Normative Narratives


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Economic Outlook: Rethinking Public Pension Negotiation

Original article:

Bryan Jeffries, the chief of Arizona’s firefighters’ association, has been arguing to anyone who will listen that his members — and the state’s police officers, too — should volunteer to cut their own pension benefits.

Mr. Jeffries, a fourth-generation Arizonan who has been a firefighter and a city councilor, says that emergency workers have a special obligation to protect the public not only from physical peril, but also from financial ruin. Cutting pensions for firefighters and police officers would help save their woefully underfunded retirement plan and bail out towns and cities that are struggling to keep up with their mandated contributions, he says.

“It is critical for our state, for the taxpayers and for the next generation that will be here long after we are gone, that we repair this,” said Mr. Jeffries, whose group, the Professional Fire Fighters of Arizona, is not a union but works on political issues relevant to its membership. “I know intellectually that with these ballooning payments, I feel a direct conflict with the oath I took to protect the citizens.”

His unusual proposal has been a touchy subject for many of the people whose pensions would be cut, because defined benefit pension plans are viewed as compensation for doing dangerous work and a lure to recruit new public servants. And despite the growing shortfall in the statewide pension plan that has put stress on cities and towns, which must make up the difference, politicians have been nevertheless wary of attacking these benefits, for fear of alienating two powerful constituencies and to sidestep questions about why they lavished such generous pensions on them in the first place.

“When you see policemen and firemen putting their lives on the line, you want to make sure that when they retire, they receive a reasonable retirement,” said Jeff Dial, a Republican state representative from the Phoenix area who supports the firefighters’ initiative.

The growing unfunded liabilities have forced cities and towns to pick up the tab. Tucson, for instance, contributes the equivalent of 51 percent of its emergency workers’ wages, up from about 11 percent a decade ago. That means if a firefighter’s salary is $60,000, Tucson must pay about $30,000 more toward his pension. For most police officers and firefighters, pensions make up the bulk of their retirement income, because they do not collect Social Security.

Joe Clure, the president of the Phoenix Law Enforcement Association, which represents 2,400 police officers, has worked with the firefighters on their initiative, but is wary of moving too hastily. “What you worry about is it opening Pandora’s box and making all sorts of changes,” Mr. Clure said. “We are offering up our own haircut.”

Fueling the resentment are reports of public servants who retire with six-digit pensions by exploiting rules that let them cash in unused vacation and sick days. Sal DiCiccio, a Phoenix councilman who favors giving new city employees 401(k) plans, published a list of the 50 highest pensions for retired city public employees.

“The whole system has been gamed by everyone,” Mr. DiCiccio said. “I’m supportive of pensions for police and fire, but people don’t expect that” kind of abuse.

While the most egregious cases make headlines, most pensions for emergency workers are modest. The average pension for a staff member (not including those on disability or paid to survivors) is $52,600, assuming they worked 23.6 years and were 51.3 years old when they retired, according to the pension fund administrator.

What is the purpose of a public pension? It should, when functioning properly, provide income security to men and women who dedicate their lives to careers in public service. It should not be an avenue to a lavish retirement, but rather a comfortable retirement in line with the spirit of public service. Municipalities should consider a hard ceiling on public pensions, so that those who wish to “game the system” are unable to make the 6 figure pensions that generate ire towards reasonable pensions (note, $100,000 is by no means a magic threshold; it is certainly possible to imagine a future in which a 6 figure pension is perfectly reasonable).

Pensions should also be stable, and should not be subject to “haircuts” every-time funds are invested poorly or government tax revenues fall. This calls into question the pension negotiation process. Generally union leaders try to maximize the benefits their constituents receive. The problem is that often times politicians are all to happy to acquiesce, hoping to garner support by appearing to be pro-public service. Funding shortages likely will not surface for years or decades later, by that time the politician who approved the plan will be long gone.

This time inconsistency is unfortunately inherent in public contracts (for example, subsidizing private corporate operations). Therefore, all proposed public pension plans should be scrutinized by independent commissions and opened for public comment, to ensure that they are reasonable. Similarly, since taxpayer money often acts as a backstop to shortfalls in pension fund, investment decisions should be subject to scrutiny from both independent investment professionals and the general public.

There is also an element of responsibility for union negotiators. It is unfair to ask people to work under certain conditions, only to have those conditions changed after the fact. Union negotiators could try to trade some of the benefits their constituents are due to receive in exchange for iron-clad agreements that agreed upon pensions will, under no circumstances, be reduced. The problem is that such clauses often already exist in many state constitutions, so an even stronger guarantee may be difficult to craft. Perhaps by doubling-up on the issue, having it both in the Union contract as well as the state constitution, such a trade-off can be made in good faith.

As municipal bankruptcies become a more prominent issue in American politics, public pensions will naturally come under closer scrutiny. Future negotiations should bare this in mind, and try to reconcile the legitimate needs of public servants with the larger responsibilities of taxpayer dollars.

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Economic Outlook: Time to Bring Federal Oversight to State / Local Government Deals

Everybody wants good jobs (both public and private) and good public services–both have positive and immediate benefits for the municipalities securing them. However, there are also costs associated with bringing in jobs and providing public services. If these costs (even if they seem far off) outweigh the benefits, in the end everyone suffers.

It has become abundantly clear that local and state officials are (generally) either unable and/or unwilling to conduct meaningful C-B analyses when making deals with taxpayer money. They are unable to strike sustainable deals because of power asymmetries; large corporations and powerful unions have more legal clout and can out-negotiate municipalities. Furthermore, in the case of private sector jobs, a company can threaten to move to a different municipality, leading local / state officials to bid against each other in a “race to the bottom“. They are unwilling to strike sustainable deals because while benefits are realized immediately (look at the jobs / roads / services I brought!), the costs are paid gradually over time, usually long after said decision maker is out of politics.   

Two examples highlight the bad deals taxpayers are getting due to a lack of political will–subsidies for corporations and municipal budget deficits.

Subsidies for Corporations

A few months back, when NN was in it’s infancy, I picked up on a NYT article highlighting how out of control subsidies for private corporations had become in America. Here are some highlights from that post:

One form of government subsidy, which was brought to light by a recent NYT article/study, highlighted how state and local governments often engaged in bidding wars to lure private corporations to their markets. Billions in taxpayer dollars go toward subsidizing these companies operations, with NO INTENTION of ever paying the money back.

It is hard to believe such an archaic system exists in today’s modern world. Small municipalities come to the negotiating table with huge multinational corporations. A  power asymmetry exists; companies often outright lie about other municipalities bidding for their business to drive up prices. A “fight to the bottom” ensues, where each party is trying to give the best deal for the business, which on the flip side is going to be the worst deal for the taxpayer as they will be financing the subsidy. No real cost-benefit analysis goes into the decision. Politicians dedicate funding because they want the short term benefits of added employment on their record, without any long term accountability on the part of the company that receives the benefit or the politician securing the financing.

At a time when fiscal responsibility is on the agenda, how can we justify taking money from schools and public goods and giving them blindly to corporations with the hope that it ends up working out in the taxpayers benefit? How can we justify paying companies, not on a needs-based basis, and not hold them at all accountable for anything?

Municipal Deficits:

The ongoing bankruptcy of Detroit–the largest municipality to ever attempt such a bankruptcy–brought the concept of municipal waste to the forefront. However, Detroit’s problems could be seen coming from a mile away; once a symbol the strength of American manufacturing, economic decline and associated emigration have left Detroit unable to pay it’s bills. Nobel Prize winning economist Joseph Stiglitz wrote an excellent Op-Ed on the subject, entitled “The Wrong Lesson From Detroit’s Bankruptcy“.

Detroit’s bankruptcy makes sense, it is the combination of government excess and economic decline. Much less understandable is the story of San Jose’s municipal budget deficit:

This metropolis of nearly a million residents is the third-largest city in California, home to tens of thousands of technology industry workers, as well as many thousands more struggling to get by. Yet even here, in the city that bills itself as the capital of Silicon Valley, the economic tidal wave that has swamped Detroit and other cities is lapping at the sea walls.

San Jose now spends one-fifth of its $1.1 billion general fund on pensions and retiree health care, and the amount keeps rising. To free up the money, services have been cut, libraries and community centers closed, the number of city workers trimmed, salaries reduced, and new facilities left unused for lack of staff. From potholes to home burglaries, the city’s problems are growing.

“We’re Silicon Valley, we’re not Detroit,” said Xavier Campos, a Democratic city councilman representing San Jose’s poor East Side. “It shouldn’t be happening here. We’re not the Rust Belt.”

The situation in San Jose is not anywhere near as dire as it is in Detroit or two other California cities, Stockton and San Bernardino, already in bankruptcy. But government officials and municipal bankruptcy experts across the country are watching San Jose closely because of a plan to reduce benefits — drafted by Mayor Chuck Reed, a Democrat, and passed by 70 percent of voters in areferendum last year.

The plan is being opposed in court by unions that represent city workers and say it is illegal under state law. It would introduce a second tier for new city employees involving much lower pension and health benefits. It would also alter pension benefits for existing workers, allowing them to choose either a similar, second-tier benefits plan or to pay significantly more out of their own pockets for the benefits they had come to expect.

The outcome of the case is expected to have a major impact on municipal budgets around the state and, perhaps, the country. If a state court rules later this year or early next year that the referendum allows San Jose to alter pension plans for existing workers, and it survives appeals, similar measures are expected to pop up elsewhere.

“These employees did nothing wrong, and their unions did nothing wrong for pushing for these benefits,” said David Crane, a lecturer at Stanford University and special adviser to former Gov. Arnold Schwarzenegger on pensions and other issues. “Nobody forced government officials to make these promises and not fund them. And now you have some really brutal things happening to people who had counted on a certain level of retirement.” 

Cities in California are under particular pressure because it is so difficult to raise property taxes in the state, and because in 1999, at the height of the tech bubble, the Legislature voted for a huge benefit increase allowing, for instance, police officers to retire at age 50 with 90 percent of their salaries.

“We have this all over the state of California,” said Karol K. Denniston, a bankruptcy lawyer with the firm of Schiff Hardin in San Francisco, who is advising a number of local taxpayer groups. “There is growing recognition that there is not enough money to keep doing what they’re doing, and something’s got to change.”

As in San Jose, public employees’ unions sued. In March, a state administrative labor-law judge found that the city had failed to bargain as required with its workers. The city went ahead with the ballot-measure change, but the administrative finding portends further litigation.

Mr. Crane blames the political leadership in Sacramento, San Jose and all similarly struggling cities for failing to deal with the pension problem while it was still manageable. Mr. Reed agreed. “I have to accept my share of the responsibility,” he said. “There’s plenty of blame to go around.”

Now, he said, city workers must understand that the 10 percent pay cut they accepted a few years ago, in a previous attempt to right the city’s imbalance, was not sufficient to solve the problem and that deep, painful pension and retiree health care changes were needed.

State and local officials have failed their constituencies with unsustainable spending. Instead of pursuing “counter-cyclical fiscal policy”, saving when times are good to have a cushion when times are bad, these officials have used taxpayer money to show all the “benefits” that have accrued during their time in office. The end result of ignoring the costs is that during times of economic downturn–when public services and jobs are most needed–there is no money to fund these essential services.

The Federal government must step up to fill this void in the name of the interests of American taxpayers.

In terms of private corporate subsidies, the federal government has the resources to negotiate with large corporations. It also has the resources to conduct strong cost-benefit analysis and determine needs based subsidies, as opposed to a money grab under the guise of maximizing shareholder value. And perhaps most importantly, the federal government will not have to bid against any other parties, as it represents every municipality within the United States. It will be able to secure the best deal for the municipality, not the worst deal.

When it comes to public services, the federal government has the benefit of being insulated from the short-sighted demands of taxpayers. While local and state officials rely on being re-elected, an appointed federal committee should in theory be able to consider the costs and benefits of any potential deal with greater prudence.

State and local governments have failed to secure good deals for their taxpayers when negotiating with both the private and public sectors. These bad deals are systematic; they are the manifestation of short-sighted political aspirations and power imbalances. It is time the Federal government got into the business of making sure that American tax-payers are getting their moneys worth.

Federal oversight would be in public  workers best interests as well; while they may get slightly less generous benefits, they will have the comfort of knowing that the deals they have struck will not be reneged. It would also help avoid ugly litigation which pits civil society against the civil servants who serve them, and want only to receive what they were promised in the first place.