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It’s the economy (and wishful thinking) Stupid

January 22, 2013 - John Stack
You’ve heard the refrain ad nauseum . “Public workers pensions are out of whack with reality” “Greedy public sector workers and their have crippled our community”. As with most complicated issues such as public pensions, there is some truth to the matter, but the big picture is much more inclusive odf all parties. There are I believe, many groups responsible, which happens to include all of us.

First, the unions did ask for, and get pension relief. Up until the early 2000’s, all employees paid 3% of their salary towards their pensions. Then, (I’m sure with some type of union influence) the State decided that if you have paid in for 10 years, you no longer had to pay in to the retirement system. Disclaimer – at this time, I also hit 10 years and stopped paying in. Didn’t make sense then, doesn’t make sense now. The stock market was still going fine, and the economy wasn’t doing so poorly. But, giving up billions a year in contributions seemed an incredibly poor financial plan.

Employer contribution rates (depending on your system) had dropped from 22-23 % or so in the early 80s to virtually nothing from the late 90s and for a few years after. The NYS Retirement system is in low-risk funds which over time do not fluctuate nearly as much as the stock market. The state, through their actuaries and such, set employer contributions based on a multiyear model. Take the years1997-2002 and the fund was making more than it needed to meet future obligations – if the economy unbelievably kept going at its unsustainable pace. As I said, rates dropped for twenty years. Local governments (villages, towns, counties, schools) continued to keep pressure on the state to keep their contribution rates low. Rather than keeping a minimum of even only 3-5 % contribution level would have been prudent. But, they didn’t.

No places budgeted for a virtually certainty of increasing rates. In fact, for twenty years straight, local governments paid less into the system as they did the year before. Taxpayers already felt they were paying too much, so the towns were reluctant to do the long term prudent budgeting as taxpayers came to them daily with tales of woe of too high taxes. But worse was the hidden spending that went on. As their pension payments decreased, other spending increased faster than it looked on the outside. If your pension costs go down 2% and your other costs go up 5%, and personal services make up the lion’s share of many budgets, the increase to the taxpayer was in the 3% range, not 5%.

The economic disaster of the mid-late 2000’s definitely hurt the system. But, as the contribution rates are “smoothed” over many years, the current “bad news” was offset by prior years of positivity in the market. In the late 1990s, rates should have stabilized at 5% contributions. But, they were allowed to drop below 2% for the next 5 years. This was a major loss to the system.

Secondarily, the type of recession that hit was doubly hurtful. While the plan didn’t realize the monster gains of the 1990s bull market, they didn’t get hurt as bad in the drop of the early 2000’s. Then the housing bust and low interest rates killed the pension fund. The mortgage bankers on wall street played Monopoly with trillions in mortgage debt based , again, on the ludicrous expectation of 10-15% yearly returns. These bankers and mortgage lenders had a huge hand in clobbering our pension funds. The pension fund keeps their money diversified, but a lot is still in bonds, cash, mortgages and other real estate investments. For 100 years, putting your money into real estate was the safest bet there was. Real estate was usually almost inverse to the market. Bad market, good real estate. Great Market, ok real estate. Now though, our money was in the worst “short term” investments for the time. Now employer contribution rates had to increase to keep up. For 2012, the NYS Teachers Retirement has an ECR of 11.84 %. Its expected to go up astronomically to 15.5% -16.5% next year.

Its not as simple (or true) as blaming public unions. A great bull market drove rates to unsustainably low rates. Unions got pension concessions. The state lowered everybody’s rates again on the expectation of forever increasing returns (and went on a hidden spending spree and hiring based upon a unrealistic permanent bull market). Taxpayers demanded that their taxes stay low NOW causing weak minded politicians (sorry, that’s redundant) to disregard fiscal long term security for a vote today. The banks and other lending institutions also only saw a completely rosy future and made their dent.

All I can say is I’m glad we aren’t New Jersey. To “solve” their pension problem, they have decided to just ignore it, and balance their budgets by NOT paying into the plan at all.


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