One can just about picture the commercial that RI Supreme Court Chief Justice Frank Williams would release to correspond with his recent presentation to the RI Bar Association, “Killing Justice: The Judiciary Under Siege.” It would begin in black and white, with dark footage and creepy music:
“Political pressure and agenda-driven criticism also fray the fabric of judicial independence … the current trend is especially worrisome because the sentiments are being voiced not just by a powerless fringe but by those in positions of power.”
The sun breaks through the clouds, bringing a shift to color and to cheerful music:
“Here in Rhode Island, we are lucky enough to have a General Assembly which understands, respects and supports judicial independence and our separation of powers.”*
But a darkly ambiguous chord plays and shadows appear:
“Judicial independence faces yet another threat. This once comes quietly and from the rear flank. Simply put — nationally and locally — judicial salaries do not reflect the respect due the office. Judicial independence is endangered.”
Luckily, as some readers may recall, and as Projo writer Edward Fitzpatrick reminds us (and as would likely be left out of the commercial):
Last year, the General Assembly approved a budget article that prevented the governor from changing the judiciary’s budget and gave Williams control over judicial salaries. This year, Williams proposed $1.57 million in pay raises for judges, magistrates and nonunion employees in the courts. Their salaries would increase by between 4 percent and 38 percent next year, and he’s also seeking raises for 2007.
Mr. Williams admits that he does somehow manage to put food on the table with the $146,098 that the inadequately respectful tax payers give him (plus benefits, including a $7,305 longevity bonus). Surely, however, with proper promotion — perhaps meaning with prudent silence — the people of Rhode Island will agree that appropriate respect for judges is more important than their own ability to make ends meet while remaining in the state.
* Ostensibly, Williams isn’t referring, here, to the General Assembly’s interest in having a “separate power” through which to filter nepotistic hiring so as to diminish the impression of impropriety.
[Open full post]One offshoot of returning to school is that it has brought me into contact with several teachers from Rhode Island and Massachusetts. Nearly all of them agree that it is in middle school that a child’s educational future, and by extension post-educational future, is largely determined. If parents and teachers don’t reach them then, very few will change direction in high school. The ProJo’s on the Woonsocket middle school, though it may be the most drastic example that can be offered, is nevertheless a depressing case in point. And remember: the problems detailed aren’t just Woonsocket’s problems, they’re all of Rhode Island’s. The school receives $12.4 million a year to operate, and a good portion of that comes from state tax dollars. Further, and this is just a guess on my part, if the average teachers’ salary’s are any indication–$64,700 for elementary teachers; $61,680 for middle-school teachers; and $63,240 secondary-school teachers–it would seem that the least experienced teachers are cutting their teeth in the middle schools and then moving on when they can. Again, I can’t say that for sure, this is just based on a conclusion drawn from the aforementioned average salaries. [HINT: I’m looking for some input!] Julia Steiny concurs with this assessment, and offers her own solution.
[Open full post]After the twelfth of the twenty-four episodes of Lost’s first season, religious viewers thought they’d taken another step toward inclusion in mainstream culture, as represented by television and film. (Or at least one religious viewer did.) Lost treated religion seriously — acknowledging it as part of the society in which we live. Without a tone of sneering irony, as is expected in one direction, and without the feel of saccharine sincerity, as is expected in the other, two characters prayed to the “Heavenly Father” right at the end of a hit show that isn’t definingly faith-based.
Well, by the two-hour season finale, it seemed as if Lost’s creators had banned the word “God” except as an expression of emphasis. I can’t help but wonder, as I have in my latest column for TheFactIs.org, whether “Religion’s Gone Missing on ‘Lost.'”
Milton Friedman has written a new editorial entitled “Free to Choose: After 50 years, education vouchers are beginning to catch on”
Little did I know when I published an article in 1955 on “The Role of Government in Education” that it would lead to my becoming an activist for a major reform in the organization of schooling…The original article was not a reaction to a perceived deficiency in schooling. The quality of schooling in the United States then was far better than it is now, and both my wife and I were satisfied with the public schools we had attended. My interest was in the philosophy of a free society. Education was the area that I happened to write on early. I then went on to consider other areas as well. The end result was “Capitalism and Freedom,” published seven years later with the education article as one chapter.
With respect to education, I pointed out that government was playing three major roles: (1) legislating compulsory schooling, (2) financing schooling, (3) administering schools. I concluded that there was some justification for compulsory schooling and the financing of schooling, but “the actual administration of educational institutions by the government, the ‘nationalization,’ as it were, of the bulk of the ‘education industry’ is much more difficult to justify on [free market] or, so far as I can see, on any other grounds.” Yet finance and administration “could readily be separated. Governments could require a minimum of schooling financed by giving the parents vouchers redeemable for a given sum per child per year to be spent on purely educational services. . . . Denationalizing schooling,” I went on, “would widen the range of choice available to parents. . . . If present public expenditure were made available to parents regardless of where they send their children, a wide variety of schools would spring up to meet the demand. . . . Here, as in other fields, competitive enterprise is likely to be far more efficient in meeting consumer demand than either nationalized enterprises or enterprises run to serve other purposes.”…
What really led to increased interest in vouchers was the deterioration of schooling, dating in particular from 1965 when the National Education Association converted itself from a professional association to a trade union. Concern about the quality of education led to the establishment of the National Commission of Excellence in Education, whose final report, “A Nation at Risk,” was published in 1983. It used the following quote from Paul Copperman to dramatize its own conclusion:“Each generation of Americans has outstripped its parents in education, in literacy, and in economic attainment. For the first time in the history of our country, the educational skills of one generation will not surpass, will not equal, will not even approach, those of their parents.”
“A Nation at Risk” stimulated much soul-searching and a whole series of major attempts to reform the government educational system. These reforms, however extensive or bold, have, it is widely agreed, had negligible effect on the quality of the public school system. Though spending per pupil has more than doubled since 1970 after allowing for inflation, students continue to rank low in international comparisons; dropout rates are high; scores on SATs and the like have fallen and remain flat. Simple literacy, let alone functional literacy, in the United States is almost surely lower at the beginning of the 21st century than it was a century earlier. And all this is despite a major increase in real spending per student since “A Nation at Risk” was published.
One result has been experimentation with such alternatives as vouchers, tax credits, and charter schools. Government voucher programs are in effect in a few places (Wisconsin, Ohio, Florida, the District of Columbia); private voucher programs are widespread; tax credits for educational expenses have been adopted in at least three states and tax credit vouchers (tax credits for gifts to scholarship-granting organizations) in three states. In addition, a major legal obstacle to the adoption of vouchers was removed when the Supreme Court affirmed the legality of the Cleveland voucher in 2002. However, all of these programs are limited; taken together they cover only a small fraction of all children in the country.
Throughout this long period, we have been repeatedly frustrated by the gulf between the clear and present need, the burning desire of parents to have more control over the schooling of their children, on the one hand, and the adamant and effective opposition of trade union leaders and educational administrators to any change that would in any way reduce their control of the educational system…
…In each case [of voter initiatives on school choice], about six months before the election, the voucher opponents launched a well-financed and thoroughly unscrupulous campaign against the initiative. Television ads blared that vouchers would break the budget, whereas in fact they would reduce spending since the proposed voucher was to be only a fraction of what government was spending per student. Teachers were induced to send home with their students misleading propaganda against the initiative. Dirty tricks of every variety were financed from a very deep purse. The result was to convert the initial majority into a landslide defeat…Opposition like this explains why progress has been so slow in such a good cause.
The good news is that, despite these setbacks, public interest in and support for vouchers and tax credits continues to grow. Legislative proposals to channel government funds directly to students rather than to schools are under consideration in something like 20 states. Sooner or later there will be a breakthrough; we shall get a universal voucher plan in one or more states. When we do, a competitive private educational market serving parents who are free to choose the school they believe best for each child will demonstrate how it can revolutionize schooling.
Why all the attention to public education issues here in Rhode Island? Why all the attention to union contract negotiations? There is one simple reason and it was articulated above by Paul Copperman in 1983: “For the first time in the history of our country, the educational skills of one generation will not surpass, will not equal, will not even approach, those of their parents.” That is a damning indictment of the status quo and those who support it.
Therefore, this debate is about ensuring all children have a fair shot at realizing the American Dream. They will only get that fair shot if we provide them with access to a quality education – where the definition of quality means they are able to compete successfully on a global basis.
The evidence is in and the status quo has failed our children with long-term adverse consequences for the competitive strength of our entire country. Serious change must occur beginning immediately. We have a moral obligation to engage in the battle for change; nothing less will suffice.
Tom Coyne of RI Policy Analysis offers this ProJo editorial on whether teachers are fairly compensated:
A growing number of Rhode Island communities are experiencing acrimonious contract negotiations with their teachers’ unions. At the heart of these discussions lies the question of whether teachers are adequately compensated for their work and the results they produce. To answer it, we must examine the relative attractiveness of the three main parts of a teacher’s compensation package: pay, health insurance, and pension benefits.
Because teachers reach the top step of their pay scale relatively quickly, we obtained the average salary for experienced Rhode Island teachers from the state’s Department of Labor and Training. For elementary teachers, it is $64,700; for middle-school teachers, $61,680; and for secondary-school teachers, $63,240.
To make these salaries comparable to those earned by other professionals, we must adjust for the fact that teachers’ contracts are for roughly 187 days’ work a year, versus about 250 days a year for people in the private sector. Dividing teachers’ pay by the factor 187/250 yields figures that are effectively comparable to those in the private sector: $86,497 for an elementary-school teacher, $82,460 for a middle-school teacher, and $84,545 for a secondary-school teacher.
Teachers often say that their pay should be compared to that of private-sector jobs requiring a master’s degree. According to the Labor and Training Department, these include the jobs of statisticians, $57,360; clinical, counseling, and school psychologists, $72,100; urban and regional planners, $65,400; social scientists, $58,000; substance-abuse and behavior-disorder counselors, $32,680; clergy, $64,360; librarians, $58,840; and audiologists, $54,660. And let’s round out the list with some other professions: lawyers, $96,580; accountants and auditors, $56,700; and personal financial advisers, $63,660.
So far, an experienced teacher’s pay doesn’t look too bad. But this actually understates the deal they have.
Let’s start with the cost of health insurance. According to the Kaiser Family Foundation, state- and local-government employees across the country pay an average of 25 percent of their employer’s total cost for a family Preferred Provider Organization health-insurance plan. In Rhode Island, teachers’ unions (and state employees) have strenuously resisted proposals that they pay 10 percent or less.
Now let’s move on to pensions…
A private-sector worker pays 6.2 percent of annual income (up to $90,000) into Social Security, or, if self-employed, 12.4 percent. The maximum Social Security benefit is now $23,268 per year, and a private-sector worker is not eligible for it until age 65 1/2 (a limit that rises each year). In contrast, a teacher is eligible for 80 percent of final salary after 35 years of service — at age 58, if he or she started teaching right out of college at age 23. Eighty percent of $64,700 is $51,760 a year in retirement income, or $28,492 more than a private-sector worker receives from Social Security.
Moreover, the teacher’s income increases by 3 percent each year, regardless of the actual level of inflation.
Now let’s look at what our private-sector worker would have to do to match this deal…
To match the retired teacher’s income and health-insurance package, our private-sector retiree would have to have accumulated savings of $800,117 by age 58.
What does it take to do this?…
To achieve $800,117 by age 58, our private-sector worker would have to save $10,820 (in real inflation-adjusted dollars) per year. Note that this is unrealistically low, because the actual annual returns do not equal their long-term average. This volatility means that a higher level of saving is needed.
Finally, let’s make the unrealistic but simplifying assumption that our private-sector worker earns $64,700 over this whole period. To match the retired teacher’s deal, our private-sector worker would have to save 16.72 percent of each year’s compensation.
But let’s assume that his or her employer matches the worker’s 401(k) contribution, so the required saving level would be only 8.36 percent of each year’s pay. Added to the 6.2 percent paid to Social Security, this yields a total saving rate of at least 14.56 percent — about 5 percent higher than the 9.5-percent rate paid by teachers.
In sum, when you consider pay, health insurance, and pension benefits, public-school teachers in Rhode Island have a very sweet deal compared with most private-sector taxpayers.
Here is an editorial response by Robert Walsh, Jr., Executive Director of the NEA in Rhode Island.
Here is a perspective from Thomas Wigand, a Rhode Island resident.
Here is Tom Coyne’s response to Bob Walsh.
Here is Michael Mancuso’s letter to the editor response to Bob Walsh.
Greg Wallace at What Attitude Problem? highlights this week’s news on General Motors, building on the news previously highlighted here on this blogsite.
First, a Washington Post article states:
General Motors Corp., the world’s biggest automaker, has offered buyout and early retirement packages to some of its nonunion, salaried workforce in North America as the company grapples with cutting costs.
The offers were sent in the first quarter in hopes of speeding the normal amount of attrition the company usually has…
GM is under pressure from investors to close plants and renegotiate union contracts. Its bonds fell last week to the lowest levels against government debt since at least 2001 after the company forecast its biggest quarterly loss in 13 years. The Detroit company is the third-biggest issuer of corporate debt…
With U.S. sales this year headed for the lowest market share in 80 years, GM is finding it tougher to cover rising health care costs for its 1.1 million employees, retirees and dependents and pay for increased costs for steel and other materials…
Then Ankle Biting Pundits weighs in with some strong observations:
…A substantial part of G.M.’s problem – but hardly the only issue – is that it is supporting about two and a half retirees for every worker. With health care costs more than $5 billion a year – and about $1,400 on a vehicle produced in the United States – many G.M. workers are expecting that long-cherished benefits could be pared back…
A posting on the blogsite notes that non-union General Motors’ retirees are paying an increasingly large portion of their medical costs but union contracts do not yet require union retirees to make similar contributions. The author of the posting also notes that GM’s problem is quite similar to the looming problem with Social Security – fewer people working to support more and more retirees.
In a different posting, Ankle Biting Pundits makes these additional comments:
…I hope the United Auto Workers union are happy. Thanks to their insane demands for lifetime health care for retirees, not wanting to contribute to rising health care costs, and an outdated, underfunded pension system, 25,000 of their members are going to heading to the unemployment line…
We take no joy in seeing anyone lose their job, that’s not the reason we’re mentioning this. Rather, we point out that what ails GM is a microcosm for what troubles America. The GM pension system is going bankrupt because an ever smaller number of workers are supporting a ever larger number of non-producers. Sound familiar (think Social Security)? The union could have cared less that health care and other costs were skyrocketing – they wanted to continue the free ride and refused to see how this stance could only lead to disaster for everyone…
It is not hard to imagine that the next step at some point in the near future is GM declaring bankruptcy and dumping its underfunded pension plan on the PBGC. It’s really the only thing they can do to survive. The shame is that all those people who are going to have their pensions cut and their health care costs skyrocket can thank their labor unions for their plight (Granted, GM management was pretty stupid to go along with their ridiculous demands). And guess who’s going to have to pay for that? Yup, us the taxpayers. Way to go UAW. Both your union members and we the taxpayers thank you.
For further examples of egregious union contract terms, read some of the comments posted to this most recent link.
A story in The Wall Street Journal states:
GM’s North American operations, which posted a loss of $1.3 billion for the first quarter, already have been eliminating about 8,000 jobs a year through a combination of attrition and early-retirement programs since 2002…Those cost cuts haven’t been enough to offset GM’s sliding U.S. market share and declining revenue per vehicle.
…Mr. Wagoner said the newly announced cuts would be “an acceleration” of normal attrition…
GM’s total North American work force was 181,000 as of Dec. 31. Of those, 111,000 are hourly workers in the U.S.
GM is the last of Detroit’s Big Three…to announce a restructuring program within the past five years, a period during which market share for the three big, unionized U.S. auto makers has plunged from 68% in 2000 to just over 57% as of the end of May.
Reaction from the United Auto Workers, the large union that represents most GM manufacturing workers in North America, came late yesterday in a statement from its vice president and top GM negotiator, Richard Shoemaker. He said the union “is not convinced that GM can simply shrink its way out of its current problems. What’s needed is an intense focus on rebuilding GM’s U.S. market share, and the way to get there is by offering the right product mix of vehicles with world-class design and quality.
“It’s one thing to present in a speech specific targets for job reductions and closing plants by the end of 2008,” Mr. Shoemaker said, but in reality “various factors” will determine the actual outcome, including talks on a new labor agreement scheduled to take effect in 2007…
Morgan Stanley analyst Stephen Girsky said in a comment that Mr. Wagoner’s plans represent “a small step in the right direction” but added, “The targeted employment reduction appears to be roughly in line with recent attrition and does not appear to be acceleration.”…
Since then, he has sketched out a four-legged strategy for restoring profitability, that starts with boosting capital spending this year and next to speed the launches of several new models, including replacements for GM’s aging lineup of large SUVs. Part two of the plan is a sweeping overhaul of U.S. marketing strategy. On legs three and four — cost-cutting and reducing GM’s burdensome health-care bill — Mr. Wagoner has offered few details and appears to be avoiding drastic, short-term cuts. Much of his success will depend on the acquiescence of the UAW and suppliers that already are straining to meet GM’s cost-cutting demands…
…cuts would save GM about $2.5 billion a year. That works out to savings of about $530 on average for every U.S. vehicle, using GM’s 2004 sales. That is about only a third of the $1,500 higher cost per vehicle that GM suffers against foreign rivals because of its high worker costs, including health care for retirees.
A GM spokeswoman said yesterday that job cuts are only one part of GM’s cost-reduction plan. The company also expects to save money in areas such as purchasing, productivity improvements and health care, she said.
On the key issue of GM’s high health-care costs for workers and pensioners, Mr. Wagoner said GM management hasn’t reached an agreement in talks with the UAW about ways to reduce GM’s $5.6-billion-a-year U.S. health-care bill. “To be honest, I’m not 100% certain that we will,” he said…
On the production front, Mr. Wagoner said GM needs “to get to 100% capacity utilization, or better” in North America, compared with about 85% in 2004. By the end of this year, based on plant closings already announced, GM will reduce its North American assembly capacity to five million vehicles from six million in 2002, Mr. Wagoner said.
“We expect to close additional assembly and component plants over the next few years, and to reduce our manufacturing employment levels in the U.S. by 25,000 or more in the 2005-2008 period,” Mr. Wagoner said. He didn’t identify specific plants that could be closed.
Mr. Wagoner faces a major challenge in GM’s contract with the UAW. The current agreement, which expires in 2007, technically prohibits plant shutdowns, and guarantees UAW workers full pay and benefits if their plants are shuttered for a lengthy period…
…could refuse to renew those income and job protections in 2007, but the UAW has fought successfully to maintain them in each contract cycle since GM agreed to the provisions in 1990…
In his speech to shareholders, Mr. Wagoner said GM ultimately plans to “look at capacity utilization on a global basis.” In other words, GM hopes to follow Japanese rivals such as Honda Motor Co. that can move production of various models rapidly from plant to plant based on sales patterns, or tool one plant to ship vehicles to any market, based on demand…
From a distance, the GM changes sound incremental and not of a size to reinvent the company’s micro-economic business model. That does not bode well for the company. After all these years of struggling, you would think that management and the UAW would get the point that re-arranging the chairs on the GM Titanic will not fix the fundamental, structural problems. These people need to get real – and do it quickly.
As I have said in a previous posting: If you don’t deal with economic reality, then it will deal with you – on its own terms. That does not bode well for the well-being and competitive strength of the American economy. Unless we significantly tackle the weaknesses embedded in the status quo, we are going to pay a hefty price. To be more precise, we are setting up the American economy for a fall which could deprive our children and grandchildren of the opportunity to live the American Dream. That is morally reprehensible.
When will people wake up and really pay attention?
Read this posting for a very detailed and informative writeup on the Islamic jihadists arrested in Lodi, California. Lots of links to follow in the posting.
The posting begins:
As put by Rusty at Jawa Report, “Four men have been arrested in Lodi California, two on suspicion of aiding al Qaeda and two on immigration violation charges. One of the most worrisome aspects of this story is that the two arrested on immigration charges were in the process of starting a religious school. Guess which religion?”
So while we sleep, sleeper cells aren’t yawning. From hospital-based terror plots to school lunches, an office building, an airport, or a shopping center, it’s all fodder for jihadis. And for a flavor of Islamists agenda for America, you need go no further than the Islamist’s favorite group, CAIR, whose board member, Imam Siraj Wahaj calls for replacing the American government with a caliphate, and warns that America will crumble unless it “accepts the Islamic agenda.” Are you listening yet? You may be but our politicians and the liberal MSM aren’t…
The posting also includes a link to this key conclusion written at the end of this Captain’s Quarters posting:
This also shows the fallacy of the “they hate us because they don’t know us” crowd. The Hayats and the other fanatics in Lodi had the freedom to practice their religion and earn a decent living in California — certainly they made a higher standard of living there than they could have expected in Pakistan or Afghanistan, especially before the Taliban were ejected by American military action. They don’t hate us because they misunderstand us. They hate us because all they know is hate, and outreach and kind words don’t make a damned bit of difference to fanatics.
It’s time we understood the difference between moderates and fanatics, and the difference between youthful indiscretions and outright treason. A free society can handle moderates and survive youthful indiscretions, but it cannot abide fanatics who commit treason. We need to make that abundantly clear in the manner which we handle the latter.
Now go read all the various links to get better informed.
Then read this LA Times report and see how these arrests may only be the tip of the iceberg.
This would certainly be good news:
[Open full post]In recent months, a number of researchers have begun to assemble intriguing evidence that it is possible to generate embryonic stem cells without having to create or destroy new human embryos.
The research is still young and largely unpublished, and in some cases it is limited to animal cells. Scientists doing the work also emphasize their desire to have continued access to human embryos for now. It is largely by analyzing how nature makes stem cells, deep inside days-old embryos, that these researchers are learning how to make the cells themselves.
Yet the gathering consensus among biologists is that embryonic stem cells are made, not born — and that embryos are not an essential ingredient. That means that today’s heated debates over embryo rights could fade in the aftermath of technical advances allowing scientists to convert ordinary cells into embryonic stem cells.
“That would really get around all the moral and ethical concerns,” said James F. Battey, chief of the stem cell task force at the National Institutes of Health. The techniques under study qualify for federal grant support because embryos are not harmed, he noted. And eventually the work could boost the number of stem cell colonies, or lines, available for study by taxpayer-supported researchers.
A June 5 posting on RI Policy Analysis links to a new Business Week article on the financially insolvent public pensions.
[Open full post]…the cost of retirement has continued its steady climb. According to the U.S. Census Bureau, major public pension plans paid out $78.5 billion in the 12 months ended Sept. 30, 2000. By the comparable period in 2004, that had grown to $117.8 billion, a 50% climb in five years. Beyond hiking taxes and cutting costs, governments have few ways to meet this bill…
…there’s little relief in sight. Excluding federal workers, more than 14 million public servants and 6 million retirees are owed $2.37 trillion by more than 2,000 different states, cities, and agencies, according to recent studies. In 2003 alone, states and municipalities poured some $46.2 billion into these plans, according to the National Association of State Retirement Administrators, a 19% jump from the year before. Excluding federally funded programs, pensions went from 2.15% of all state and local spending in 2002 to approximately 2.44% in 2003. But the largest state and city funds were still short $278 billion in 2003 — approximately 20% of state and municipal revenue excluding federal funds…
As much as states are throwing into pensions, they may owe even more. Despite a 2004 stock market rise that should narrow some of the gap, pension experts at Barclays Global Investors (BCS ) say that if public plans calculated their obligations using the more conservative math that private funds do, they would not be $278 billion under, but more than $700 billion in the red. “It’s just ruining the financial picture for states and municipalities,” says Matthew H. Scanlan, managing director of Barclays, one of the largest managers of pension-fund investments. “You’re looking at a taxpayer bailout of this pension crisis at some point.”
There’s more bad news. One major category of cost isn’t disclosed at all: how much retiree health care has been promised to public retirees. No one can estimate how much these promises will add up to, but they’re sure to be in the tens of billions, and only some states seem to have put aside reserves for them, according to bond analysts. That’s chilling, given how quickly medical costs are rising. After a pitched battle, the Governmental Accounting Standards Board (GASB), the independent accounting standards-setter for state and local governments, has finally begun to require states to disclose these liabilities. Numerous unions and state government representatives objected to the change, says GASB member Cynthia B. Green, “not because [unions and states] didn’t think these were important, but because they thought once the governments did their studies and found what the price tag was, they would be concerned or, if not concerned, staggered.” The requirement will be phased in beginning in late 2006.
If these costs aren’t brought under control, rising taxes could prove unavoidable — and a competitive problem for the states in the worst shape as well as for the country…companies — and even citizens — could end up moving to states in better fiscal shape. “You could see it turning into an economic desert in certain states,” he warns. Combined with the national retirement issues surrounding Social Security, these plans contribute to a depressing outlook for U.S. competitiveness overall…
One reason for the drop [in pension funding levels] was unavoidable: The impact of the bear market of 2000-2002 on the value of these fund investments was severe. The other reason was just foolishness: a lathering on of billions of dollars worth of new promises to workers in flush days. It was a familiar mistake: Public-pension provisions are determined by elected officials, and civil servants vote. Legislators have a long history of making such expensive upgrades to already generous plans.
Some of these giveaways are truly spectacular. In 1998 the city of Houston instituted a deferred-retirement option plan, or DROP, that would allow workers to in effect take their retirement when they became eligible for it but continue to work at their salary. The retirement income was put in a side account where it earned an attractive rate of return, and the employee could later have his pension adjusted upward to a higher level. The DROP, along with other pension improvements, drove the city’s pension plan down from 91%-funded in 2000 to just 60% two years later. Houston had gone from contributing 9.5% of payroll toward pensions to more than 32%. Joseph Esuchanko, a Michigan actuary brought in to study the problem, discovered that things would only get worse. According to his calculations, it was possible for employees to become millionaires thanks to the system…
…even bare-bones guaranteed retirements are increasingly rare in the rest of the economy. According to the Census Bureau, 90% of state and local workers have a defined-benefit pension with a guaranteed payout. But only 24% of people employed in the private sector have such plans. (Most public-sector employees contribute along with employers to their pensions, unlike private-sector workers.) And more of the companies that once offered these benefits — places like Motorola, IBM, and Delta Air Lines — are dropping them for new workers in favor of 401(k)s. Health-care coverage for retirees, a costly perk that companies have been shedding at lightning speed, also remains common in the public realm.
It has long been accepted as truth that government workers get good benefits and job security in lieu of high salaries, but over the years the gap between public and private employee paychecks seems to have narrowed. It’s hard to come by perfect comparisons, since government numbers for the private sector include lower-wage industries like retailing, which pull down the averages, but overall, public-sector workers look to be getting a pretty good deal. In 2004 average salary for a public worker was $49,275 compared with $34,461 for everyone else, according to the Employee Benefit Research Institute (EBRI).
Even white-collar workers are better off in the public sphere. According to the U.S. Labor Dept., state and local government managers and professional staff earned $42.87 an hour last year, while their private-sector counterparts earned $41.52. One big reason: government workers get $2.62 an hour in retirement benefits; everyone else gets $1.63.
States pay more for public retirees too. According to the EBRI, the average public-plan retiree got $16,188 a year in 2003, far more than the $7,200 their private company counterparts could expect. One reason for that big split is that some public retirees do not get Social Security. But that too is changing. Since 1983 most public workers have been part of that system too, so in the future the disparity could well widen. All in all, EBRI concludes, state and local government wage and salary costs are 40% higher than the private sector’s; its employee benefit costs are 60% higher…
This tendency to dole out goodies in fat times is the core moral hazard of public-pension plans. Politicians like to reward voters when they can, and public workers vote…”That was the mirage of cost-free benefits,” says S&P’s Young. “Nobody pays, nobody gets hurt.”…
But states have also voluntarily heightened their own exposure to this risk. Rosalind M. Hewsenian, managing director of Wilshire Associates, says the biggest cause of the sharp drop in funding levels at public plans over the past few years was a drop in employer funding and a reliance instead on investment gains to make up the difference…
Elected officials are hesitant to ask the rest of their voters to pay for these promises through higher taxes. One primary reason: Outside of government workers, very few employees have these kinds of deals anymore. “Our people at 55 years of age can get 75% to 80% of their salary [as pension], and it’s a pretty nice salary,” says Illinois State Representative Robert S. Molaro, a member of a commission convened by the governor to make recommendations for fixing the pension system. “It will be hard for us to go to the taxpayers and ask them to pay for our pensions with benefits you in the private sector couldn’t even dream of.”
Given this divide, it’s reasonable to wonder why there hasn’t been more debate about these plans already. They’ve been protected from scrutiny for a number of reasons. The public-pension systems lack the regulatory system governing corporate pension plans. Corporations have to disclose timely, detailed information about their pensions to investors and the SEC. Rating agencies focus on them, too. In combination, these groups can pressure companies to be more conservative in their fund management. Devereaux A. Clifford, managing director of pension consultants Greenwich Associates, says it was pressure from these watchdogs that forced corporations to lower unrealistic investment return assumptions, from 8.9% in 2002 to 8.3% in 2004.
The public world has far less scrutiny. Nor do these plans have an equivalent to the Pension Benefit Guaranty Corp., the government-sponsored insurer of corporate plans. They have to conform to the funding requirements or accounting demands of the Employee Retirement Income Security Act, the federal law passed in 1974 to monitor private pensions. And public fund reporting lags corporate reporting by at least six months. Important factors like the performance and cost of bonds issued to cover pension obligations are even harder to suss out.
That’s bad news. Understanding the depth of these retiree problems seems especially important for state and local governments because of their limited financial options. Unlike the federal government, which can always print money, and private companies, which might sell more widgets and make more profits to fund their pensions, and whose pensions are guaranteed by a government-backed insurer, local government basically has only one way of meeting those promises: your taxes. Public-pension experts note that these obligations must be paid. Public-sector retirement benefits are generally guaranteed by state constitution…
The more likely answer is the most painful: Taxes will keep going up and benefits will be cut for future public employees. Both are unpopular. The debate is just starting to be heard.
June 5 marks the one-year anniversary of President Ronald Reagan’s death.
This posting provides links to many special moments in the President’s life and brings back many fond memories of a great man. Follow all the links, they are a treat.
Here is an article from the Washington Times.
