Public Pension Solvency Requires Asset Bubbles

The title of this post expresses what is probably the greatest example of a monstrous hypocrisy – that public employee unions, and the pension funds they control, are supposedly helping the American economy, and protecting the American people from “the bankers.” Overpriced “bubble” assets caused by banks offering low interest rates hurt ordinary working people in two ways – they cannot afford to buy homes, and they are denied any sort of viable low risk investment opportunity. But without an endlessly appreciating asset bubble, every public employee pension fund in the United States would go broke.

The inspiration for this post is a guest column published on April 27th in the Huffington Post entitled “The Real Retirement Crisis,” authored by Randi Weingarten, the president of the American Federation of Teachers. The totality of Weingarten’s column, a depressing plethora of misleading statistics and questionable assertions, compels a response:

Weingarten writes: “America has a retirement crisis, but it’s not what some people want you to believe it is. It’s not the defined benefit pension plans that public employees pay into over a lifetime of work, which provide retirees an average of $23,400 annually…”

Here we go again. This claim is one of the biggest distortions coming out of the public sector union PR machine, and despite repeated clarification even in the mainstream press, they keep using it, faithfully counting on low-information voters to believe them. “An average of $23,400 annually.” Not in California. In the golden state, public employee pensions average well over $60,000 annually (ref. “How Much Do CalSTRS Retirees Really Make?“), if you adjust for a 30 year career working in public service. And in most cases public employees also receive supplemental retirement health benefits worth additional thousands each year.

With respect to the causes of the 2007-2008 financial crisis, Weingarten continues: “It’s not the cost of such [defined benefit] plans, which may ultimately cost taxpayers far less than risky, inadequate and increasingly prevalent 401(k) plans.”

What! Exactly how can 401K plans ever cost taxpayers more than defined benefit plans? This is absurd. Public sector defined benefit plans represent fixed payment obligations regardless of levels of funding. When they’re underfunded, the taxpayer makes up the difference. A 401K plan that is underfunded creates no lingering obligation to the taxpayer. If someone from the public sector has an underfunded 401K plan, then they will get whatever government assistance or lack of assistance that someone from the private sector might get. That’s tough, but fair. It is hypocritical to pretend to care about workers, but put the welfare of public sector workers above the welfare of private sector workers. If we are to spend taxes on government administered retirement programs, then everyone should earn benefits according to the same formulas and incentives – whatever they are.

Weingarten then suggests we expand Social Security:  “Social Security, which is the healthiest part of our retirement system, keeps tens of millions of seniors out of poverty and could help even more if it were expanded.”

This is a great idea. Why not give every public employee Social Security? Why not insist on this? Social Security is progressive, meaning that high income people get far less back than low income people. Since the public sector workers make far more, on average, than private sector workers, their participation in Social Security will have a significant positive impact on the solvency of Social Security (ref. “Add ALL Public Workers to Social Security“). Why aren’t public sector unions insisting they participate? Don’t they value the progressive benefit formulas? Don’t they want to expand the system? Could it be they are hypocrites?

Here’s a macroeconomic “big picture” quote from Weingarten:  “And while the stock market and many pension investments have rebounded, for numerous Americans the lingering economic downturn, soaring student debt, diminished home values, the responsibility of caring for aging parents and other financial demands have made it hard, if not impossible, to save for retirement.”

What Weingarten doesn’t acknowledge is the shared agenda that public sector unions and union controlled pension funds have to perpetuate the asset bubble that’s killing middle class families (ref. “Pension Funds and the “Asset” Economy“). California’s artificially inflated home prices are driving young families out of the state where they were born, preventing them from living near their aging parents, depriving their children of a relationship with their grandparents. But pension fund solvency requires ongoing appreciation of real estate and publicly traded stock even if they are already overpriced. As for student debt – if middle class families didn’t have built into their tuition payments the costs for overpaid, over-pensioned, and under-worked unionized faculty, a bloated workforce of unionized college administrators, and subsidies that make college virtually free for low income students, their “student debt” would be manageable because their rates of tuition would be far lower. Does Weingarten care about the “middle class,” or might hypocrisy be at work here?

Here’s another Weingarten quote that invites a rebuttal:  “Defined benefit plans not only help keep retirees out of poverty, every $1 in pension benefits generates $2.37 in economic activity in communities.”

The problem here is that ALL investments generate economic activity. You don’t have to run it through a pension fund. If taxpayers get to keep the money they would have paid to fund a public employee’s pension, they’ll invest it or spend it too. In California’s case, as is proudly proclaimed in, for example, CalPERS press releases, “9.5% of CalPERS investment portfolio is reinvested in California.” Nine-point-five percent. The other more than ninety percent goes to other states and countries, presumably places with business climates that aren’t poisoned by the policy agenda of public sector unions. How does that help California’s economy?

Finally, Weingarten alludes to a new initiative being advocated by public sector unions to provide enhanced retirement security to private sector workers. She writes:  “The AFT is engaged in a broad-based effort with a bipartisan group of state treasurers, other unions, asset managers and even some large Wall Street firms to vastly expand retirement security through pooled, professional asset management.”

Here is shameful hypocrisy disguised, once again, as altruism. Because these private sector defined benefit plans will not guarantee participants a 7.5% return on investment. They will have to conform to ERISA, meaning the future retirement liabilities that will be offset by invested assets will have their present value calculated at conservative rates. This double standard guarantees the “normal contribution” for public employees in order to generate a given defined benefit will be remain far less than that required of private citizens. Some observers have even suggested these private defined benefit plans, where the assets will be co-mingled with public sector defined benefit plans, will be used as piggy banks to shore up the public sector plans. After all, if the assets are co-invested and earn a rate of return that exceeds the discount rate used to value the future liabilities for the private retirees, but falls short of the discount rate used to value the future liabilities for the public sector retirees, then the surplus from the private sector’s fund will be applied to the deficit in the public sector fund. Why not? It is easy to be diabolical, and hypocritical, when your critics have to dive so far into the weeds to challenge your logic or your morality.

Weingarten doesn’t have to deal with weeds, however, or wonks, or the tough realizations that are the reward of complex analyses. She just has to say things that are emotionally resonant, then let her multi-million dollar PR machine feed it to the masses.

When interest rates were lowered in the 1990’s, stock prices soared, forming what was later called the internet bubble. When that bubble popped in 2000, interest rates – and credit criteria – were lowered even further, forming the real estate bubble. Through it all, pension funds banked profits on artificially inflated asset values, ordinary citizens went into debt to their eyeballs to buy homes and pay tuition for their children, and the unions that controlled the pension funds negotiated massive increases to pay and pension benefits as if these bubbles could last forever. When reality finally returned in 2008, the government unions and their banker allies handed struggling taxpayers the bill, holding onto their excessive pay, benefits, bonuses and pensions, and engaged in quantitative easing and other fiscal shenanigans calculated to perennially inflate new asset bubbles, and the pensions that depend on them.

That is the real story, Ms. Weingarten.

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This article originally appeared on the website of the California Policy Center.

Construction Unions Should Fight for Infrastructure that Helps the Economy

One primary reason California has the highest cost-of-living (and cost of doing business) in America, combined with a crumbling infrastructure, is because California’s construction unions have allied themselves with environmental extremists and crony “green” capitalists, instead of fighting for what might actually help their state.

California’s construction unions ought to take a look around the rest of the country, where thousands of jobs are being created in the energy industries – really good jobs – doing something that actually helps ordinary people. Because the natural gas revolution unleashed in North Dakota, Texas, Wyoming, Colorado, Utah, New Mexico, Pennsylvania, West Virginia, and Ohio is creating thousands of jobs in those states at the same time as it lowers the cost of energy for consumers who struggle to make ends meet.

More generally, construction unions should remember that it is not only how much their own members earn that matters, but how much things cost everyone. If things cost less, you can make less yet enjoy the same standard of living. When unions fight for high paying jobs on projects that are useless, they only help themselves. When they fight for projects – such as natural gas development – that lower the cost of energy, they are helping everyone.

The California Public Policy Center released a new study this week entitled “The Benefits and Costs of Oil and Gas Development in California,” written by Dr. Tim Considine, an energy economist with the University of Wyoming. In the study, Considine estimates the recoverable reserves of shale oil in the South San Joaquin Valley to total 15 billion barrels, with another 10 billion barrels offshore in the Santa Barbara Channel, accessible now from land-based wells using slant drilling. At $100 a barrel, this is $2.5 trillion worth of oil. And where there’s oil, there’s gas – over 12 trillion cubic feet just offshore in the Santa Barbara channel. What are we waiting for?

Developing these sources of energy over the next 25 years in California, according to Considine, could create up to 500,000 high paying jobs in the energy industry and inject hundreds of billions of tax revenue into the state’s government. When are California’s construction unions going to fight for something that actually helps all Californians?

Instead, apparently, they are lobbying hand in hand with environmental extremists for a “Bullet Train” that almost nobody will ever ride – costing taxpayers over $100 billion so it can operate at a loss – and “Delta Tunnels” that will cost tens of billions and not increase the supply of fresh water in California by so much as one drop.

Can unions themselves be guilty of “labor malpractice”? Because unions are supposed to fight for the interests of ordinary people. They are not supposed to join hands with rich, elitist, misanthropic environmentalist fanatics who live in wealthy coastal enclaves, who would be thrilled if gasoline cost over $10.00 a gallon, and electricity rates were over $1.00 per kilowatt-hour. That’s where we’re headed in California if construction labor doesn’t wake up and fight for ordinary people.

Here are two visions of California’s infrastructure priorities:

(1) Spend $150 billion on a bullet train that almost nobody rides and operates at a loss, and build two “delta tunnels” that do not result in one drop of additional water storage or supply. Prohibit development of any fossil fuel reserves in California. Finance this prodigious waste of money through increasing taxes along with proceeds from “carbon emissions auctions” that enrich Wall Street billionaires and crony “green” capitalists. Continue to neglect California’s infrastructure.

(2) Develop California’s energy resources using private financing, creating hundreds of thousands of high-paying jobs, generating hundreds of billions in tax revenue, and lowering the cost of energy to consumers. Use proceeds to help finance infrastructure investments that benefit all Californians:
–  New aquifer and surface water storage.
–  Desalination plants on the Southern California coast.
–  New power stations – natural gas and nuclear.
–  New natural gas pipelines connecting California to the rest of North America.
–  A liquid natural gas terminal off the Central California coast.
–  Upgraded freeways, bridges, and existing rail corridors.

Which of these visions delivers prosperity to the most people? Which creates more jobs for members of construction unions? Which reflects truly beneficial infrastructure priorities for California?

California’s construction unions have thousands of members who want to build and produce real assets. This distinguishes them from public sector unions, who have an incentive to deny infrastructure spending because it takes tax revenue out of their own pockets. Public sector unions use environmentalist extremists for cover – it justifies them keeping public funds for their pay and benefits instead of investing in infrastructure. There is NO identity of interests between public sector unions and construction unions, other than a residual ideological affinity that falls apart under logical examination.

Perhaps it is time for California’s construction unions, joined by people of conscience from all unions, to care more about all of California’s workers. Perhaps it is possible for construction union leadership to agree to disagree with union reformers on the issue of open shops vs closed shops, or project labor agreements vs. free and open competition, and at least recognize together that environmentalist extremists have too much power in California. They should be challenged, before more money we don’t have is spent on projects we don’t need, simply because it was politically feasible and created a handful of jobs.

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This article originally appeared on the website of the California Policy Center.