Tennessee’s state and local government pension benefit payments equaled just 2.8% of pension plan assets – perhaps as low is it would need to be in fast-growing state with many more future retirees. (We know pension plan assets have been misreported and inflated for NYC since Scott Stringer took over as Comptroller, by including the separate 401K-equivalent assets of individual teachers as pension plan assets, even though they can’t be used to pay pension benefits. Despite the Census Bureau’s clear instructions, that may have happened elsewhere).
Other states with relatively low ratios of pension benefit payments to pension plan assets include some other fast growth states such as Washington (4.7%), Utah (4.9%), Nevada (6.1%), and Texas, North Carolina and Virginia (6.6%). And also some slower growth states such as Idaho (5.8%), Nebraska (5.7%), Hawaii (5.0%), Iowa (5.0%), South Dakota (4.9%) and Wisconsin (4.6%).
Wisconsin’s fully funded, one-of-a-kind pension system surprises people, but not those who know the legendary thrift of Gary Gates…Gates, 78, helped make the state’s pension plan a model for a nation of now-struggling systems. There’s just one problem: almost no one understands how Wisconsin’s system works…
A Wisconsin retiree’s pension benefits can rise above the minimum level and also fall back down to that minimum if the plan’s investments underperform or if the cost of the benefits comes in higher than anticipated — for instance if pensioners end up living longer than expected. This approach is called a “shared risk” model, referring to the way it avoids sticking taxpayers or retirees with all the potential losses from a financial crash.
These adjustments are made automatically — no politician has to take a difficult vote to approve them. To smooth out the effects of up and down markets, the state spreads the gains and losses across five-year periods.
That means that unlike in New York, the unions can’t cut deals with their politicians to increase pension benefits, and lie about the future cost, knowing full well they can never be cut back to what they were actually promised, no matter what. In Wisconsin their benefits would be reduced, and all public employees, not just the newly hired, would end up paying more. And unlike in some other states, taxpayers can’t get away with underfunding pensions to cut taxes, expecting to move away before the bill comes due. The bill comes due immediately. Wisconsin shows that the excuse that past irresponsibility is irrelevant, because pensions are inherently disastrous, is not true. What happened is the result of Generation Greed’s values, which have affected everything else the same way.
At the time, Room 8 blogger Larry Littlefield said the deal would devastate the system financially, a position the Bloomberg administration appears to be coming around to as it asks Albany to cut city pension costs. Klein blames Albany for siding with the union.
“The mayor repeatedly raised the pension issue throughout his tenure but didn’t get the needed support in Albany,” Klein told the Insider. “Anyway, my point about pensions is that the defined benefit structure is unsustainable, whether someone works until 62 or 55.”
Klein clearly doesn’t understand the Rule of 70 – 70 divided by the interest rate is the doubling time. The NYC pension plans assume a future rate of return of 7.0% (briefly increased to 8.0% to show that the 2000 pension increase “cost nothing”). That is certainly too high an assumption right now, but let’s use it because it makes the math easy.
Under the 2000 pension deal, NYC teacher pension fund pension payments jumped by $1.36 billion per year in today’s (2019) money, while pension contributions by the teachers themselves fell by $618 million. That’s $2 billion per year that wasn’t in the pension fund, like it should have been, to earn future returns. 70/7 means a doubling time of 10. So that $2 billion debt from just one year in the early 2000s became $4 billion and then $8 billion over two decades, and it will continue to increase until taxpayers put in enough to catch up. And that’s just for one year of greater benefit payments and lower contributions. The next year benefit payments were also higher, and teacher also contributions lower, as well, and the shortage for that past year is also doubling, and then quadrupling. As is the additional money that was paid out of the fund or not put in the next year, and the next year, and the next year, and every year since the deals were cut.
The 2008 pension increase created an additional $1 billion per year increase in pension benefit payments, and since that wasn’t paid for either it has since doubled to a $2 billion hole. It will keep doubling and redoubling, even as the money that wasn’t in the fund due to additional benefit payments in later years is also doubling and redoubling.
At the end of my prior Sold Out Future analysis through FY 2016 I noted that while my back-of-the-envelope shows fast growing Sunbelt states don’t have as much of a Sold Out Future as New York City, that doesn’t mean they aren’t selling. A more sophisticated analysis might show they had Sold Out Futures too. And sure enough, an analysis by the Bureau of Economic analysis showed just that.
The national total is worse, with a 2018 pension funding shortage equal to 23.1% of personal income, even though I used the higher personal income total for 2020 is used for the calculation. New York City comes in a little better at 36.1% of personal income, due to its booming Wall Street income that year, as do the Rest of New York State (17.5%), New Jersey (28.6%), and Connecticut (27.2%). Fast growth states such as North Carolina (17.6%), Nevada (27.6%), and Texas (16.2%) appear worse now that the future benefits of their rising number of public employees – and thus future retirees — is accounted for. California also comes out looking worse, when a larger number of future retirees is taken into account.
The new worst states are Illinois, still last with a pension funding shortage equal to 49.9% of state residents’ personal income, Alaska at 44.0%, New Mexico at 37.5%, California at 35.7%, Hawaii at 35.1%, Mississippi at 34.4%, New Jersey at 28.6%, Ohio at 28.2%, Nevada at 27.6%, and Connecticut at 27.2%. If New York City were a separate state it would be about as bad off as California, and no longer worse than Illinois, but still worse off than New Jersey. The Rest of New York State would be better off than the national average.
This is that sad situation that later-born taxpayers, service recipients, and public employees find themselves in. The one discussion nobody (else) wants to have is how things ended up this way. Not now, when stock prices are high, and Wall Street cannot be blamed. But here is how the blame varies from state to state.
Did past taxpayers not put enough in?
It’s one thing for a state or city’s taxpayers to suddenly face a huge pension bill after decades of shorting their pension promises. It’s another for taxpayers to pay enough to provide public employees with far richer retirement benefits than most of them will receive, and still find themselves on the hook for $billions more due to retroactive pension increases in 3 am deals in the state legislature, in the absence of any public debate.
That is the situation current and future residents of the New York City find themselves in. NYC taxpayer pension contributions averaged 18.4% of the wages and salaries of active public employees from FY 1987 to 2019, a higher percent that in any state. Compare that with your employer’s contribution to your 401K. New York City’s pensions are as underfunded as those of New Jersey, but in New Jersey taxpayers paid in just 7.3% of public employee payroll over those decades, less than the U.S. average of 10.4%. The New York State pension system is among the least badly funded, even though taxpayers only kicked in 8.2% of public state and local government payroll, on average, from 1987 to 2019, also less than the U.S. average.
Nevada taxpayers kicked an average of 17.7% of payroll to that state’s state and local government pension funds from FY 1987 to 2019. But in Nevada public employees do not also get Social Security.
So for a fair comparison, one would have to say that NYC taxpayers kicked in 24.6% of payroll for both pensions and OASDI, including the 6.2% FICA tax, compared with Nevada’s 17.7%. More than anywhere else. Far more. Enough to pay for a very rich pension benefit with even a modest contribution by the employees themselves.
Other states where taxpayers have contributed much more than the U.S. average to public employee pension funds over the decades, as a percent of public employee payroll, are Illinois at 15.5%, Connecticut at 15.1%, Louisiana at 14.6%, West Virginia at 14.4%, Alaska at 14.1%, Rhode Island at 14.1%, Massachusetts at 13.9%, Ohio at 13.6%, California at 13.1%, and Maine at 12.8%.
In many of these states the public employee pension funds remain underfunded despite a high level of taxpayer contributions since 1987, for a variety of reasons. California and Illinois had retroactive benefit increases, along with a high level of pension spiking and fraud. After a big pension benefit increase for teachers in 2000, sold as costing nothing, California legislators simply refused to increase pension funding for years, allowing the hole to keep growing. Until finally passing an increase in funding “for the schools” by referendum. Connecticut repeatedly deferred required pension contributions from the 1990s…
To the present.
Though the pension refinancing will save state money this fiscal year and next, it will cost Connecticut over the long haul.
In some of these states, as in Nevada, taxpayers paid a great deal for public employee pensions, but did not always have to pay for Social Security, which many of those retirees do not and will not get. That is a big difference from New York City. Teachers do not get Social Security in California, Connecticut, Massachusetts and Illinois. No state and local government workers do in Ohio. (I looked for a comprehensive list of the share of public employees not earning Social Security credits by state, but could not find one). When assigning blame for the consequences of public pension underfunding, public employees who do and do not get Social Security have to be talked about separately, and differently.
Finally, remember that high levels of contributions in the past decade, after the pension funds were already drained, don’t make up for low contributions and retroactive pension increases further in the past, because that money should have been in the pension funds and earning investment returns. Now higher taxpayer contributions are required just to avoid getting further in the hole. Or not.
States where taxpayers have kicked in relatively little to pensions over 30-plus years as a percent of payroll include Nebraska (at an average of 4.8% of payroll), North Dakota (5.1%), South Dakota (5.3%), Vermont (5.5%), North Carolina (5.7%), New Hampshire (4.6%), Iowa (5.8%), Kansas (6.2%), and Wyoming (6.3%). These low taxpayer contribution rates, and the low taxes that go with them, could be indicative of relatively low pension benefit levels relative to wages and salaries, something more like a private sector compensation package. Or they could be indicative of current taxpayers paying less in taxes by shifting the cost of their public services to future taxpayers. In the case of North Carolina, years of contributions below 5.0% of payroll in the 2000s have been followed by an increase to 8.4% of payroll in FY 2019, and rising.
On the other hand, many of the states where taxpayers paid the most on average over the 30-plus years from FY 1987 to FY 2019 are also among the states where taxpayers have been forced to increase their pension contributions the most over the past few years. New York City’s taxpayer pension contributions were at a massive 33.2% of public employee wages and salaries in FY 2019. The cost of a rich retiree health benefit is on top of that. Taxpayer contribution levels are much higher than that for the separate pension plans for NYC police officers, firefighters and teachers, who have used their unchallenged political clout to grab one benefit increase after another over three decades.
And worse, it is not enough. With another stock market bubble pushing up asset values, NYC taxpayer pension contributions have temporarily stopped going up, but they aren’t enough to get the city’s pension funds out of the hole. There will be another huge increase in the next recession, just in time to compound the pain of another fiscal crisis.
Meanwhile, pension contributions by New Jersey taxpayers and for the New York State pension system remain far lower as a percent of payroll, at 14.9% and 11.7% respectively. That’s up from the averages of 7.3% and 8.2% from FY1987 to 2019. The U.S. total is itself up from 10.4% on average from FY 1987 to 2019 to 16.2% for 2019 alone.
Other states with notably high FY 2019 taxpayer pension contributions as a percent of the payroll were Illinois at 32.2%, Connecticut at 27.7%, Kentucky at 24.8%, California at 24.2%, Pennsylvania at 24.1%, Louisiana at 23.0%, Rhode Island at 21.3%, Hawaii at 19.8%, Alaska at 18.5%, Michigan at 18.0%, West Virginia at 16.1%. Many of these states will be facing even greater contributions as a percent of payroll in the future. In some states taxpayer contributions are rising as a percent of payroll because payroll is falling, because services are being cut to pay for the pensions of the already retired. For all the talk about “defunding the police” since the George Floyd incident in 2020, in many places the police – and other public services – had already been defunded by the soaring cost of the retired police in FY 2019.
New York City taxpayers are being hit hard now despite consistently putting more into the city’s public employee pension funds as percent of public employee wages and salaries, than the U.S. average, taxpayers paying for the New York State pension funds (which also cover local government employees in the part of NY State outside NYC), or New Jersey taxpayers.
NYC did cut its taxpayer pension contributions for a few years around the year 2000, as part of the irresponsible Mayor Giuliani for Senate, State Comptroller McCall for Governor, and Governor Pataki for President pension deals that also drastically increased pension benefits. The money that taxpayers didn’t contribute during those years was also not in the pension funds to earn future returns, with the hole doubling and redoubling over two decades. Whatever NYC taxpayers should have put in 20 years ago, however, they have long since paid back many times over. In New York City the taxpayers are not to blame for the pension disaster. The public unions and the politicians they control are completely out of solidarity with all other workers, and have cheated them in secret deal after secret deal between themselves. It is collective bargaining with the same side on both sides of the table, with both political parties.
The same cannot be said of New Jersey. That state’s taxpayer pension contributions averaged just 7.3% of payroll from FY 1987 to FY 2019. New Jersey notoriously cut its pension contributions in the mid-1990s to cut taxes, in the administration of then-Governor Christie Whitman, and substituted a payment from a “pension bond” instead. Later, Governor Christie cut a deal with the unions to start fully funding New Jersey’s pensions in exchange for the unions accepting the reversal of some of the retroactive pension increases they had scored. But then Christie reneged on his share of the deal, saying the state could not afford it. And yet that state’s taxpayer pension contributions were still below the U.S. average in FY 2019.
Connecticut floated a huge pension bond in 2008, but nonetheless has been forced to drastically increase its taxpayer pension contributions in the years since. That state later cut additional deals to defer $billions in additional pension contributions until after 2034, allowing more Generation Greed members to sell their homes and move away. Future taxpayers will be forced to make bond payments to make up for the pension fund payments past taxpayers – today’s seniors — should have made, and higher pension contributions of their own besides.
As is the case with the pension funding gap, New York City’s FY 2019 taxpayer pension contributions are even more burdensome when measured as a percent of city residents’ total personal incomes, rather than the very high public payroll here. In FY2019, NYC taxpayer contributions to the pension plans for state and local government employees equaled 2.00% of the total personal income of everyone living in New York City. I’d bet that more than half of the city’s workers are putting away at least that share of their incomes for their own future retirement.
The burden of taxpayer pension contributions on city residents’ own incomes was well more than double the U.S. average (0.91%), the Rest of New York State (0.75%), or New Jersey (0.85%). All that extra money city residents and business taxpayers put in over the decades apparently just allowed more to be taken out, still leaving them even worse off. If New York City were a separate state, it would be (once again) worst off in the country. Yet somehow you never hear about this in news stories about public labor relations in the city. What you hear, over and over again, is that New Yorkers deserve inferior public services because its public workers are underpaid (based on starting pay) and understaffed (compared only with the city itself in the past, not anywhere else).
As it is, the state where taxpayers were paying the highest share of their own incomes in taxes for state and local government pension contributions in FY 2019 is Illinois at 1.75%. That is more than double what it was in FY 2008 – or any year before. For decades Illinois had an overall state and local government tax burden that was no higher than the U.S. average, despite extensive public services and (like New York) a disadvantageous fiscal relationship with the federal government. Current and future residents of the state, other than retirees with tax exempt income, are paying for that now.
The next worse off is California with taxpayer pension contributions at 1.50% of personal income, Alaska at 1.48%, Kentucky at 1.46%, Louisiana at 1.28%, Connecticut at 1.28%, Rhode Island at 1.21%, Hawaii at 1.18%, Pennsylvania at 1.15%, Michigan at 0.98%, and West Virginia at 0.97%.
If politicians and the media want to blame taxpayers for the public employee pension crisis, and report that public services problems are a result of public employee compensation being too low, they should do so in states where taxpayer pension contributions are the lowest share of state residents’ personal income.
And in particular, in those states where taxpayers are contributing a lower share of their own incomes for public employee pensions than they had been decades earlier.
Are today’s taxpayers in these states reaping the rewards of past fiscally responsible management, the way those in places like Illinois, New Jersey and Connecticut are paying the price for the past? Maybe. Perhaps in the District of Columbia, and perhaps in Wisconsin. Or perhaps it is a result of a shift in contributions.
One of the biggest changes in WRS happened when Republican Gov. Scott Walker and Republican legislators passed Act 10 in 2011. It made public employees, except for those in police, firefighter or public safety unions, contribute more toward their pensions. Before Act 10, most public employee unions negotiated contracts that had employers’ making all pension contributions.
The Fiscal Bureau summary documents a major shift in sources of pension contributions since Act 10: Contributions by public employees went from $11 million in 2010 to $965 million in 2019. Over that same period, contributions from state and local governments fell from $1.5 billion to $1 billion.
In those other states, however, public employees should be wary that politicians are underfunding their pensions to cut short term taxes, rather than inflate benefits, as in New York City. I would, in particular, be concerned about Florida, one of the lowest-tax states. There is no place close New York, in terms of public employees, contractors and people in the past ripping off the general public and the later-born. Not Illinois, not California, not New Jersey. To find a place that is as bad, you have to look in the other direction. At Florida. Those who move there have to hope to die before the bills they aren’t paying now come due.
What about Wall Street? As the table shows, for the period from 1987 to 2019 the state with the lowest average return on its public employee pension funds was South Carolina at 7.4%, followed by Connecticut at 7.6%. There is no way that any pension fund should have been assuming a higher rate of return than that, and yet the average fund achieved it – the U.S. average was a return of 9.7%. This is a result of a long period of inflating asset values, the reason claims were made that there was “plenty of money” to suck more out of pension funds in benefit increases and put less in to temporarily reduce taxes.
With past returns like these, far higher than those achievable going forward, it is clear that investment returns are not a cause for public employee pension problems. Not nationwide, and not in Kentucky, where PBS Frontline chose to focus on Wall Street fees as the cause of that state’s pension crisis. Looking long term that state’s average annual pension investment return was 9.1%, more than anyone has a right to expect.
What happens when the bubble bursts, and the public unions and politicians and media say it isn’t Generation Greed’s fault, “Wall Street stole our money?” Chances are at that point interest rates and dividends will be higher as a percent of those normalized paper asset values. Had the focus been on actual income, the claims of 100 percent pension funding around the year 2000 would have been shown to be false.
And what about that low average past investment return of 7.5% for New York City? I believe it is a product of misreporting to please public union supporters. New York City teachers get a guaranteed 7.0% return on their own 401K-equivalent investment accounts, in addition to their pensions, and any shortfall is taken out of the teacher pension fund.
Taxpayers then have to make that up, and the cost of the money not being in the pension fund doubles and redoubles. Former New York City actuary Robert North, after the cost of city pensions exploded, reported to the Census Bureau that this extra money taken out of the pension fund was an additional retirement benefit that teachers received. But Scott Stringer, whom the United Federation of Teachers spent huge money to install as city Comptroller (and additional huge money to try to make Mayor) erased the benefit from the data. So what does it count as now? Perhaps investment returns that were not received.
That is certainly the case for the $12,000 “Christmas Bonus” extra pension check received by former Police, Corrections and Fire employees. Initially, the practice was that whenever the police and fire pension funds had a year with an above average return, the so-called excess was paid out as a 13th check. And when this was followed by a below average year? Taxpayers had to make this up, because “Wall Street stole our money!” During the Bloomberg Administration this was converted to a guaranteed $12,000 extra check per year, over and above whatever the pension is they are supposed to receive. So much for it being based on “extra” money.
So how is that extra benefit being reported to the Census Bureau? When I first compiled Census Bureau data on individual NYC and NY State pension funds, I was shocked at how low the past investment returns for the NYC police and fire funds had been, compared with the rest. Someone should put a detective on it, I wrote. Then this report came out.
That explains the lack of a detective on the case. Forget it Jake, it’s Chinatown.
These payments will total approximately $500 million in 2014. VSF payments are not only a benefit typically not available to retired officers in other jurisdictions…
I can think of one that did the same thing, and had it come out later.
One of Detroit’s two pension funds handed out nearly $1 billion in bonus cash payments over two decades to retirees and active employees’ retirement accounts instead of reinvesting the extra earnings for the future, according to a Free Press review of city records.
The payments, often referred to as a “13th check,” contributed to Detroit’s financial crisis and its historic Chapter 9 bankruptcy filing by increasing the amount the city needed to contribute each year to keep the pension fund solvent.
Had the city’s General Retirement System held on to the excess cash, the city might not have felt the need to borrow $1.44 billion in 2005 to plug the city’s unfunded pension liabilities gap, the Free Press found. That debt has ballooned to nearly one-fifth of the city’s total debt today and played a role in pushing the city into filing the largest municipal bankruptcy in the nation’s history in July.
It’s unclear exactly how much extra money was distributed from the city’s other pension fund that covers police and fire service employees. Officials, however, have told the Free Press it was a much less frequent practice and that it happened in earnest for only a few years. An unofficial tabulation by Rago puts the bonus figure for police and fire at $218 million for the three years 2000-02. Pension board officials have consistently defended the practice, but the City Council finally outlawed it in late 2011.
The pension cuts that were part of Detroit’s bankruptcy involved paying that money back, as the 13th check was found to be fraudulent.
Let’s look at some other possible factors behind pension problems, such as the contributions by public employees themselves.
While New Jersey taxpayers have put in less than average in pension contributions over the decades, New Jersey’s public employees have put in more than average, at 5.2% of payroll on average from FY 1987 to FY 2019. That ranks 18th highest among states, and exceeds the U.S. average of 4.6%. Even there, however, public employee pension contributions are less than taxpayer pension contributions for the period. New Jersey public employees made 41.4% of total contributions over those years. The U.S. average was 30.8% for the public employees, and 69.2% for the taxpayers.
For the New York City pension system, public employees only paid 3.8% of their payroll in pension contributions, on average, from FY 1987 to FY 2019, and even that is an exaggeration. For decades, but not today (as far as I know), taxpayers made the “employee” contributions to the police and fire pension funds too. Were these reported to the Census Bureau as employee contributions or taxpayer contributions?
Before NYC teachers got a deal to retire with full benefits at age 55 with 25 years of work, instead of the promised 62 and 30, without any additional employee contributions for past service, they (and other city workers) got a similar deal to that also required them to “buy back” past years of service with additional contributions. This inflated employee contributions for a while, but an extra benefit worth far more was received in exchange.
Meanwhile, as part of the “screw the newbie, flee to Florida” cycle, most NYC public employees were not required to make any pension contribution after they had worked 10 years (and their pay started to rise). Transit workers and managers with more than 10 years in when the deal got done actually got their prior contributions refunded, with interest. And then new hires were forced to pay more into the pensions than Generation Greed was promised to begin with.
Even at that, NYC public employees accounted for just 17.1% of total pension fund contributions from 1987 to 2019, ranking near the bottom (47th).
For the New York State system, meanwhile, the public employees only contributed 1.2% of payroll to their own pensions, which would have ranked 50th (second to last) as a separate state. State workers, and local government employees in the rest of the state, only made 12.8% of total pension fund contributions over these years, with taxpayers kicking in 87.2% of the contributions. How the NY State pension system is as well funded as it is, with both employees and taxpayers kicking in a below average amount, I don’t know.
Other states where public employees didn’t contribute very much of their pay for their own pensions, on average as a percent of payroll during the FY 1987 to FY 2019 period, include Florida at 1.1%, Utah at 1.1%, Nevada at 1.5%, Virginia at 1.6%, the District of Columbia at 1.9%, Delaware at 2.0%, Arkansas at 2.2%, Indiana at 2.3%, and Tennessee at 2.3%. Many of these are states where taxpayers didn’t pay much in either. Are retired public employees actually getting pensions in Florida and Tennessee? Are current workers being promised them? “Here’s a deal for you,” politicians may be telling them. “You’ll get this great pension, and you don’t have to pay for it (and neither do we).” And then – Wall Street stole our money!
On the other hand, some the states where public employees contributed the most to their own pensions, on average as a percent of payroll, during the FY 1987 to FY 2019 period nonetheless also ended up with underfunded pensions. These include Ohio, where public employee contributions averaged 9.4% of payroll, Massachusetts at 7.9%, New Mexico at 7.9%, Illinois at 7.1%, California at 6.4%, Kentucky at 6.4%, Louisiana at 6.2%, and Rhode Island at 6.1%. And, apparently, Texas, where public employees have averaged a 5.6% of payroll contribution to their own pensions over the years.
Bear in mind that in many of these states some or all public employees do not pay 6.2% of their paychecks into Social Security, which they will also not receive. Including all public workers in Ohio, and at least teachers in Massachusetts, Illinois, California and Kentucky. And teachers in Texas.
When it comes to retirement funding, a majority of states pay into both a pension plan and Social Security. Texas is in the minority of states that only pays into a pension fund and does not pay into Social Security for the majority of its teachers — which means most Texas teachers won’t have access to Social Security benefits when they retire. Fewer than 50 of the state’s districts participate in Social Security on their own.
Among states that only offer a pension plan for teachers, Texas is dead last when it comes to funding its pension programs — by a lot.
For years, Texas only paid 6 percent — the constitutional minimum — into the Teacher Retirement System. It now pays 6.8 percent, according to the National Association of State Retirement Administrators. And the Texas Constitution says the state’s contributions to pension funds can’t eclipse 10 percent without a constitutional amendment approved by voters.
Compared with 40 percent for NYC.
It takes a special kind of politician to not provide public employees with Social Security benefits and also underfund their pensions. Perhaps the same sort of person who has an eight figure compensation package as a CEO even as most of the (in reality) employees are designated self employed contractors so the employer half of Social Security and Medicare don’t have to be paid.
By the way, if you think, based on this, that voting Republican in New York City will allow taxpayers to cheat public employees, rather than the other way around as it has been for 60 years, think again. The Mayors and Governor who cut the richest pension increase deals, both around the year 2000 and back in the 1960s and early 1970s, were Republicans — Giuliani and Lindsay, Pataki and Rockefeller. The richest NYC public employees tend to live in the suburbs, and state legislators from there – and Upstate, and Staten Island, and the southern rim of Brooklyn – are happy to vote to inflate their pensions at the expense of city services. And the public unions (and private contractors that do business with the city, and their unions) are happy to play both sides against each other to grab more and more and more.
Two weeks after the state’s largest teachers union gave Senate Republicans a boost by endorsing their candidate in a critical special election race, Republican lawmakers fast-tracked a bill that would allow New York City teachers to retire with full benefits five years sooner than they can now.
The changes to the pension plan agreed to by the Legislature were a high priority for New York State United Teachers, the 585,000-member statewide labor organization that includes the United Federation of Teachers, which represents city educators.
In October, the Bloomberg administration consented to the pension sweetener in exchange for the adoption of a school-wide merit pay system linked to student test scores.
Albany, however, had final say concerning the approval of the retirement plan. After the mayor’s deal was struck, some members of the union expressed concern that the state Legislature would not immediately follow suit.
The Senate quietly passed the measure on Wednesday. It did not get much public attention, because that same day lawmakers announced with much fanfare an agreement with the New York Racing Association.
The Democrat-led Assembly, which had already passed the early retirement bill last year, voted for it again on Monday. Governor Spitzer is expected to sign the legislation.
And, of course, the public safety unions tend to endorse Republicans, and Republicans tend to retroactively enrich their pensions in return. Just as in New York City in the 1960s, once the majority of Dallas, Houston and Fort Worth police officers, firefighters, and other city workers had moved to the suburbs, the state legislature started passing pension retroactive pension increases at the expense of the increasingly poor and minority city residents left behind. As if responding to some kind of iron political law.
No matter what plan each mayor comes up with, it still has to be approved in Austin. History has shown that legislators don’t have to worry about paying for any plan, both literally and metaphorically, that they put in motion, and they are highly susceptible to powerful political contributors’—and fellow legislators’—desires (see Houston circa 2001 and Dallas circa 1993). There’s also the question of how interested a Republican Legislature will be in helping out cities that are predominantly Democratic. A lot of people in Houston are hoping that Turner’s decades as a state legislator, and his closeness to John Whitmire, who had long served on the Pension Review Board, which oversees all of Texas’s public pensions, will prove beneficial. He may be luckier than Rawlings, who so far has received little to no support for his entreaties.
Finally, how about the richness of the pension benefits offered as a factor? That’s what those on the right probably would wish to talk about, and public employee pension benefits are far richer than private sector benefits, at least for those who also receive Social Security.
But if those benefits are never retroactively enhanced, and gradually pre-funded over a course of a career based on the proper assumptions and in the proper amounts, then pension funds should never end up in crisis. Yet they always seem to. Take one pension plan I’m familiar with that isn’t in the same situation.
Like state and local governments, the Fed offers retirement benefits that far exceed what a typical private sector worker is likely to receive. But unlike state and local pensions, the Fed accounts for its costs honestly and funds its benefits responsibly. The Fed’s retirement plan puts aside much more money, and takes much less risk with that money, than do state and local employee pensions.
Including the pension, employer contributions to 401Ks, and retiree health care, the Fed’s retirement package can be worth up to 34.2 percent of worker’s annual salaries. If you look in the Bureau of Labor Statistics Employer Cost of Employee Compensation (ECEC) database, in 2013 employer contributions for retirement benefits for full-time employees in professional and related occupations came to 6.2 percent of annual wages. So the Fed’s retirement package is about 5.5 times more generous than in comparable private sector jobs.
Far less than the City of New York, but still high. So why no underfunding?
The Fed works under FASB (Federal Accounting Standards Board), not GASB, accounting guidelines. Under FASB rules, the Fed discounts it pension liabilities using “yields available on high-quality corporate bonds that would generate the cash flows necessary to pay the System Plan’s benefits when due,” which is how most economists think liability valuation should be done. For 2015, the Fed used a discount rate of 4.05%. Based on this discount rate, the Fed’s retirement plan had $13.27 billion in liabilities. Combined with the plan’s $12.5 billion in assets, this produces a funded ratio of 94 percent.
Under those stricter rules, Federal Reserve employees aren’t getting retroactive benefit increases that let them go out with more than they were promised coming in. But the promised benefits are also equally funded throughout their careers. Unlike the rest of the federal government, which has done nothing about its own pension problem despite knowing about it for decades.
When Labor Secretary Robert Reich unveiled the Clinton administration’s legislative solution to corporate pension underfunding this fall, he was asked about the federal employee pension problems. Reich said it was a problem that would be examined, but the administration has not announced any plans to tackle the issue.
Instead, the administration’s focus has been on improving pension funding in the private sector and bolstering the federal Pension Benefit Guaranty Corp. (PBGC). The PBGC takes over pension plans when companies go out of business, paying employee benefits up to $29,250 a year. The PBGC has enough cash to continue paying benefits for years, but its multibillion-dollar losses are mounting.
Figures to be released by the end of the year will show that the PBGC insures corporate and union pensions plans with aggregate underfunding in excess of $50 billion. Some members of Congress have warned that the PBGC may someday require a taxpayer bailout.
They put that off until just recently, so Generation Greed could be spared the consequences and get everything they promised themselves but didn’t pay for.
But many of those who have analyzed the federal pension system say its more than $1 trillion in underfunding will cost taxpayers much more over the years.
That hole still grows. And the federal pensions are what are promised to our military personnel, who we send to risk our lives and a lifetime of disability and pain in order to protect us, something all too real during the past 20 years. Yes, those benefits are rich about as rich as those for NYC police officers and firefighters, but only for those who stay in the military for 20 years. And those benefits will end up costing far more if you don’t pre-fund them responsibly, unless you don’t pay them.
Getting back to state and local government, if workers were allowed one year in retirement for every two years worked, and paid a pension equal to half their inflation-adjusted average pay, then pension benefit payments would equal 25 percent of payroll.
But the U.S. average is benefit payments equaling 31.2% of the payroll of active state and local government employees. Including the payroll of those who will change jobs during their career and therefore receive little if anything in pension benefits. So the benefit payments for full career employees are an even higher percent of the cash pay of such employees alone.
Pension benefit payments are 42.2% of the cash pay of active New York City employees, 35.6% for employees of the State of New York and local governments elsewhere in the state, and 32.2% for New Jersey. The states with the highest pension benefit payments as a percent of current cash payroll are Illinois (49.8%), Ohio (47.6%), Connecticut (41.8%), Oregon (39.8%), Louisiana (39.1%), Kentucky (37.8%), Alaska (37.7%), Pennsylvania (37.3%), New Mexico (37.1%), Wisconsin (36.9%), California (36.8%), Missouri (36.6%) and Rhode Island.
That’s just the pension benefits. Retiree health insurance and other benefits are on top of that. You can compare these figures with your employer’s contributions to your 401k, if there are any.
Pension benefit payments are a far greater percentage of the payroll of active workers than in the past. In part because benefits have increased. In part because public employees (unlike many other Americans born after 1958) are living longer. In part because growth has slowed, so instead of few retirees in new communities with many new taxpayers, you have many retirees from a past with just as many people as today. And in part because government payrolls – and services – have been slashed, to cover part of the soaring cost of public employee pensions.
I’ll conclude this post with a quick trip around the country, based on this spreadsheet.
Current and future taxpayers in New Jersey, Connecticut, Pennsylvania and the Rest of New York State can point to below average past taxpayer pension contributions, as a percent of taxpayers personal income, as one cause of their pension problems. For New York City, neither past taxpayers, or future taxpayers are to blame. In fact, looking back past the FY 1987 to FY 2019 period I used in this analysis, one finds even higher taxpayer pension contributions in NYC, to pay off debts run up by a previous round or retroactive pension increases in the 1960s and early 1970s. Perhaps that’s why national reporting on public employee pensions never, ever talks about New York City.
Past Illinois taxpayers paid less of their incomes than average state and local taxes for public employee pensions until the mid-1990s, and about an average amount through 2008. That state even borrowed money to make pension contributions, with a big spike in contributions due to a pension bond, leaving debt behind. Those who benefitted from paying less in the past are either dead, retired, and/or moved to Arizona. Now current and future Illinois taxpayers and service recipients are getting clobbered. In Wisconsin, on the other hand, past taxpayers paid more, and current taxpayers are paying less.
There was a time when Florida, North Carolina, and Tennessee taxpayer pension contributions were not as low, as a percent of state residents’ personal incomes, as they are today. And not as low when compared with the national average as they were today. What changed? These are among the states that people are moving to in order to take advantage of low taxes. Perhaps, as in so many northern states and cities, the pension system is being used to shift today’s taxes to tomorrow’s taxpayers, and someday future residents of these states will wake up to the same nightmare as once fast-growing California.
Although California’s taxpayer pension contributions were never much below the U.S. average in the past. Oregon had low funding, a big pension increase for past and older public employees, and apparently some big pension bonds. Colorado and Texas have always underfunded their public employee pensions, but rapid population growth is giving them one last chance to avoid a massive fiscal crisis. Any chance they’ll do it?
Think about two things politicians, public union leaders, and public pension actuaries have said about public pensions over the years.
- It’s OK for public pensions to use less strict funding criteria than private pensions, because state and local governments can’t go out of business. They can aways make future taxpayers and service recipients become worse off to make up any shortfall.
OK for whom?
2.The public employee pension problem is exaggerated, because all the pension funds will have enough money to pay current beneficiaries (the already retired).
No problem for whom?
You hear that, millennials and later hired public employees? That’s what your “representatives” have been saying about your future to rationalize what they have done in the past.
The final post in this series will combine public employee pension funding, inadequate past infrastructure investment, and bonded debt into one great big Sold Out Future ranking. I’ll write it when I can. But you can see the numbers right now by downloading the spreadsheet.