Tuesday, September 14, 2010

CONNECTICUT’S UNFUNDED PENSIONS

The Securities and Exchange Commission (SEC) is suing New Jersey for deceiving investors in its bonds. There is a growing lack of transparency that bond presentations do not mention.

Connecticut employees’ pensions have for years been funded by the State of Connecticut, but the funds are raided, according to columnist Chris Powell, managing editor of the Journal Inquirer in Manchester. In the past two years, the raids have taken away $315 million, or half the Connecticut pension funds, to pay for state spending which the state budget has not covered.

If the State runs out of money, government employees will normally be the first to be paid, as required by contract. And this is so even if the State has to close down everything else, police and fire departments, hospitals, park and recreation, higher education.

What is happening in Connecticut is happening in everywhere. States have been collecting funds for pensions for government employees for years, but the states have been raiding those funds for spending. The situation is widespread, being only more worrisome in this prolonged recession.

The Connecticut treasurer collects for three funds: pensions, whose under funding now amounts to $11 billion; state debt, $14 billion; and health benefits for retired state employees, $29 billion. (For health benefits, nothing has been set aside, according to Andrew White, Independent Party candidate for state treasurer.) Were all the funds to be entirely disbursed suddenly, each household would on average pay an additional tax of $55,000. The total state debt is $75 billion, according to Mr. White. The total unfunded pension liability across the country is $933 billion, estimates the Manhattan Institute.

The public is sleeping. Politicians hide the problem, continue it, and leave it for their successors to hide. Politicians don’t care who has to pay as long as it is not they, as Tom Sowell has pointed out. No one seems personally responsible. Once in a while the truth, when it is no longer manageable, leaks out—in election time or when a unique statesman suddenly appears or an official body with a conscientious chairman writes a report

A report from the National Association of State Budget Officers has “admitted” that states are financing current operations with debt (a no-no), or with money taken from highway-maintenance and other trust funds, by pushing payments to vendors into future fiscal years, or other “creative, innovative” adjustments to budgets.

The New York State Comptroller is another example. It has issued a devastating report on New York State “fiscal manipulations,” which present a distorted view of state finances. This “shell game” includes shuffling money among accounts to hide deficits, loans made by the state to itself—which is like borrowing from your credit card to pay off your mortgage—and other manipulations to “mask the true magnitude of the State’s structural budget deficit.”

In California, the state legislature passed a bill enabling state employees to purchase -- at a discount -- additional taxpayer-guaranteed high-yielding retirement annuities,” thus adding to the retirement debt of $550 billion. In ten years another $30 billion will be added from these rich annuities.

States that care about taxpayers are Indiana and Texas. Indiana is governed by Mitch Daniels, who has sold a highway instead of (we presume) raiding the government pension funds.

Other states besides California and New York that severely under fund pensions are Illinois and Rhode Island, according to Steve Malanga’s “How States Hide Their Budget Deficits” in the August 23 Wall Street Journal.

Perhaps Connecticut should be added to Malanga’s list. We have asked an expert in the field, Andrew White, how he would improve the Connecticut problem. He says he would restructure the Treasurer’s office for asset growth. Here is his answer:

“As the next Treasurer, I would pick my own Chief Investment Officer. Together we would restructure the pension portfolio to yield better upside while still protecting for the downside (e.g. switching mainstays of the fund from active to vastly cheaper passive managers). That will go a long way to increasing assets in the pension funds.”
He adds:

“I would also bring together representatives of the unions and government employees (who own the pension fund assets). I would make the case: serious risk of zero benefits in 10 years and still at mercy of bankrupt government or 90% of benefits locked in (i.e. beneficiaries control specialized beneficiary 401k plans). I would also include the vital taxpayer representatives. Potentially, a touch more tax in only one year in 2011 to be permanently off the hood for state employee pensions vs. sharply higher taxes within10 years devastating employment. Everyone gives a little, and everyone walks away a winner.”
Even so, the existing problem of underfunding remains throughout. Senator Casey (D. Pa.) has introduced a bill calling for a bail-out of unfunded government pensions. Or a state legislature might scrap the employees’ contract, combining it with suddenly inflated taxes. Or the SEC might sue yet another state for deceptive investment practices.

Natalie Sirkin
C2010
sirnat9@gmail.com

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