TUA’s study on Chicago police pensions was referenced in an article at The Globe and Mail.
It turns out Jane Jacobs was wrong. Rationalist urban planners weren’t the worst thing that ever happened to the Great American City. Pension-promising politicians have done far more harm.
That’s clear in newly bankrupt Detroit, which spends 40 cents of every tax dollar on retirement benefits and debt service costs. Is it any wonder the street lights don’t work?
Detroit is admittedly an extreme example, driven to its knees by decades of depopulation and political dysfunction. But its insolvency has drawn attention to the greatest threat to American cities since possibly the Spanish flu: unfunded pension and health liabilities for retired workers.
Short of declaring bankruptcy, it’s nearly impossible for cities to cut contractually protected pension and health benefits. So instead, they’ve been slashing basic services and/or cutting back on new investments in infrastructure, undermining the basis for future prosperity.
Even that hasn’t solved the problem, though. Estimates of the extent to which cities have failed to set aside enough money to pay pension and health benefits vary. But the gap easily amounts to hundreds of billions of dollars. Include state governments and the shortfall is into the trillions.
“Pension liabilities are widely acknowledged to be understated,” Moody’s credit rating agency said this month. It estimates the true shortfall at three times the sums reported by cities.
Last week, Moody’s downgraded Chicago’s credit rating by three full notches. The vibrant Windy City is no Detroit. But benefits for former employees and interest on its debt now suck up a third of its operating budget. And things will only get worse. Moody’s pegged Chicago’s unfunded liabilities at $36-billion (U.S.) – almost twice the $19-billion reported by the city.
Accounting gimmicks are one of the biggest reasons for the discrepancy. Cities have bet on a rate of return on pension investments above 7 per cent, although the yields on government bonds hover around 2 per cent. Not only have cities and states contributed billions less than they should have over the years to fund future pensions, but very few have set aside any money at all to cover retiree health benefits.
It’s no mystery how most U.S. cities and states got into this mess. For decades, politicians bought labour peace by promising higher pay and benefits for public employees without thinking twice about how to pay for them. Most knew it would become someone else’s problem anyway.
Whether public employees deserve their pensions is beside the point. (While the pensions of Detroit workers appear reasonable, they also reflect that city’s lower cost of living.) Still, politicians shirked their fiduciary responsibility for the financial integrity of their cities.
In Chicago, the average police pension is $55,000. For firefighters, it’s upward of $60,000. In 2011, 94 former Chicago police officers had pensions above $100,000, according to Taxpayers United of America. What’s more, unlike their peers in many other cities, retired Chicago police also receive partial federal Social Security benefits, up to about $13,000 a year.
Since police, firefighters and teachers typically retire in their 50s, many will draw pension and health benefits for three decades or more. That is, unless other cities follow Detroit, which is asking a bankruptcy judge to let it slash pensions. If Detroit gets its way, it will set a precedent other large cities may try to follow. Until now, all they’ve been able to do is squeeze concessions from unions that affect only new employees, who will retire later and contribute more to their pension fund. And in most cases, police and firefighters have been exempt from the changes.
The greatest reckoning may come in California. The state has already seen smaller cities such as Vallejo, Stockton and San Bernardino declare bankruptcy. Last year, almost 15,000 former California public employees drew pensions of more than $100,000. And the $100K club is adding thousands of new members a year as baby boomer retirements pick up steam.
Public pensioners can be expected to put up a fight wherever officials seek to cut their benefits. But it would be hard to top the sheer nerve of Bruce Malkenhorst, the former city manager of the Los Angeles-area industrial enclave of Vernon (population 112). His 2012 pension was $540,000, until the California Public Employees’ Retirement System cut it to $115,000.
Mr. Malkenhorst, 78, who has been convicted of misappropriating public funds, is now suing to recoup the difference, citing “elder abuse.” It does make one read Jane Jacobs and weep.
Findings from TUA’s pension projects on Milwaukee, Wisconsin, are featured in this story from the Wisconsin Reporter.
By M.D. Kittle | Wisconsin Reporter
MILWAUKEE – Tom Barrett presides over a $1.42 billion budget and a “company” with some 8,300 employees, but with all that responsibility the Milwaukee mayor only ranks seventh on the list of top paid city employees with $145,635 annual earnings.
Perhaps more striking, his estimated $2.86 million lifetime pension also ranks seventh among his Milwaukee peers, according to a new report by Taxpayers United of America. Those figures demonstrate how the public pension system is simply unsustainable, say members of that group.
TUA estimates show that Barrett will draw an annual pension of $127,945, and eventually net nearly $3 million if the 59-year-old mayor retires within the next year and lives to the age of 86, life expectancy based on the all-powerful Social Security Administration’s actuarial table.
At a press conference Wednesday in downtown Milwaukee, Taxpayers United released its long list of hefty pension earners, scores of city, Milwaukee County and Milwaukee Public Schools employees who could collect at least $1.5 million in government-paid retirements.
The top salary in city government, according to data obtained by TUA through open records requests, was Bevan K. Baker, the city’s health commissioner, who earned $148,413 in 2012. The nonprofit TUA estimates Baker’s annual pension earnings at $129,890, with a lifetime pension payout of more than $2.7 million.
Milwaukee Public Schools Superintendent Gregory Thornton stands to receive the highest pension payout. Last year, his salary was $265,000, with about $75,000 in fringe benefits. TUA estimates Thornton’s annual pension at $211,500 with an estimated lifetime payout of a stunning $4.4 million.
Thomas Harding, director of Milwaukee County’s Mental Health Complex Behavioral Health Division, earned $254,068 last year, and TUA estimates his lifetime pension payout would be just under $4.3 million.
The Chicago-based TUA, one of the nation’s largest taxpayer advocacy organizations, takes a critical position on what it sees as a public pension system based on big promises that will be impossible to keep.
“Looking at the top salaries in Milwaukee and estimating pensions for those employees, it is easy to see that a system that pays so many millions of dollars to people whom do absolutely nothing is unsustainable,” said TUA president Jim Tobin, a resident of Shawano. Tobin and crew plan to release pension estimates on his hometown government as well as Green Bay and Brown County in August.
With as much as 80 percent of local taxes going to pay for salaries and benefits of government employees, Tobin said local and state governments are going to be forced to take a fresh look at their priorities.
“As more retirees have to be paid out of that 80 percent, less money is available to pay current employees for the services we need today,” he said.
Badger State’s big secret
Tobin, a vocal supporter of the efforts of Gov. Scott Walker and the Republican Party in curbing collective bargaining for most public sector employees in Wisconsin, blasted the state and its lawmakers for protecting what he calls a “secret statute” that prohibits the release of personal pension information.
That’s why TUA’s projections, criticized by public officials, can only approximate pension earnings. They come with a list of caveats and assumptions.
Projections assume the employee will work 41 years or more in the pension system and retire at age 65 with 70 percent of salary drawn from the last few years of that career. They use IRS life expectancy tables, at 86 for women. And they factor in about $26,000 annually in Social Security payments, to which those earning more than $100,000 a year are entitled. Social Security payments would add more than $500,000 to the employees retirement fund over 21 years.
Public officials have said TUA’s approximations are imperfect at best, with employees at varying experience levels on the pension spectrum and with no promise that younger employees will remain in the system.
MPS spokesman Tony Tagliavia said it appears the group’s pension approximation on Thornton is “grossly overestimated.”
“Perhaps most significantly, the superintendent had only worked in Milwaukee Public Schools for three years…and the group’s calculation assumes 41 years of MPS service,” Tagliavia said.
Rae Ann McNeilly, executive director of TUA has a curt answer to critics:
“Release the actual pensions and we won’t have to estimate,” she said at the press conference.
McNeilly said TUA sent letters to Walker and legislative leaders Wednesday asking them to change the pension privacy law.
Wisconsin Administrative Code ETF 10.70 defines “individual personal information.” Personal pension information is considered confidential under Wisconsin Statute 40.07, and is “never a public record.”
Information included in statistical reports and retirement system summaries in which “individual identification is not possible” is a matter of public record.
The state Department of Employee Trust Funds also cannot release lists of annuitants “except as required for the proper administration of the Department,” the law states. In other words, the names and the numbers associated with them aren’t anybody’s business outside the agency.
“The State of Wisconsin refuses to release actual pension payments in an effort to hide the huge payments from taxpayers. We can’t let them get away with that so we estimate the pensions for current government employees, giving taxpayers an idea of what their ‘public servants’ get paid not to work,” Tobin said.
Illinois, “arguably the most corrupt state in the nation,” Tobin said, releases full pension information, with recipients’ names.
The latest Illinois data show a retired school administrator earns nearly $400,000 per year in a state pension, and could collect more than $11.5 million in retirement checks over her lifetime after retiring at 56.
Perhaps that’s why Illinois’ public pension debt exceeds $100 billion, an unfunded liability growing at an estimated $17.1 million per day.
Like ‘bubonic plague’ to ‘E. Coli’
McNeilly acknowledges that the Wisconsin Retirement System, the Badger State’s public pension program, is one of the healthiest in the nation, nearly fully funded by existing accounting standards.
“That’s like saying instead of having the bubonic plague they only have E. coli,” she said.
When new – and truer – pension accounting rules go into effect next year, unfunded liabilities from California to Wisconsin to New Jersey are going to look worse than they are today, with return rates dropping by as much as 50 percent.
Pension reform advocates have long called for public retirement funds to peg their return rates to market levels, in the 3 to 4 percent range, as opposed to the higher troublesome rates.
That’s really not a problem in Milwaukee, where the city’s public pension system is nearly fully funded, said deputy comptroller John Egan.
A report earlier this year by Pew Charitable Trusts rated the City of Milwaukee Employees’ Retirement System the top city pension system in the United States.
In January, the system was funded at 113 percent, according to city officials.
Egan said he hadn’t seen TUA’s pension data so he couldn’t respond to the report, but as things stand now taxpayers won’t be on the hook in the future.
“It’s much like a 401(k). The money is already there,” he said.
But it’s not quite like a 401(k), where employer contributions can and do change based on market conditions. And the city’s return rate is now at 8.25 percent, according to Egan. Such rosy estimates took a beating during the recession when pension investments plummeted.
Egan pointed to the late 1990s when returns soared well into the double digits.
“You have to look at pensions from a long-term perspective,” he said. “To look at what the current rate is doesn’t make sense to me.”
But return rates that didn’t pan out and political promises over the years are the reason so many pensions are running in the red. With 12,128 retirees, another 10,714 active employees and 3,887 inactive employees, Milwaukee and its taxpayers have a lot riding on its pension investments, Pew Charitable Trust praise notwithstanding.
Tobin would like to see government pensions replaced with 401(k)-style retirement savings accounts, and employees be forced to increase contributions to their benefits – something Wisconsin’s public unions have and will continue to fight against tooth and nail.
Officials from Milwaukee County did not return requests for comment.
Jim Tobin, President of Taxpayers United for America, was mentioned in the following article by William Kelly at Chicago Now.
Chicago, Illinois, June 24, 2013 – I read with some interest “The Fight for Educational Choice Lives On” by Illinois Policy Institute’s John Tillman on the Illinois Review. I, too, share the dream that is true educational choice.
My parents were both teachers; in fact, my father, William F. Kelly, who passed away in 2006, was principal of Abbott Elementary on Chicago’s South Side and spent his decades on Earth filling young minds with wisdom. In addition to his subscriptions to Smithsonian and American Heritage Magazine, teaching was my dad’s great passion and he did it well. He never tired of the written word and he consumed it voraciously. Consequently, education and educational choice has always meant a great deal to me.
For me, school isn’t a place you go to; it is a perpetual state of being. My father took every spare minute to teach life’s critical lessons and he relished the opportunity. I guess you could say I spent my entire childhood in the “principal’s office.”
That is why I take issue about what true educational choice is and what it is not.
In his piece, Tillman talks about the foes of educational choice: the unions. But unions aren’t the only ones opposed to true school choice. In the end, school choice is just another fight over property tax dollars. And the unions aren’t the only ones fighting for their slice of the taxpayer pie; there are wealthy private interests that are trying to get their grubby little hands on Illinois tax dollars too. Why do you think Mayor Rahm Emanuel and his donors are even involved?
I have been involved in the fight for taxpayer rights since the early 1990s; I learned from the best – Jim Tobin of Taxpayers United of America – the barracuda of taxpayer watchdogs in Illinois and one of the most ethical men I have ever met. Sadly, there aren’t very many real Jim Tobins left.
I learned some important lessons from Tobin, including: Always look beneath the surface and never take an Illinois politician at his word. Of course, a politician isn’t just a person holding or running for public office; a politician is anyone involved in the political process for advancement or gain.
That is why it is important to look beneath the surface of this school choice debate and ask the critical questions. The recent controversy over online charter schools and the failure of the effort is a case in point. We have one year before the moratorium on publicly-funded online charter schools is lifted and there is still time to protect taxpayers and their families.
The key issues remain unresolved:
First, the Illinois State Charter School commission is flawed. The commission should not receive a 3% kickback for every new charter school it approves. That is an incentive to approve disreputable charter schools – virtual or otherwise. It also smacks of special interests and pay-to-play politics. It is a system ripe for abuse.
Second, if one of the benefits of online charter schools is to save taxpayer dollars, then save them. K12, Inc., which was behind this recent 18 suburban school district virtual charter school play, asked for $8,000 in taxpayer dollars per student. Yet K12 has operated with far less per student in poorer school districts. Here, the school isn’t “brick-and-mortar” and yet wanted $8,000 per student. Why?
In the first eight months of 2012, K12, Inc. spent $21.5 million in advertising appeals and has been criticized for the millions spent on lobbying and executive compensation. There’s your answer.
Third, if students drop out of the virtual charter school, the school should be forced to give back a pro-rated amount of tax dollars back to the state. The charter school shouldn’t keep the tax dollars as a windfall for its failure to retain students. And drop-out rates for K12, Inc.’s schools are high.
Fourth, any school board of any publicly-funded charter school or virtual charter school should be accountable to the parents and voters who send their children to that school.
And lastly, true school choice means that parents should be able to send their kids to any school of their choice – religious or otherwise – and receive a tax voucher to pay for it. Their choice should not be limited to a bad public school and an even worse taxpayer-funded virtual charter school. Anyone who says this is school choice is pulling our educational leg.
Online or digital learning is a critical tool for the future of education – one my father would have appreciated. But publicly-funded virtual charter schools are not a substitute for real school choice in education. I’m not fooled by all the slick marketing without the practice. That is another lesson the taxpayers and real school choice advocates really don’t need to learn.
