This is the second in a series of follow up articles based on The John Birch Society's participation as an exhibitor at this year's National Conference of State Legislators in Philadelphia the week of July 20.

If Bernie Madoff ran your state pension plan you might be better off. At least Mr. Madoff is convicted and thrown in jail and not able to do more harm for the next 150 years or so. The politicians in charge of state pension plans around the country, however, are still loose and burying state employee retirement nest eggs deeper into the ground. The growing intrigue over how they are going to avoid a Ponzi like finish to their pension schemes helped make the State of State Pension Plans seminar at the National Conference of State Legislators (NCSL) one of the week's standing room only events.

While the conditions of state budgets around the country are dismal, the condition of state employee pension funds are actually worse. Where state budget cash flow has to be resolved on a yearly basis, state pension dilemmas can, and usually do, get pushed forward to "sometime in the future." This year though, the future is suddenly much closer owing to the collapse of the nation's house of cards financial system and all the state houses of cards with it.

Even back in 2004, a year or two into the FED's, post dot.com bust, real estate bubble, re-inflation economic boom, most state pension plans in the country were underfunded. Pension kitties were typically short 15 to 35 percent versus their long term liabilities — the technical financial term for those pesky promises that eventually come due as payouts to retired employees.

One of only three states that did earn high marks for being 100 percent funded was North Carolina. But, proving how fleeting glory can be, the North Carolina pension fund at the time was also a top holder of GM corporate debt. (North Carolina administrators say they sold most of it off before things got really bad.)

No shock, state pension funds are now in worse shape than in 2004. Deposed New York governor Elliot Spitzer was not at the conference, but a week earlier he pegged the total unfunded liabilities of state pension plans to be around $1 trillion dollars. Speaking in the seminar, public employer asset management advisor Jim Link painted a grim picture as well. However, he left the door open for hope if states take the necessary steps to protect their still considerable war chests of pension capital.

The primary steps Mr. Spitzer, Mr. Link and state legislators have started talking about are restructuring pension plans — to lower "guaranteed" defined benefit payouts where not prohibited by state constitutions and everywhere to initiate two tiered benefit plans that eliminate defined benefits for new employees. That is, to start bringing new state employees in on 401K versions of state pensions that expose their retirement payouts to the same risks of the financial marketplace as enjoyed by the dwindling number of private sector workers.

Nancy Kopp, Treasurer for the state of Maryland, however, was not buying the talk of moving from defined benefit plans (fixed returns) to defined contribution plans (fixed contributions with market performance based returns). The baby boomer graduate of Wellesley College appealed to the audience to not give in to the calls to scale back on benefits to public service employees, averring that their retirements as, "Productive senior members of our society who came before us," should be kept secure. Kopp sees retirement plans as part of the total benefit package for public sector employees. She offered rhetorically, "I can't advise young people to enter public service, if they couldn't support their families."

Illinois state senator, and CPA, Chris Lauzen countered Kopp's emotional arguments with a sanity check approach. The baby boomer graduate of Duke University opened his presentation by laying out the bitter facts for his state: "Illinois has become unhinged from financial reality. Our pension system is bankrupt. We have to start paying off the debt."

(Take a wild guess which political parties Kopp and Lauzen belong to.)

Lauzen actually supplied data to bolster his position. The problem is that with only just over 60 percent of its pension liabilities funded, if Illinois does not make radical changes in its system, it is going to soon be following the social security path of the federal government and have to start making pension payments directly out of yearly tax revenues. Keeping in mind that like most states, about half of what is taken in as revenues goes to fund public education, in about 20 years, pension plan liability payouts will take up the other half of Illinois state tax revenues! And, that's under the "rosy" scenario where Illinois is able to generate an 8.5 percent return on investment (ROI) from its pension assets. If Illinois is only able to generate a 6 percent ROI on its pension assets, Lauzen estimates that pension liability payments will absorb 100 percent of the state budget in just ten years. Obviously, something, or more precisely, someone will have to give before then.

Anticipating that it will be taxpayers who are first asked to give, Lauzen supplied additional data for thoughtful consideration. Illinois has 5,200 retirees from state universities and Chicago colleges who are each going to pick up over $100,000 in pension checks this year. In just over three years this $100K retirement sinecure club will double to 10,000 retirees. Even Treasurer Kopp would have a hard time explaining to a family of four living on $60,000 of private sector income with no pension benefits that they need to ante up for sales and property tax hike — to help the state make its $100,000 a year pension payments to the retired professor of Marxist philosophy living large across town.

Going further, Lauzen supplied a spreadsheet listing the names and projected yearly pensions of the top 100 school administrators in Illinois as of 2007 (slide 9). Lauzen calculated the total pension liability for these 100 administrators to be $890 million dollars. This may sound like chump change now for taxpayers who have been forced to get used to pumping tens of billions of dollars into the bonus checks of Wall Street executives who trashed their companies, but consider this; If students were cars, most public school systems in the U.S. would have beat GM and Chyrsler into bankruptcy court. (While teachers languish under conditions they do not control just like workers on the auto factory floor, everything that can be said of U.S. automotive and finacial executives can be equally said of public school administrators in the United States.)

There is no easy way to diffuse the state pension time bomb. Any state employees and retirees who imagine they can weather the financial storm on the backs of a continually shrinking pool of private sector workers have been misinformed by someone they should not have trusted. Americans are going to have to wrestle back the ability to produce things the rest of the world wants to buy, rather than trying to continue to live on debt and IOUs. This is the best lesson those in the education half of state employment system should start teaching.

If they would like help with their lesson plans, The John Birch Society and its volunteer members stand willing to provide this valuable public service free of charge.

End note: What will happen to the value of U.S. Treasuries if China and other foreign sources stop buying? Well, you can bet that sitting at number 5 on the list of biggest U.S. Treasury debt holders with $522 billion dollars, state and local governments have some interest in the answer. Oh, and yes, you guessed right. The biggest share of that $522 billion book entry is sitting in state pension plans. So, with each monetized dollar of federal stimulus money states take in to balance their bloated spending budgets, they drain off more value from heir pension plans.

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danwhitehead1 said:

	It sounds to me - - - - - - like justice and punishment are swiftly winging in; it's not going to be pretty.
	report abuse vote down vote up

August 06, 2009
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