By RiShawn Biddle | There’s nothing more infuriating to public sector unions than when state and local governments attempt to scotch decades of deals made with the unions in order to shore up virtually-insolvent pensions.

So it wasn’t surprising when Illinois affiliates of several unions, including the American Federation of State County and Municipal Employees, the National Education Association, the Service Employees International Union and the American Federation of Teachers, came together in January to sue the state for daring to address its pension woes by passing a modest reform plan.

As far as the unions were concerned, it was an outrage that the Land of Lincoln was addressing its $95 billion in underfunding – the nation’s second-largest tally of pension liabilities after California – by reneging on its “promises.”

The state would be requiring government employees to retire at age 60 instead of 55, still five years earlier than the average retirement age for private-sector workers. Workers could also no longer use their sick and vacation days to boost their already-generous annuity payouts.

Proclaimed Michael Carrigan, the president of the AFL-CIO’s Illinois affiliate: “[Government workers] will not stand by while politicians try to take away their life savings”.

All the puffery would be convincing except for one inconvenient fact. The unions themselves are as much to blame as the politicians for the mess the state pensions, and their rank-and-file members and pensioners, are in.

The AFSCME affiliate controls six of the state employee pension’s 13 board seats. This includes three current and former local presidents, along with the head of its unit for retired rank-and-file workers. Add in the presence of Danny Silverthorn, an appointee of Gov. Pat Quinn who formerly ran another union, the West Central Building and Construction Trades Council, and public-sector unions have ensured their sway over the pension’s affairs.

Meanwhile the NEA affiliate, the Illinois Education Association, along with an affiliate of the American Federation of Teachers, hold full sway over the Teacher Retirement System’s (TRS) operations. Cindy Klickna, the president of the NEA affiliates, holds a seat, as does Marcia Boone Campbell, the secretary-treasurer of the AFT chapter.

Thanks to the fiscal fecklessness that AFSCME, NEA, and other public-sector unions, Illinois has managed to make its own pensions even more virtually-insolvent than those of other states. The TRS alone is officially underfunded to the tune of at least $56 billion, and more-likely to be $76 billion in the hole, or 36 percent more than reported, according to an analysis by Dropout Nation using a formula developed by Moody’s Investors Service.

As for the state’s pension for other civil servants? It is officially $23 billion in the red – and more likely, $30 billion, or 30 percent higher than reported.

All across the country, public-sector unions effectively control what are supposed to be government-controlled pension systems. They have helped pile up long-term liabilities that are ultimately borne by taxpayers. Thanks to state and local laws, along with the massive campaign largesse, public sector unions are often the ones truly in charge of overseeing government pensions.

Chicago’s collection of pensions are in as much a state of virtual insolvency as that of the Illinois state government. The Second City gained some help last week when the state legislature passed a bailout plan for two of its pensions. The Public School Employees’ Pension and Retirement Fund of Chicago, which officially reported a deficit of $8 billion in 2012 – and is likely underfunded to the tune of $11 billion – is, for all intents and purposes, a division of the AFT’s Chicago local, which controls eight of the 12 seats on its board.

The California State Employees’ Retirement System, the nation’s largest pension, is another government annuity system that is effectively controlled by unions. Five of the 13 seats on CalSTRS board – including that held by the board president – are controlled by an SEIU affiliate, the California State Employees Association, and the California School Employees Association, the nation’s largest union for school district workers who aren’t teachers.

When you factor in the presence of state officials such as Comptroller John Chiang and Treasurer Bill Lockyer – both of which owe their elections to support from CSEA ($40,700 in donations in 2010 alone), the two unions have virtual control over the fund.

Meanwhile in Massachusetts, the SEIU’s locals there control two of the five seats on the board that oversees the state’s civil servants’ pension, while another union, the Retired State, County And Municipal Employees Association, holds a third seat. The dominance of unions over the pension is one reason why the civil service pension is underfunded to the tune of $28 billion – more likely $38 billion.

With states facing at least $914 billion in unfunded liabilities, according to the Pew Charitable Trusts, cost-cutting governors, along with government reform and school reform advocates, have pushed aggressively to overhaul pensions.

Public-sector unions have pushed back just as hard. For the past two years, the AFT has run what can best be called an enemies list of money managers whose executives have either backed school reform initiatives or other efforts not to its liking.

One money manager on this year’s list: GCTR, the Chicago-based money manager formerly ran by Bruce Rauner, the Republican nominee for Illinois governor, who has run afoul of the union for founding a collection of charter schools – and aroused the ire of nearly every public-sector union for his support for replacing pensions with 401-K-like defined-contribution plans.

But for decades, unions haven’t had to resort to such tough tactics to keep pension trustees and state governments in line. Why? Because they have been the ones running the show in the first place.

Thanks to state laws, which often require a certain number of pension trustees to be elected by public employees. Because civil servants are often forced by law to become members of public sector unions, outfits such as AFSCME and NEA effectively control who gains seats on pension boards.

In Illinois, for example, AFSCME regularly informs rank-and-file members on who to choose for seats on the state employee pension. The AFT’s Chicago local’s control of pension seats goes even further: It even holds the elections for pension trustees, with its governing coalition all but assuring that its top players win their spots.

The role of public-sector unions as major players in state and local politics, both through their vast campaign war chests and the armies of workers they deploy on behalf of their favored politicians, has also allowed for them to control pension affairs. AFSCME spent $35 million during the 2011-2012 election cycle, according to the National Institute for Money in State Politics, while the NEA spent $70.1 million, the single-largest spender among public-sector unions.

Even in states where pension trustees aren’t chosen by employees, unions can use their cash hordes to maintain influence. In New York State, public-sector unions accounted for 13 percent of the $3 million raised in 2010 by Thomas DiNapoli, who, as comptroller, serves as sole trustee over the Empire State’s pensions.

For AFSCME, NEA, and AFT, in particular, influencing all aspects of pension operations have proven to be beneficial to them. The grand bargain is that they collect millions in union dues in exchange for ensuring that the rank-and-file gain perks such as generous pensions and the ability to retire earlier than would be possible in the private sector.

But governors and legislators are starting to face the reality that defined-benefit plans are unsustainable. They have taken steps to force government workers to stay on the job longer, cut back pension benefits for younger workers, and force those nearing retirement age to contribute more to their retirements.

These steps, which will become more-aggressive in the next decade, have put unions on the defensive because they can’t assure members that they can keep their end of the bargain. At this rate, public sector unions may not even be able to get allies on pension boards or statehouses to do their bidding much longer.

RiShawn Biddle is editor of Dropout Nation, co-author of “A Byte at the Apple: Rethinking Education Data for the Post-NCLB Era,” and a communications and public policy consultant. Follow him on Twitter @dropoutnation. This article originally appeared on Rare and is cross-posted here with permission.

By Steven Greenhut | Public-sector unions and their allies often turn back efforts at reforming their pension plans by simply denying that there’s any sort of problem. In California, the Legislature and governor claim that they have fixed the problem when they passed a modest pension-reform act applying to the state’s biggest retirement system (the California Public Employees’ Retirement System, or CalPERS). Yet even when everyone agrees that pension liabilities are at a crisis level, there are few ways of addressing it.

For instance, the governor and top legislators have pointed to massive, annual shortfalls at the California State Teachers’ Retirement System (CalSTRS). CalSTRS officials and the Legislative Analyst’s Office have called for annual infusions of as much as $4.5 billion to keep the system solvent. There’s no debate here about the size of the problem and what it will mean for teachers’ pensions. But there’s virtually nothing to be done.

Part of the problem is political. The powerful California Teachers’ Association has even fought a modest bill that would divert an extra couple billion dollars in surpluses this year only to the system. A common suspicion: Union supporters are more interested in having extra cash available to fund a brand-new universal preschool program pushed by the Senate president than in fixing the creaking teachers’ retirement system. That new program would create many union jobs.

CalPERS has been handling its underfunding problem in part by increasing the fees that local agencies must pay. That has been stressing city budgets in particular, as they must come up with more money to pay for their employees’ pensions.

CalSTRS is set up differently. It must go to the Legislature to get an OK to increase contribution rates. And the union-dominated Legislature isn’t about to approve such a thing. So, desperate to find ways to backfill its emptying coffers, CalSTRS’ leaders came up with a complex but clever plan to increase contributions.

Individual teachers would contribute an extra 2 percent to the CalSTRS system. In exchange, the Legislature would turn an annual salary adjustment (similar to a COLA, but without compounding) into a vested benefit, meaning that it could never be taken away. Teachers have been getting that benefit every year for many years and there’s no sign that the Legislature is going to stop giving it to them. But they could possibly stop if finances get too tight, so CalSTRS sees the guarantee as something of value. Here is my column on it for U-T San Diego.

Because of various California court decisions, agencies cannot take away vested pension benefits — even going forward — unless they give back something of equal value. So CalSTRS can’t simply ask employees to pay more each year, but the system desperately needs more cash.

The problem, though, is that this “California Rule” is at the heart of the state’s pension problems, and explains why some cities face bankruptcy. Reforming pensions for new hires only doesn’t solve the problem. In San Jose, for instance, pension costs have soared 350 percent in 10 years and have led to cutbacks in the police force. That city approved wide-ranging pension reform that would have given employees a choice of lower benefits or higher contributions going forward. The courts rebuked that part of the measure, even though San Jose officials argued that their charter-city status allowed them to do this.

So this definition of vesting leaves fewer options for officials. The CalSTRS plan brings in a little more cash in the short term, but it could create more of a problem in the long term by further expanding an area of benefits that are off limits from tinkering.

Localities are facing a declining number of options. The San Jose mayor’s plan for a statewide ballot measure to specifically allow changes to benefits for current employees was derailed by a union-friendly attorney general who gave the initiative a biased summary that would have made it nearly impossible to pass. And the courts have shown no willingness to chisel away at the vesting protection. And even after cities have gone bankrupt (Vallejo and Stockton, for instance) council members who are allied with or fearful of unions have chosen not to confront CalPERS and have cut programs and raised taxes while leaving pensions whole.

Even after bankruptcy, Vallejo is in trouble again and an analysis suggests that Stockton might have budget problems again in four years.

San Diego officials have been implementing a pension-reform plan that mainly tinkers with pensionable pay and isn’t dependent on new court interpretations — and Ventura County is attempting to follow that approach. Even that reform model is being challenged by a state agency that is behaving like an arm of the public-sector unions. (It has claimed that a ballot measure is in essence an unfair labor practice.)

Something has to give somewhere. But as of now, the only ones who will have to give more are taxpayers. It’s a sad story about how powerful interest groups can halt reasonable solutions for purely selfish reasons.

Cross-posted from Public Sector Inc. with permission.

By Mike “Mish” Shedlock | Bridgewater Associates did an analysis of pension funds recently and concluded 85% of them will fail if returns average 4%.

Bridgewater notes that public pensions have just $3 trillion in assets to invest to cover future retirement payments of $10 trillion over the next many decades. It would take an investment return of roughly 9% a year to meet those obligations.

With the 30-Year long bond yielding a mere 3.5% and with stock valuation through the roof, I expect negative returns for 7-10 years.

Stretched out over 30 years, 4% seems about right. 9% is out of the question.

CNBC has further analysis in Report: 85% of pensions could fail in 30 years:

Influential and well-regarded hedge fund Bridgewater Associates Wednesday warns public pensions are likely to achieve 4% returns on their assets, or worse. If Bridgewater is right, that means 85% of public pension funds will be going bankrupt in three decades.

Bridgewater came to these conclusions by stress testing the nation’s public pension plans, much the way banks need to be evaluated on what could happen given a wide range out outcomes.

Many pension observers make the claim pensions will achieve 7% to 8% returns. But even if that assumption is correct, which is unlikely, public pensions are looking at a 20% shortfall, Bridgewater says. A 4% return is much more likely, the firm says.

Bridgewater set up a sophisticated model to simulate many of the possible market environments to see how they would affect public pension’s resources. In 20% of those scenarios, public pensions run out of money in 20 years. And in 80% of the scenarios, public pensions run out of money within 50 years, Bridgewater says.

Massive Number of Municipal Bankruptcies on Horizon

I wonder what Bridgewater’s model would predict starting with losses for the next seven to ten years, because that is what I think is highly likely.

Given the only way to shed pension obligations is bankruptcy, one hell of a lot of municipal bankruptcies are on the horizon unless some other legal maneuver is found.

Mike “Mish”Shedlock is the editor of the top-rated global economics blog Mish’s Global Economic Trend Analysis, offering insightful commentary every day of the week. He is also a contributing “professor” on Minyanville, a community site focused on economic and financial education.

By Jack Dean | One of the largest and best organized pension reform groups in California is Citizens for Sustainable Pension Plans in Marin County.

Wednesday evening CSPP presented a debate in San Rafael featuring candidates for the Marin County Board of Supervisor in Districts One and Five — Toni Shroyer, Judy Arnold, Susan Adams and Damon Connelly. Moderator of the event was Dick Spotswood, columnist for the Marin Independent Journal. The video runs nearly two hours:

The debate was covered by Nels Johnson of the Independent Journal.

By Steven Greenhut | California’s governor and legislators have been almost giddy about the state’s balanced budget and they simply ignore the clear evidence that the state remains awash in debt. Its budget is balanced in the same way a person’s budget is balanced if they meet the bare minimum payments on a host of credit-card debts. Sacramento Bee columnist Dan Walters published a good piece debunking all the Capitol feel-goodism:

“To Brown, et al, the budget is balanced because it provides enough money to pay the obligations that he and the Legislature choose to pay. But when what they choose not to pay is included, the budget is billions, even tens of billions, of dollars out of balance. They choose, for instance, not to include a $70-plus billion shortfall in the trust fund that pays teachers’ pensions. … They also choose not to include a $60-plus billion unfunded liability for the health care of retired state employees and there’s really no way for that debt to be shared. It will be paid, sooner or later, from the state budget – and it, too, is growing by the day.”

And he ticks off many more billions in debt that is piling up. Meanwhile, state Democratic leaders are coming up with new spending programs (i.e., free preschool), which explains why they don’t want to worry too much about paying for the old programs. The Democratic approach has been to just ignore critics and keep saying how great things are. This is a great illustration about why it was so wrong for voters to approve Prop. 30, which increased taxes. The more money that comes in, the more quickly the state officials will spend it. They only address problems when there is a revenue crunch. More money just lets them avoid making hard choices.

This post originally appeared on Public Sector Inc. and is cross-posted here with permission.

By Jack Dean | Longtime pension reform activist Marc Garmin, editor of the Vallejo Independent Bulletin, shot and edited this excellent video. Introducing Chuck Reed is former Vallejo City Council Member Stephanie Gomes, who provides some background on the role pensions played in the bankruptcy of her city.

To read the accompanying article, visit the website of the Vallejo Independent Bulletin.

By Jack Dean | Sacramento-based Pacific Legal Foundation has filed a complaint and petition for writ of mandate in California Building Industry — Bay Area v. City of San Ramon.

According to PLF’s weekly president’s report, in this case the City of San Ramon is imposing a new special property tax district, which will levy a tax on landowners of undeveloped lots without providing any additional services. The Mello-Roos Act specifically forbids such a “pay something – get nothing” special property tax. And because the proceeds will be used for general government services, the tax also violates California’s Proposition 218, which requires voter approval for “general” taxes.

Says PLFs president Rob Rivett, “While we have sympathy for the fact that San Ramon is feeling a bit tight these days because it’s having trouble coming up with the money to pay for its generous pension promises to its employees, forcing landowners to cough up illegal taxes is not the way to pay off this debt.”

By Jack Dean | Adam Shapiro of Fox Business interviews Cate Long — one of the most respected voices writing about the public pension crisis. She warns that some public-sector employees will be lucky to receive pension payments of 70 cents on the dollar.

Cate Long is a regular contributor to Reuters and writes their MuniLand blog.

By Steven Greenhut | California’s Democratic leaders and their public-sector union allies have been staving off serious pension reforms thanks to their domination of the Legislature, their control of every state constitutional office and series of favorable court decisions. You really couldn’t blame the reform movement for giving up and moving on to other things — or moving out to other states. Voters, for instance, overwhelmingly approved San Jose’s 2012 pension reforms but the courts gutted the measure thanks to the so-called California Rule that doesn’t allow officials to cut benefits for public employees even on a go-forward basis. That city’s bold Democratic mayor, Chuck Reed, sought to take a measure to the statewide ballot that would allow such reductions, but the state attorney general killed that effort with an unfairly written ballot summary — and a Sacramento judge just concurred with the AG.

Who has time for this? Why not just let the cities continue to cut back on their services so they can pay for the six-figure pensions they handed out so generously? San Jose recently announced cutbacks of 100 more police officers, with Reed blaming the pension debt. The bankruptcy judge in the Stockton case last week said he has been reading media reports about once-bankrupt Vallejo now possibly heading back toward bankruptcy given that it never touched its pensions and is facing fiscal problems again. The judge wants to look closely at Stockton’s workout plan to see if it will, well, work out. I reported on a fiscal document in October that suggests otherwise. Stockton almost certainly will face a fiscal crisis again in four years even after bankruptcy and a tax hike — at least that’s the view of former Republican Assemblyman and fiscal watchdog Dean Andal.

Yet last week, pension reformers met in Sacramento to plot strategy again. In my U-T San Diego column, I compared it to the Monty Python scene from the Death of Mary Queen of Scots. Mary’s assailants think she’s dead, but she pipes up: “No, I’m not.” And she’s downright perky, too. Likewise, there was no doom and gloom in Sacramento. Former San Diego councilman Carl DeMaio, leader of San Diego’s pension-reform effort that led to overwhelming support for a cap on pensionable pay in June 2012, is pushing a statewide ballot initiative for November 2016. He wants to build county organizations to support the measure — and is championing some local measures, too. Ventura County, for instance, is following San Diego’s model — caps on pay, 401 (k) plans for new hires, protection of death benefits for public safety.

The San Diego model is being implemented and has so far withstood union challenges because DeMaio chose not to do as Reed did and challenge existing precedent. It doesn’t go as far, but it is still alive and kicking — despite continuing efforts by a union-dominated state agency to invalidate the law. Here we see state officials rigging the game at every stage, yet DeMaio and others remain remarkably upbeat and even perky. They know pension reform is the right thing and they keep moving forward hoping that eventually more public officials will decide to put California taxpayers and residents above union demands.

Still, this is exhausting and fruitless work. In essence, the critics of an overly generous pension system are trying to save the system from itself by assuring that it remains properly funded. But even as the numbers look bleak — i.e., a state teacher retirement system that’s falling short in funding by around $4.5 billion a year, which is even acknowledged by Democratic leaders — there’s no rush by the Brown administration or the Legislature to address them. It’s great that the reform movement is still trying, though, even as the irresponsibility of the state’s political leadership becomes more maddening.

Steven Greenhut is the California columnist for U-T San Diego.

By Jack Dean | In this excellent Fox Business interview, Professor Walter Russell Mead explains to interviewer Adam Shapiro why liberals and conservatives both get it wrong when it comes to saving public pensions, and how ‘New Deal’ guarantees are obsolete. Lengthy but packed with good insights.

Walter Russell Mead is the James Clarke Chace Professor of Foreign Affairs and the Humanities at Bard College.