Free Markets, Free People


State pensions and bankruptcy–a leftist’s lament

Dean Baker, over at HuffPo, headlines a post: “Debts Should be Honored, Except When the Money Is Owed to Working People” and says:

It seems to be the lesson that our nation’s leaders are trying to pound home to us. According to the New York Times, members of Congress are secretly running around in closets and back alleys working up a law allowing states to declare bankruptcy.

According to the article, a main goal of state bankruptcy is to allow states to default on their pension obligations. This means that states will be able to tell workers, including those already retired, that they are out of luck. Teachers, highway patrol officers and other government employees, some of whom worked decades for the government, will be told that their contracts no longer mean anything. They will not get the pensions that they were expecting.

I beg to differ. It seems that “lesson” was already taught with the specially done bankruptcies of GM and Chrysler where the bond holders were screwed in favor of unions and government.

But nevertheless, the simple reality of the situation in the states is this – they overpromised something for which they haven’t the revenue to fulfill.  What would Baker have them do except restructure that debt so it is both affordable and something they can manage?  The fact that a state promised something it hasn’t the means to produce doesn’t make what it promises sacrosanct.  Especially if the means for fulfilling it is more debt or much higher taxes for those who aren’t affected by the problem.

This is the general story of public pensions. Public sector workers are often better situated than their private sector counterparts, in that they even have pensions. But study after study shows that these workers paid for their pensions with lower wages than their private sector counterparts. It is tragic that so many private sector workers cannot count on a secure retirement, but it won’t help them to make workers in the public sector equally insecure.

What’s even more tragic is the fact that Baker and the left can’t see that state governments have badly managed those retirement funds just as the federal government has with Social Security.   It isn’t just the states who are in trouble – they’re just having to face the reality of their mismanagement first.  Facing the reality on a national level is coming in a few years.  And it won’t be pretty.   In the meantime, this is the reality states must deal with, and unlike the federal government they can’t create money out of thin air with the click of a mouse.

Additionally he notes that many in the private sector “cannot count on a secure retirement”, yet we don’t see him whining about ensuring they’re covered.  You know, tough beans and all, folks, but the public sector folks vote Democratic.

So Baker is left with an essentially emotional argument to try to shame the right (who somehow became the bad guys here) into going into even more massive debt at a state level to pay workers what they are “due.”  Well, since I had nothing to do with the states making promises they couldn’t keep, I feel no obligation to bail them out when their promises are found to be empty.  Baker’s cry that the right believes people should pay debts and that right-wing lawmakers conspired to rewrite bankruptcy laws to make it harder but now want to help facilitate state bankruptcies is facile at best.

As mentioned, state pension plans have been in trouble for years – even in good economic times.  Warnings and calls to do something have essentially fallen on deaf ears as politicians preferred to kick the can down the road (just as they have  done with Social Security).  Now, at least for a number of states, that road has come to a dead end.  While it may be emotionally satisfying to argue that the right wants people to pay their debts and charge them with hypocrisy, it should also be understood that the rewriting of bankruptcy laws was intended to take the action from being a first choice for those who used existing law to shirk paying debt when they probably could, to a law that was a available to those who had done all they could to pay their debt and found it impossible because they hadn’t the means to do so.

Whether he likes it or not, that’s where many states are at this point.

Of course Baker doesn’t offer a solution (although I think it is pretty well implied), just a whine.  The reason he doesn’t offer a solution is the solution is obvious – even if he doesn’t like it.  Restructuring the debt may reduce the pension amounts paid, but it doesn’t necessarily mean they’ll be eliminated altogether.   As for what people were promised (and planned their lives around) vs. what they get, they need to look to their state leadership for answers – not taxpayers.

~McQ

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23 Responses to State pensions and bankruptcy–a leftist’s lament

  • It is tragic that so many private sector workers cannot count on a secure retirement, but it won’t help them to make workers in the public sector equally insecure.

    False…and stupid…juxtaposition.  It WILL help EVERYBODY involved in the larger economy if that economy is not burdened with a debt load that cannot be serviced without IMMENSE taxation.
    By a TWO to one margin, polling shows Americans DO NOT think bailing out states is wise.  I can see little taste for it in the new (sane thus far) Congress.
    This leaves voluntary bankruptcy by states (they cannot, as sovereigns, be compelled into bankruptcy), or some other process that I frankly can’t see…except out of a creative court.  Classical contract law recognizes that a contract is not breached if performance becomes impossible.  IMNHO, that would be a stretch here…but…

  • McQBaker’s cry that the right believes people should pay debts and that right-wing lawmakers conspired to rewrite bankruptcy laws to make it harder but now want to help facilitate state bankruptcies is facile at best.

    Yes and no.  While I absolutely agree that “the states” got themselves into this mess – courtesy of generations of voters who didn’t pay attention to what their elected representatives were promising – there is much to be said about honoring one’s commitments, no matter how stupid they seem in hindsight.  It’s like making a foolhardy bet: you don’t use your stupidity as an excuse to welsh.

    There is another dimension beyond a point of honor, and that’s teaching a lesson: if the people of the bankrupt states have to suffer years of high taxes and reduced services to pay the pensions and benefits of all those state workers they hired over the years, then perhaps they’ll learn to think twice about hiring more in the future and offering them such generous benefits.  Indeed, it is to be hoped that everybody learns a lesson from this coming disaster.

    Finally, what would bankruptcies mean for not only the credit ratings of the states involved, but also for the general rule of law?  Many of us railed against the high-handed and frankly despotic treatment meted out to the GM shareholders by The Dear Golfer because it was a breach of contract and a brazen contravention of the spirit (if not the letter) of the law.  Engineering legislation that allowes states to get out of their debts seems to me the same sort of thing.  And if the states can get a dispensation to get out of their debt this time, what’s to stop them doing the same thing over and over again?  Why should anybody trust them with a loan when there’s clear evidence that, if push comes to shove, they’ll get Uncle Sugar to cancel it for them?

    • Yeah, doc, you are mistaken about the bankruptcy process.  It is HIGHLY evolved and rule driven…at least PRE-Obama…and very rational.  In the kind of bankruptcy we are considering here, debt is not dissolved, but restructured (which often means LOWERED) according to a ranking system.  A plan has to be concocted, with each creditor class represented and contributing, for the debtor to pay what the court determines is feasible over a period of time.
      I KINDA agree with your voter responsibility point, but I am not sure if the voters really knew much.  That is a badge of fraud, to my mind, and it removes culpability to a degree.  The tendency to collude between elected pukes and their unionized workers is ONE very BIG reason there should be no such thing as a public-sector union.

    • There is another dimension beyond a point of honor, and that’s teaching a lesson: if the people of the bankrupt states have to suffer years of high taxes and reduced services to pay the pensions and benefits of all those state workers they hired over the years, then perhaps they’ll learn to think twice about hiring more in the future and offering them such generous benefits.  Indeed, it is to be hoped that everybody learns a lesson from this coming disaster.

      >>>>  I didn’t hire anyone though.  And these things are not always done in sunlight, subject to public review

      • I’d wager most people aren’t even aware its the reason why CA is in trouble. And the growth of bureaucracies and jobs they “create.”" Most folks have no idea. Me neither until recently.

    • There are several problems with your post.  The first is the public worker unions bought the legislators via campaign contributions.  In other words, they end up owning both sides of the table.  Second, it has not been true for a long time the public employees suffer from smaller salaries than those in the private sector.  Third, there really is no way to pay these pensions.  If taxes are increased, then people leave.  Then, the remaining people get taxed even more and more of them leave.  This is a spiral down the drain.  Either way, these pension obligations will not be met.

      • Omnibus response:

        Ragspierre[Bankruptcy law] is HIGHLY evolved and rule driven…at least PRE-Obama…and very rational.  In the kind of bankruptcy we are considering here, debt is not dissolved, but restructured (which often means LOWERED) according to a ranking system.  A plan has to be concocted, with each creditor class represented and contributing, for the debtor to pay what the court determines is feasible over a period of time. [emphasis mine - dj505]

        I don’t disagree that under normal circumstances bankruptcy is a rational, well-understood process.  The problems are I see it in this case are that:

        1. As you say, The Dear Golfer is involved, and so there will be plenty of impetus / opportunity for him to ignore the normal process and use this as another opportunity to reward his thuggish supporters with taxpayer money (cf. GM / Chrysler);

        2.  These are not individuals or corporations going bankrupt but rather sovereign states.  As I understand it (please correct me if I’m wrong), there isn’t a lot of legal framework / history to deal with such a situation, and;

        3.  The sums involved are enormous, and the number of people who may be hurt (through even partial loss of benefits) is equally large.  That puts even more pressure on the politicians and courts to ignore the law and make sh*t up as they go along in the interests of “fairness”.  Can you imagine, for example, what the Ninth Circuit Court of Appeals or The Wise Latina would do in such a case?  “Law?  WE DON’T NEED NO STINKIN’ LAW!”

        sharkI didn’t hire anyone…

        Neither did I, but it seems to me that rule of law requires that we honor our collective commitments.  I once heard the United States described as the easiest club in the world to join, but the one that also has the highest dues.  Even though I didn’t vote for many of the things that “the club” has agreed to do, as a member I have a responsibility to pay my share of the costs.  I just hope that we will all remember this when it comes time to elect new club officers.

        Rick Caird[T]he public worker unions bought the legislators via campaign contributions.  In other words, they end up owning both sides of the table.

        Whose fault is that?  Answer: the people of the various states who kept putting these yahoos into office time and time again.  I recall being corrected here once about the importance of state / local government when I placed too much emphasis on DC; I see now how right the person who corrected me was.

        At any rate, unless the “contract” between the various states and their employees / pensioners was somehow made under fraudulent or coercive terms, then it seems to me that it is a valid contract that ought to be honored.

        Rick Caird[I]t has not been true for a long time the public employees suffer from smaller salaries than those in the private sector.

        I don’t disagree, but I suggest that it is immaterial whether or not the promised pay / benefits are “excessive” or not: they were promised, and I say that it is central to upholding the rule of law to see to it that all parties of an agreement honor the terms of that agreement no matter how stupid they may seem in hindsight.

        Rick Caird[T]here really is no way to pay these pensions.  If taxes are increased, then people leave.  Then, the remaining people get taxed even more and more of them leave.  This is a spiral down the drain.

        I absolutely agree with what you say and I think that it has bearing on what Ragspierre writes above: a contract isn’t considered “broken” if a party CANNOT honor its terms for some reason.  However, it seems to me that the states are hardly even trying: they do not seem to be implementing plausible plans to meet their obligations but instead are just throwing up their hands and crying for somebody to either bail them out or fix it so that they don’t have the obligations any more.  They want to keep spending at current levels even while poormouthing about how they can’t pay their debts.  I would have more sympathy if Sacramento or Springfield (or Raleigh, for that matter) called for assistance AFTER slashing state spending to the bone AND putting legal frameworks into place to guard against getting into such a situation in the future.

        Rick Caird[T]hese pension obligations will not be met.

        To put it mildly, that sucks.  While I haven’t got any love for unions (especially public sector unions), I think it’s downright dirty to tell a retiree that he can’t expect any more checks: “Yeah, I know that you held up your end of the bargain and put in your time.  I know that you counted on the retirement THAT WE PROMISED YOU and therefore had no reason to save up or establish your own retirement fund.  But, you know, we’re broke (mostly because we foolishly agreed to pay you waaaaay too much).  We don’t feel like paying you any more, so f*ck off and die.  Maybe if you’re lucky, we’ll pay you half of what we owe you.  Now, if you’ll excuse me, I have to see about getting a contract for my brother-in-law to build a teapot museum.”

        All those pensioners will go on the dole.  They will be paid, just not as much as they thought they’d get, and not by the people who promised them in the first place.

        • Presumably…which is a BIG presumption…there would be a VERY elaborate drafting process that would entrain both judges and legislators in drafting the code.
          The amount are big, but that is simply a matter of scale.  Remember, Enron passed though bankruptcy.

          • Color me cynical, but it occurs to me that the legislators involved would include people like Bawney Fwank.  You know: the people that MiniTru assures us are “experts”?

            As for an elaborate drafting process, one could say that ObamaCare is the result of such a process (over 2k pages is pretty friggin’ elaborate).  Our country can’t take too much more “elaborate”.

            Anyway, the legislators are the ones who set up this rotten system and stand to profit most from keeping it afloat.  THAT will be their principle goal.

          • Doc, this is the other end of the spectrum.  I have on my desk a little blue book that IS the entire bankruptcy code.
            I would assert that ObamaCare is NOT elaborate, but profligate.  BIG difference!
            The STATE legislators have a DIFFERENT set of interests (generally) than does Congress.
            I don’t suggest this is a simple problem, with simple solutions.  I suggest that bankruptcy CAN provide a very fair, predictable, KNOWN set of rules, assumptions, and procedures that would be better than ad hoc stuff.

          • We are in accord: bankruptcy is, can be and SHOULD BE pretty straightforward.  Heaven knows that we’ve got a few hundred years of practice at it in our country, so it’s hardly unknown territory.  But if the politicians can meddle because this situation is “extraordinary” or “an emergency” or [insert scare phrase here], then they WILL, and the straightforward process gets tossed right out the window.

  • The public sector employees that Mr. Baker wants to paint as victims are not innocent bystanders in this problem.  They made a bargain.  The bargain was this: The union will utilize its dues to influence politicians to provide union workers with highly lucrative retirement benefits, and incredible job security.  The politicians, in exchange for the support of the unions, will promise TAXPAYER MONEY (not their own money) to pay the wages and benefits of the public employee.
    This is corruption, somehow legalized… The only two parties who benefit (public employee union workers by the benefits and job security, and politicians by the financial support of the unions) are not the people who pay the tab in the end.
    I wonder if the question at hand, instead of being “should the states be accountable for the contracts they made,” should be, “can you enforce a contract where what I’ve promised is my neighbor’s money?”  You may say, “Yes, but the voters elected those people.”  Ah, but not ALL of the voters elected those people, and a good number of the people who did elect those people were the very people who benefited from the corrupt bargain.
    It is a difficult question, because it is morally and legally right to meet your obligations.  On the other hand, the corruption at the heart of this issue makes it difficult to feel an obligation to honor the contracts as written, particularly when it is not those who made the contracts (politicians and unions) that hold the obligation, it is the taxpayers.  It seems reasonable to tear up the contracts as written, and come to a reasonable settlement on what should be paid.

    • It is a difficult question, because it is morally and legally right to meet your obligations.

      When that is possible, yes.  But the very concept of bankruptcy was part of our “NOT Europe” design, and is (interestingly) a constitutional principle.
      In the British Isles, it was common to be thrown in a debtor’s prison if you had obligations you could not pay.  It could be a life sentence.
      Generally, as an economic principle, bankruptcy makes a lot of sense, as it provides a very rational means of providing for people or businesses to move through a state of insolvency toward sound financial footing or liquidation, while providing creditors assurance that they will see all that they can of their bargained-for deal.  Credit card companies (which typically get little or nothing, their debt being unsecured) have talented actuaries who crank the prospect of consumer bankruptcy into their interest formula.  This is part of what we call “business certainty”, and it allows folks to rely on the rules (up ’til Obama) in their planning for business risk.

      • I agree.  The point of my final sentence: “It seems reasonable to tear up the contracts as written, and come to a reasonable settlement on what should be paid” is that, through the bankruptcy process, a reasonable amount (as opposed to the amount resulting from the corrupt bargain struck by unions and politicians and foisted on the taxpayer) could be paid and the taxpayer could be out from under the burdensome obligation.

  • Baker also leaves out the fact that public sector workers are now paid on par or greater than private sector couterparts AND, have greater job security primarily through union protections AND have more lucrative retirement options, yet private sector workers and businesses are primarily responsible for paying for it.  This is unfair, irresponsible, but mostly it is unsustainable.  I would ask Baker this:  Would he run a business this way?  Would he run his own life this way?  I assume he would answer no (if he is sane) and if so, why is ok for government to operate this way?  Is it only because those who benefit from it are overwhelmingly Democrats?

  • members of Congress are secretly running around in closets and back alleys working up a law allowing states to declare bankruptcy

    There seems to be some sort of leap of thought that these “members of Congress” are only of one political stripe.
    These public employee pensions come from many different directions.  Whether it be by level of government (federal, state, county, municipality, etc.), different locale, etc.  Each of these groups of pensioners was promised by a different set of politicians, with different political leans.  There is no one solution, and every solution will not be pretty.

    • Even should the code provide for state bankruptcy, it will HAVE to be voluntary.  A thorny…but kinda GOOD…constitutional issue would forbid the Federal bankruptcy courts from assuming control over sovereign states.
      That COULD be a very worthwhile fight in this climate.  I heard Krauthammer recognize that their is a new thing abroad in the land…a popular CONSTITUTIONALIST movement.

      • I’ve seen it suggested that any state that goes bankrupt would revert to territorial status: no representation in the Congress, no voting in federal elections, etc., and a “territorial governor” would be installed in the former state (now territorial) capital.

        While the idea of tossing out the idiots who’ve run their states into the ground is appealing, can you imagine how The Dear Golfer would govern the “territories”?  Jebus…

      • try to shame the right

        This problem is so big that those “rich” folks (on the right LOL) aren’t the only ones who will be paying

  • I am a retired state employee from PA.  PA’s pension has nothing to do with unions, in fact, it’s been in existince since 1923.  PA pensioners don’t get automatic COLAs so over time whatever pension benefits a retiree receives will be seriously impacted by inflation.  Fund assets are from employee contributions, employer contributions, and investment returns.  The states have internal mechanisms to deal with budgetary issues.  PA have underfunded the fund, by withholding payments, for a long time.  The fund has been virtually self-sustaining for years and now all of a sudden we want to make it easy for politicians to reneg on binding contracts on a whim?  Good luck with that.

    States are constitutionally sovereign.  I see a real problem with the feds meddling with state business, which is what would happen with their assets being supervised by a federal bankruptcy court.  Pension issues can be resolved without creating an unconstitution process to make it easy for politicians to look good politically at the expense of being morally just.  In fact, PA has already changed the retirement code for new employees. 

    That aside, PA has a very bloated state legislature.  It is twice the size of California’s with a population that is 1/3 its size.  In addition, PA has historically been ranked 49 out of 50 states in the number of state employees per capita.  Budgetary problems here are the result of just plain poor management by the executive and legislative branches.  Another point, state employee unions are weak.  They get too much credit for pulling strings.

      

  • Glad to known that cubicle monkeys are now considered “the working man.”

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