Public employee pension and municipal insolvency

This paper studies how governments manage public employee pensions and how this affects insolvency risk. I propose a quantitative model of governments that choose their savings and risk exposure by borrowing/saving in defaultable bonds, borrowing in non-defaultable pension benefits, and saving in a pension fund that earns a risk premium. In insolvency, the government can receive transfers from households who may differ from the government in their preferences for public services and private consumption. I match the model to a panel of CA cities and a hand-collected record of fiscal emergencies. The model predicts that governments are highly vulnerable to another stock market bust. A hypothetical shock to pension funds in 2015 produces twice as many fiscal emergencies as the original 2008-10 shock. In the quantified model, the government undersaves and take excess risk relative to what households would choose. Savings requirements that limit spending to essential services plus 0.3% of cash-on-hand produce large welfare gains for households. Requiring the pension fund to invest more in safe assets decreases household welfare because the lower average return discourages the government from saving.

That is from the job market paper by Sean Myers of Stanford University.

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Abortions happen For very different reasons. One might imagine that some are a matter of convenience with fairly high electricity while others - one I am intimately familiar with - are neither a matter of convenience nor elastic. For this reason it is likely that both postulates are true, but for different sub-populations

Nearly all are matters of convenience.

Isn't lying a sin too?

I’m full on board the pro-choice train. However in the US over 92% of abortions are due to unplanned pregnancy and not medical or disability reasons.

Convenience is a loaded term, however. Accidental pregnancy is a better term.

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Oops - “fairly high elasticity”

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While the threat of insolvency is one aspect of the situation, the complete evil of it is another. Politicians sign off on the extravagant pension deals of public employees, buying their loyalty at the expense of the population for far into the future, when these same politicos' souls are in Hades. The cultural effect is negative as well. The idea of the once-holy Protestant work ethic, where productive work is required for an individual to eat, has disappeared. Public employees spend a shrinking portion of their lives providing a public contribution in exchange for a free ride into an ever-extending future with no worries about their own personal solvency. Not only that, public employees frequently receive retirement benefits while moving on into similar or identical positions, often with the same agency. The pension benefits dwarf the income earned by private sector members that are actually working.

It's acceptable for a private company to reward its employees with any kind of compensation it wishes, both in current salaries and wages and retirement benefits. But for politicians to commit public funds far into the future to benefit pubic employees that retire in the prime of life and then continue to draw public sector salaries is wrong on every level.

Yes, they should all go get CEO jobs at WeWork. That's the genius of the private sector in action.

We'd have to scrap the minimum wage, so all the public employees could find employment at their true value on the labor market.

ha ha lol!!!! That's GREAT!

man, that lazy public worker canard never stops cracking me up

His comment was stupid. And you’re a smart dude.

The public sector pension crisis is coming though. States cannot declare bankruptcy. This is going to hit the fan and the letter next to the politician’s name will be irrelevant.

How long until States institute a wealth tax?

"How long until States institute a wealth tax?"

It will only be effective as a surprise tax. After the first few states implement it, the wealthy will start hedging their bets by moving assets out of states likely to implement a wealth tax. Which will have a very bad feed back effect on the states who would need to seize the assets but fail to be first in line.

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In your view, the ideal [public] worker contributes zero to GDP because they are paid zero for their labor based on it being of little to no value, thus having zero income and thus buying nothing produced, which is what is required to have even fixed GDP.

So, who do you think must put money in consumer pockets to pay yo buy more and more production to grow GDP?

When I google "how to put more money in consumer pockets", the results all point to government:
Tax cuts
Deregulation of lending leading to increased debt defaults
Lower govrrnment interest rates to promote more 20%-500% consumer debt
Government borrow and spend building infrastructure, followed by government debt default. Should include defense borrow and spend on winning WWIII by global nuclear war ending civilization.

I never see a conservative saying employers need to grow GDP faster by paying more workers more in wages and benefits. To conservatives, only government can put more money in consumer pockets to produce higher growth since the victory of Reaganomics, which HW called voodoo economics because it promises a free lunch: cut costs and benefits increase.

Ie, you benefit from your wages being cut to cut costs.

You benefit by tax cuts ensuring the roads become potholed, clogged with traffic, and bridges are closed requiring a five mile detour. Unless Congress borrows and spends to pay for fixing your local roads and bridges.

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It’s hard to believe that the public pension decisions reflect anything like the analytical basis, or even awareness, that this paper seems to suppose.

The current Chicago fiasco is a case in point, but there is a long list of “head in the sand” examples.

I remember the 90s when the California public pension funds had so much in booked assets that it was over funded, so employer contributions were cut and pension benefits increased.

While the booked values were much lower in 2003, the argument was the stockmarket always recovers losses and then goes back to 8% + growth, so employer contributes did not need to be returned to the rates in the early to mid-90s, an action that would destroy the California economy, which I guess means increasing the rate of job creation, GDP growth, and population growth back to the 90s when the employer contributions were much higher.

It was the example of the Califoornia public pensions in the 90s cited for privatizing Social Security, or investing it in Wall Street, because California public pensions proved benefits could be increased while cutting the employer FICA tax.

The GOP kept pushing SS privatization based on higher benefits and lower FICA tax rates even as public pensions failed to see the 8%, then 10%, then 15% returns needed to offset the cuts in employer contributions. Meanwhile tax cuts and deregulation by GW Bush and the GOP failed to restore job and GDP growth, ending in the crash in stocks, and real estate killing any hope of Wall Street providing the free lunch privatizing Social Security depended on. If investing heavily in stocks and real estate failed for the California public pensions, for a hundred million people with home mortgages and 401Ks/IRAs, how would it work for Social Security?

As the US population continues to age, the retired workers are going to drag down GDP. The 30% with millions in retirement funds and real estate with no debt, are not going to consume at several times the rate of the other 70% who live on Social Security benefits, welfare, and part time Walmart greeter pay.

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You might just do something sensible like replace defined-benefit programs with defined-contribution programs. Of course, that would limit the opportunities for professional aggrandizement via production of esoteric academic papers, so we can't suggest that.

+1 Pay every obligation as it's incurred, month by month. Let the true cost be seen immediately.

+1, Yes. any future benefits will always be gamed by politicians and government workers at the expense of the tax payer.

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Fiscal emergency means the hologram broke down in abstract tree terms, the QM wave collapsed when the city attempted to budget ahead.

The tree trunk that leaked is the relationship between taxes and pension payments. They were ill matched, the tree trunk cannot hold 'round'.

This is the general principle of banking, keep deposits and loans closely correlated and the flow of credit is stable, the velocity equation works and we can use double entry accounting.

Velocity equation is a cart before horse construct first developed by Copernicus. Fischer Black did not think money was non-neutral and he was wealthy, like I am. Surely you're more educated than to believe in monetarism, MY?

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Prop 13 and making promises for the future, what could go wrong. Or, maybe you could underfund your retirement program to give a tax cut because this year--and only this year--there was a fund surplus, what could go wrong.

Or maybe you can institute defined contribution programs for public employee retirement. Or maybe you can finance insurance benefits for public employees and their retired colleagues by making an assessment on their total compensation and then have insurance companies submit sealed bids as to the deductible they'll insist on for fulfilling a contract in return for the issue of that assessment. Or maybe you can limit compensation-per-worker for public employees to 110% of compensation per worker among private sector employees in your state or commuter belt. Or maybe you can cap compensation packages for senior management in public agencies to a figure approximate to the 96th percentile of private sector compensation-per-worker. Or maybe you can have a system whereby the rate of levy on assessed valuation resets automatically every six years or so, so property tax collections per capita do not grow faster than personal income per capita unless elected bodies have public hearings and vote on an increase (with the yeas and nays recorded).

You get crude and troublesome measures like Proposition 13 because you won't do sensible things like the foregoing.

No, you get Prop 13 because people respond to emotion and not reason, just as you get politicians not funding what they promised. Although I am not a public employee, I think it is a bit disengenous for you to propose that public employees take a pay cut to their compensation to fund a benefit you promised.

How about you do that yourself...tell your boss that you are willing to have your pay cut because the company took on more debt than it should have and didn't set aside the money to fund your retirement program.

I'm sure he/she would be glad to hear that.

No, you get Prop 13 because people respond to emotion and not reason,

You had the antecedent situation because it was in the interests of public employees and politicians, and the opposition was motivated on that basis. You think public 'emotion' is worse than a bunch of rent-seekers talking book. Because you're a condescending ass or your a rent-seeker yourself.

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I think it is a bit disengenous for you to propose that public employees take a pay cut to their compensation to fund a benefit you promised.

Either they take the pay cut or someone else does. What's your adjudicatory principle, Mr. Non-Emotion?

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you get politicians not funding what they promised.

The promises made by the politicians are to be funded with other people's money. Little consideration is given to the possibility of future economic reversals or changes that could have a negative effect on pension funding.

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You get prop 13 because people got taxed out of their homes.

We have a corrupt vicious cycle of public employee unions finding and buying politicians who reward their benefactors with rich benefits paid by people who get nothing equivalent on the private sector. No politician can win in California without pledging fealty to the public employee unions. It will continue until it fails catastrophically. The early signs are already evident.

All of this nonsense is backed by the homes of average Californians. When the system collapses, we will all be property taxed out of our homes.

Yeah, sure, but did you notice that corporations, which live forever, and you do not, have their property taxes capped; when you die or leave, the property taxes will go up for your purchaser...so you have folks staying in their homes, out of fear of leaving and paying higher property taxes on houses that now suit your needs. Funny how this site doesn't discuss how Prop 13 reduces housing mobility.

Disneyland needs more tax breaks.

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And Prop 13 did not cause any of the public pension problems in Illinois or New Jersey, to name but two examples.

Yeah, they just didn't fund the program as they were obligated to do. That's how you, as a Republican governor, balance the budget and kick the can down the road.

Yeah, they just didn't fund the program as they were obligated to do.

IOW, they didn't fleece private sector employees enough to offer more deferred compensation to public employees, a position you take even though private sector employees are systematically less well compensated than public employees and retire later. (If my own experience as a public employee is representative, you could cut the staff in a typical office by about 20% with no service reductions).

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What I find really interesting is what the union reps in the obviously distressed funding situations believe. I assume some are just innumerate and clueless, but some must understand that it will be impossible to actually pay the ever more generous benefits they are demanding.

The responsible play would have been to lead, help their members to understand what was coming, and move to defined contributions plans 20 years ago, as most of the Fortune 500 did.

The only thing I can figure is that they believe they will eventually get a Federal taxpayer bailout.

And in the meantime, the horse might learn to sing.

Overpaid business executives don't need unions.

They take what they can get away with.

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The governor underfunded the city's retirement plan? Chicago just went broke.

Suburban and downstate pension funds too are underfunded.

"Five state-run funds that cover downstate and suburban teachers, state employees, state-university employees, judges, and Illinois lawmakers
355 suburban and downstate police pension funds, 296 suburban and downstate firefighter pension funds, and a pension fund for suburban and downstate municipal workers
Seven pension funds in Chicago and three pension funds in Cook County"

How did those suburban and downstate funds get to be underfunded? Easy, don't pay in, and whalah there is an underfunded plan, but, don't forget to use that money instead for tax increment real estate financed projects.

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Oh dear, the Prop. 13 bugaboo promoted by the mathematically challenged.

Property tax revenue in California is far above what was remitted prior to the passage of Prop. 13. -even when adjusted for population growth and inflation. Homes turn over on average every 7 years in California and thus are constantly being reassessed at higher values.

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...the obvious problem is that state/local governments can not print money as desired.

The Federal Government has no such constraints and thus spends lavishly without limit.

Federal deficit & debt seems staggering, but few in government, academia, or the media see it as any grave problem.

Obviously then ... the Federal Government should fund all state/local government pensions.

Federal money is essentially unlimited -- (just consult Liz Warren on that)

I was thinking somewhat similarly.

The Federal government should resolve this dire crisis like it did the health care hoax with a bill patterned after the Affordable Care Act. They could name it the Affordable Pension Act. Problem solved!

In addition, I don't put much faith in the suggestions of those not involved in the actual process of risk-taking.

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The Gnome Pension Investment Plan:

1. In your budgeting, use the rate of return estimate that the Wall Street guy gave you in the sales presentation.

2. Limit your actual cash funding to the barest minimum, while you slash taxes and give money away in corporate subsidies.

3. Invest in arcane hedge fund and PE deals, that are iliquid and with high fees, and where there's no way to determine the actual rate of return.

4. Hope the next market crash happens after you are out of office.

Because if government had to fund its operations out of present receipts, then the true costs would be revealed, and government would get a lot, lot smaller.

How the politicians handled pensions is a crime, for which the plan participants don't bear the blame but will eventually bear the consequences, along with the rest of the pubic who allowed politicians to play those games.

But it's an accounting scandal, not a debt scandal.

However, deferred compensation is hardly a radical or irresponsible concept. And I have no problem with a government utilizing debt every bit as a corporation does: to invest in the future, and to spread the cost over the period of benefit, and to enable collective actions and investments that are not possible invididually or privately.

Public debt is an entirely different creature, like public employee unions which shouldn't even exist.

no it's not and yes they should

step back from the Ayn Rand

Public debt is politicians attempting to transfer costs to non-voters. Public employee union members get, effectively, three votes. Both involve ridiculously perverse incentives.

Are you a government employee?

Capitalism is wage theft.

Are you a slaveholder?

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When AG says public employee unions shouldn't exist, he's channeling FDR. Most of these unions were organized well after the "real" labor movement was already in decline, but somehow, desk jockeys scoop up the mantle of coal miners.

This is public choice 101. Public employees are not particularly evil, just human, and as such, they respond to incentives like humans do. The whole mess was so predictable.

Last week, Chicago public school teachers just won a 16% pay increase for a system where enrollment is down 9% in the past 4 years. CPS annual budget is ~$6 billion, but the pension shortfall (never mentioned in negotiations) is $10 billion by the city's own (erroneous) reckoning and more like $30 billion in reality.

The teachers struck anyway. The new (black, female, lesbian) mayor of Chicago is already being denounced as a tool of the patriarchy.

But I feel like the worm may be turning, even in blue Chicago. Taxpayers are pretty irate, the local news coverage isn't interested, but something is stirring.

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Lot of tribalism and nonsense on both sides here. We both want fiscally sustainable government that provides real services. Right?

Grandfather all current employees’ pensions pro rated with years of employment, and switch to defined contribution with 7% matching. Seal the deal with maintaining health benefits for Dems and allowing termination for cause for Republicans.

Allow the public sector unions to continue but allow for withholding of dues if the public sector union uses funds for political activities or fights termination for cause. Outlaw strikes for public sector unions to prevent bankruptcy of local governments.

Moderates for America.

Government should be limited to the provision of truly public goods, which is the only possible way to mitigate regulatory capture and rent-seeking. And public employee unions make no political or economic sense: there's no labor-capital dynamic and it's effectively three votes for the union members.

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In Illinois, the Supreme Court ruled that future benefit accruals for current employees could not be reined in, only new employees.

Which means the pension underfunding will only get worse for another generation.

Over the longest of runs, however, even public employee compensation comes under the eye of the market and budget makers. The problem is being solved by hiring fewer government workers. In the current jobs expansion, dating from February 2010, the economy has added 22.2 million jobs, and 22.1 million of them are in the private sector.

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There is a need to disentangle different policy mistakes: Are employees paid above market wages and if so why? Are employees paid in an inefficient combination of present and future income and if so why? Are taxpayers choosing an inefficient combination of present and future taxes and if so why?

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