If you live in the world according to the mainstream media, the row between state executives and unions is all about (by implication) greedy unions trying to preserve their perquisites when budget “realities” demand that they suffer. Consider this excerpt from a recent article New York Times article about the fight in New Jersey:
Across the nation, a rising irritation with public employee unions is palpable, as a wounded economy has blown gaping holes in state, city and town budgets, and revealed that some public pension funds dangle perilously close to bankruptcy.
Um, the “wounded economy” trashed the state budget? Funny how the article fails to point fingers at the real perp, which is the global financial crisis, brought to you by your friendly TBTF banks. Andrew Haldane, Executive Director of Financial Stability for the Bank of England estimated that the costs of the financial crisis was 1 to 5 times global GDP. If you were, as economists recommend, to try to tax them to recoup the cost of the damage they did over a period of 20 years, the charge would be over $1.5 trillion a year. That’s more than the market cap of the biggest global banks. Funny, their staff and executives got record bonuses in 2009. So maybe the unions have the wrong strategy. They need to screw up in a particularly destructive manner.
And how exactly did the crisis “reveal” that some pension funds were close seriously under water? A more accurate rendition would be that, at least in New Jersey, the state has been raiding the pension kitty for over 15 years. This is not news to anyone who has been paying attention, any more than underfunding of corporate pensions. In the Garden State’s case, Governor Chris Christie skipped the required $3.1 billion pension fund contribution last year. He claimed this move was to force reform, but what impact does another $3.1 billion failure to pay have on an unfunded liability that was already over $50 billion?
The shell game started in 1995 with Christine Todd Whitman. As Bob Herbert reported:
Over the past 25 years the State of New Jersey has struggled, under a succession of Democratic and Republican governors, to reverse a social and economic decline that, by the 1960’s, had hit many Northeastern industrial areas.
Difficult budget decisions were made, often at significant political cost. But the benefits for New Jersey residents were many. A vastly improved higher education system was developed and state aid to local public schools surged. The environment was cleaned up. Mass transit was improved. The state’s budget was balanced without gimmicks and its credit rating was triple-A….
Now many of the gains made over a quarter of a century are in danger of slipping away because the current Governor, Christine Todd Whitman, has chosen to finance her political ambitions with a popular buy-now, pay-later economic policy that will place a financial stranglehold on future generations of New Jerseyans….
This is best illustrated by Mrs. Whitman’s decision to withhold billions of dollars that should be going into the public employee pension funds over the next few years, and using the bulk of that money to balance the state budget. Then, with an audacity that dazzles her supporters and even draws grudging admiration from opponents, Mrs. Whitman smiles and characterizes the withheld funds as savings.
Of course, they are not “savings” — not in any sense of the word. The pension obligations at some point will come due and future generations will have to meet them.
Not only will the money have to be made up, but future taxpayers will be deprived of the income that the money — if properly invested now — would be expected to generate…The changes that she has made have been drastic. According to the New Jersey Education Association, which has filed suit against the state, the employer contributions to the pension system this year will be as much as 96 percent below the amounts contributed in the early 1990’s.
The state also did a swell job of investing the money it did have. Per a 2009 FireDogLake article:
Orin Kramer is also Chairman of the New Jersey State Investment Council, which is tasked with oversight of the state’s public pension system. In 2006 he successfully pushed to shift a huge chunk of the state’s $72 billion pension fund to private money managers rather than state employees. Kramer was the “prime architect of the diversification strategy” that saw union retirees pick up the tab for $115 million in Lehman Brothers losses on money invested shortly before the firm’s collapse
And the Lehman losses were not a one-off; New Jersey has the dubious distinction of being the only state ever reprimanded by the SEC for pension mismanagement, including phony accounting:
The story of the accused New Jersey pension fund was that it has saved enough from 2001 to 2007 for a reserve whose purpose is to improve payouts. This was the feature of a five-year plan to support public workers and teachers. It turned out that it was nothing but a creative cooking of the books.
The regulatory authority’s Director of the Enforcement Division, Robert Khuzami, cried out foul for the deception, where the investors were the obvious losers. Fraudulent representations of the true financial picture brought in over US$ 26 billion of fresh cash from less sophisticated financiers.
The rule of Governor Donald T. DiFrancesco, a Republican, as well as those of James McGreevey and Jon Corzine, Democrats, witnessed the amassing of the shenanigan statements. The incumbent office of Gov. Chris Christie currently faces a colossal contribution deficit. The only options include tax hikes, skimping on fiscal spending, which is mostly on public service, or worse, further drowning itself in debt.
Christie has been compelling more belt-tightening measures, from which the education sector is not spared, in order to choke up the lost billions. The ugliest scenario could mean bondholders brawling against poor New Jersey pension fund beneficiaries for the fund capital.
In case you wonder about how those bonds were issued, a 2009 Forbes story sheds some light:
Seeking to make up lost ground without putting up more money, the state’s leaders looked to the magic of the stock market. In 1997 New Jersey sold $2.75 billion of bonds paying 7.6% interest, putting the proceeds into the pension fund to be invested for higher returns.
At that time Whitman said the ironically named Pension Security Plan would save taxpayers about $45 billion. It hasn’t worked out that way. The fund has earned less than 6% annually since the bonds were issued.
And note Corzine did attempt to remedy the situation, increasing contributions and cutting benefits, but did not go far enough.
Although Christie has been gunning for the unions in his zealous efforts to address the budget shortfalls, inconveniencing those at the top of the food chain is off the list. Christie nixed a millionaire’s tax last year.
Now of course you can argue that the unions should have taken some sort of action or negotiated harder. But did they have the leverage?
And what should the unions do now that they are in this mess? I’d fight for shared sacrifice. The dire state of the budgets is hitting everyone. The union members will have to take less, as many Americans have had to. But they need to recognize that these fights over pensions are an effort to eliminate public unions as a political force; the budget battles are simply a useful excuse for the right to break a long-standing foe. Thus the unions need to find a way to regain the moral high ground. New Jersey, one of the richest states in the US, has mismanaged its way into this mess. That fact needs to be hammered hard, and the unions also need to put forward a realistic plan in which they make concessions provided upper income earners do their part to address the budget shortfalls.