June 27, 2012
Public employee unions have had a bad month – and things are about to get worse. On top of an embarrassing and costly smackdown in Wisconsin, a thumping by two California cities that trimmed public worker benefits, and an unfavorable Supreme Court ruling in a case involving mandatory fees demanded by unions, the Governmental Accounting Standards Board (GASB) just approved a change in how cities and states present their unfunded pension obligations – a change which will likely fuel even tougher reforms of bloated public worker benefits.
The new guidelines will require more realistic and transparent reporting of the nation’s obligations to public employees. For instance, it is estimated that the Illinois State Teachers’ pension, formerly described as 48 percent funded, will now report being only 19 percent paid for. Voters will not be happy.
None of this sways Lee Saunders, newly elected head of the country’s largest public employee union, who had this to say about recent setbacks dealt his organization: “We know that Wall Street and their allies are engaged in an all-out assault against our members and the services we provide. They know that AFSCME stands in the way of their efforts to destroy the middle class.”
Does Mr. Saunders really think the coast-to-coast effort to rein in crushing public sector benefits is the work of devilish bulls and bears? That the voters in Wisconsin or legislators in California want to destroy the middle class?
No, he knows that his organization is in trouble because the recession exposed the real costs of past political payoffs to public employee unions – some might argue, in the nick of time. For years, soaring pension and healthcare benefits have been buried in plump city and state budgets and also hidden by accommodating accounting practices. This latter sleight of hand is about to change, thanks to the new GASB requirements.
How California Unions Hijacked the Golden State
The accounting revisions are just that. They do not alter the amount of money taxpayers will have to shell out to public workers in the future, but they will help reveal just how much is due. They do not bring public pensions totally into the real world – managers can still assume earnings rates that are laughably high – but they will give voters a clearer picture of their fiscal future. For the first time, local governments will have to report their total pension obligations – not just how much they are contributing on an annual basis.
The rules also require potentially insolvent plans to calculate their liabilities in a more conservative fashion, which will result in a bigger balance sheet debit. Though not required to do so before 2015, numerous local governments will likely adopt the new approach sooner rather than later.
For the country as a whole, Boston College’s Center for Retirement Research estimates that public pensions were 76 percent funded in 2010; under the new rules, those plans would be 57 percent in the black, suggesting a shortfall of roughly $900 million. For many communities and programs, the news is much worse. The numbers are significant. Nationwide, the pension liability for state and local governments is estimated to be roughly $3.6 trillion – twice total state and local spending. By revealing a bigger funding gap, the accounting change could make it easier for legislators to explain to voters why reforming existing benefit packages make sense.
Though voters don’t seem to need much help. Across the country, mayors and governors – Democrats and Republicans – are finding support for trimming benefits. No one wants to see fewer cops on the street or teachers in the classroom. Given a choice between cuts to rich pensions or to current services, voters and legislators are quick to slice benefits. Evidence that public workers enjoy richer pensions than those in the private sector has helped tip sentiment. As a result, over 40 states have lowered retirement costs – mostly by trimming promises to new workers or hiking required employee contributions.
Unhappily, for many cities and states, reining in benefits is not enough. When President Obama famously claimed that “the private sector is doing fine,” what he meant to highlight was that the recovery was being hamstrung by layoffs in state and local governments. He’s right. Local governments across the land have had to scramble to balance budgets, causing the number of public workers to shrink. For the president and his party, the cost is significant. Not only has the contraction of the public sector – roughly 12 percent of GDP – dimmed the country’s headline growth rate and consequently threatened Mr. Obama’s reelection prospects, but it has weakened a reliable and profitable source of support for Democrats. In 2010, AFSCME alone spent $90 million on national political campaigns. This year the total will rise to about $100 million.
For the U.S., a shift in growth favoring the private sector is without a doubt a positive trend, as is facing up to the over-the-top promises made by needy politicians over the past several decades. Economic recovery cannot be sustained by rising government outlays – the Greeks are not alone in having proved that point. The Greeks have also made clear that transparency in government finances is key to good policy-making. The GASB has taken an important step along that road.