Bloomberg BusinessWeek

Pension Plans Go Broke as Public Payrolls Expand: Joe Mysak

Friday, June 11, 2010

Seven states will run out of money to pay public pensions by 2020. That hasn’t stopped them from hiring new employees.
The seven are Illinois, Connecticut, Indiana, New Jersey, Hawaii, Louisiana and Oklahoma, according to Joshua D. Rauh of the Kellogg School of Management at Northwestern University. Combined, they added 9,700 workers to both state and local government payrolls between December 2007 and April of this year, says the U.S. Bureau of Labor Statistics.
This number, 9,700, illustrates just how hard it is for political leaders to reduce headcount even as tax revenue declines, and even as the gap grows between what governments owe their workers in retirement pay and benefits and the amount they have on hand.
Hard? It’s almost impossible, as that number shows.
Politicians have talked a lot about layoffs during this recession. In most cases, that talk is an empty threat. Nobody wants to fire teachers, or firemen, or policemen, in the name of efficiency or good government.
It’s easy to get passionate about the subject. Let’s take a look at the numbers.
Companies started firing more employees than they hired in January 2008. After pausing in November 2009, they fired more in December. With the economy starting to turn around, they have hired more than fired every month so far this year.
Since the Peak
Employment peaked in December 2007 at 115.6 million, according to the U.S. Department of Labor. During the subsequent two years, companies shed 8.5 million workers, or 7.3 percent.
State and local governments, by contrast, kept hiring right through August 2008. From a peak of 19.8 million, these governments have reduced headcount by 231,000, or 1.2 percent.
This breaks down to 46,000 fewer employees on the state side (0.9 percent) and 185,000 among local governments (1.3 percent).
And this, I think, is what drives people crazy. What our politicians are telling us is that state and local governments are optimally sized -- just right. If tax revenue declines, well, then we’ll just have to find more taxes and fees to replace it. We couldn’t possibly look at the cost-of-labor side of the equation.
Doesn’t that strike you as a tad arrogant and entitled?
If you really want to provoke outrage, of the same populist stripe that once targeted bankers’ bonuses, you have to take into consideration public pensions.
Enviable Dotage
Generous and bloated are the terms that have been used to describe them; critics have set up websites to pillory those government retirees who enjoy $100,000-plus annual pensions and other goodies, such as health-care benefits for themselves and their families for life.
These pensions and benefits are enviable, not to mention envied by all those private-sector employees who long ago were forcibly weaned off such defined-benefit programs to 401(k) plans that were subsequently shellacked by the stock market crash.
What’s equally clear is that such pensions and benefits now seem unaffordable, because those responsible -- state and, sometimes, local governments -- didn’t put away enough, or haven’t invested wisely enough, to pay for them.
“Are State Public Pensions Sustainable? Why the Federal Government Should Worry About State Pension Liabilities” is the title of Rauh’s recent study. It’s a provocative piece of work, especially for one of its tables, titled, “When Might State Pension Funds Run Dry?”
Circle 2018
Not everyone may agree with Rauh’s conclusions or methodology. He did get my attention with that table, showing Illinois running out of pension-fund assets in 2018; Connecticut, Indiana and New Jersey in 2019; and Hawaii, Louisiana and Oklahoma in 2020.
That’s when I consulted the website of the Bureau of Labor Statistics and was surprised, or perhaps nonplussed is the word, to discover that the state and local governments in these states, combined, added employees even as private companies were firing.
They have joined other state and local governments in firing workers since the peak of August 2008. That month, the seven states and their local governments employed 2,714,800 workers. They have since shed 20,300, and now employ 2,694,500. That’s still more than they carried in December 2007. But I suppose it’s a start.
--Editors: Laurence Arnold, James Greiff