Monday, November 9, 2015

People in Glass Houses Shouldn’t Complain about Public Pensions

In recent years, it seems that every ballot measure to bump municipal taxes in the North Bay has elicited comments like “I’m willing to pay more for better city services, but will vote against this tax increase for fear that my money will instead be spent on pensions.”

I understand the sentiment, but it misses the point.  Pension funding is already a legal commitment on California cities, a burgeoning financial obligation that hangs like a sword over the desk of every city manager and financial officer in the Golden State.  Whether or not a tax measure passes will have no impact on the financial hole already dug.  The only question is whether we choose to backfill some of the funds that were sucked toward pension funding by the recession.

Regular readers will likely recall my take on the recent history of municipal finance, including pensions.   I argue that the costs of suburbia were becoming an uncomfortable burden as early as the 1970s.  But rather than looking to the root causes, rabble-rousers such as Howard Jarvis grabbed the public spotlight by claiming that government inefficiency was the real problem and that taxes could be trimmed without harm.  The result was Proposition 13.

By the 1990s, the financial crunch had continued to worsen and, in the absence of enough folks pointing a finger at the flawed land-use model, local governments were becoming increasingly clever in looking for ways to offload near-term financial obligations.

Although somewhat later than the 1990s, a good example is former Governor Schwarzenegger constructing a deal to sell state office buildings for cash, with extended leases then signed for continued state use.  The arrangement would have effectively converted current assets into cash to pay current bills and debts to be paid by later Californians.   Upon entering office, Governor Brown promptly and justifiably quashed the plan.

But that quashing was the exception as various other schemes to push costs onto future generations moved ahead.  Among those were deferred maintenance, letting future folks pay the maintenance bills incurred by current use,  allowing new development to secure the impact fees without considering the long-term financial sustainability, and bonding for short-term needs.

To be clear, if the life of the improvement is the same as the life of the bonds, bonding is a fine approach for ensuring that the people who benefit from an improvement are the same as those who pay for it, e.g., 30-year bonds to pay for a water treatment plant with a design life of 30 years.  But issuing long-term bonds to pay for improvements that will provide all of their benefits in the early years is a scam played by the present on the future.

Another mechanism to give the benefits to the present while offloading costs to the future was pensions.  Faced with a lack of funds to give pay raises, and threatened with labor stoppages as a result, city governments in the 1990s gave expanded pension benefits in place of salary bumps.  It’s not that employees were eager for larger pensions.  It’s likely that most would have preferred bigger paychecks.  But pension benefits were offered instead and the employees were convinced to settle for those.

Of course, the pension payments made by cities were actuarially computed to fund the future pension benefits.  But those computations were subject to being upset by economic turmoil or longer lifespans, both of which have come to pass.  Thus, our cities now find themselves strapped into paying the benefits for municipal employee hours that were worked in 1990s.

I know that this explanation is somewhat ingenuous.  Not all of the municipal malaise that led to the pension debacle can be laid at feet of our land-use pattern.  Other factors such as the growing income divide, which leaves the many residents strapped for income and eager to believe arguments that allow them to keep their tax bills manageable, were also involved.

But the land-use pattern played a role.  Compared to other countries, the U.S. has an unusually large infrastructure value per capita combined with lower tax rates, so a cash crunch over infrastructure maintenance was predictable, as were creative and sometime dubious ways to manage that burden.

I know some who argue that we shouldn’t honor the pension obligation.  But there are two big arguments against that path.  The first is that the pension obligations are legal.  Perhaps we were swindled by our forebears, but they dotted their i’s and crossed their t’s.  Even more importantly, these are our friends and neighbors whom some suggest we shortchange on their retirement.  I find that suggestion unacceptable.

While the imposition of pension costs on us was legal, the morality was more dubious, but there’s not much we can do about it.  As many of those responsible for the deed have now left the stage, our only options for expressing our disappointment are to visit the cemetery to spit on gravestones or to stop by a senior living center to snatch away walkers, neither of which seems suitable.

So, even as we struggle to pay the bills left to us by others, at least we enjoy the dubious pleasure of knowing we occupy the moral high ground, right?

Well, maybe not.  After all, is our generation doing much to address the land-use model that is the cause of much of our financial distress?  Not really.

It’s true that urbanism is gaining ground, with walkable communities and transit-oriented development a growing element of the land plans of many communities.  But much of that change is the result of market demand or directives from higher levels of government.  Except for a few lonely voices, there are few calls in city halls to change the land use model that has led us to our current state.

So, even as we decry the debts left to us by the past, we’re busy leaving debts to the future.  We’re continuing to build infrastructure for which the incremental tax revenues are insufficient to maintain.  We’re doing little to retrofit past land uses to make them more financially sustainable.  And on a national level, there are many who follow policies that would widen the income gap.

About the only change we’ve made is giving reduced pensions to new public employees, which may be justifiable, but is attacking the wrong end of the problem.

We’ve done nothing to justify acting morally offended.

Ironic, isn’t it?

P.S. In case any are wondering about my credentials to argue these points, or whether I’m a late convert to the cause who was a long-time part of the problem, my history is moderately good.

Even as a brand new homeowner in 1978, still trying to figure out how to cover the bills, I argued strenuously against Proposition 13.  I didn’t have the grasp of the facts that I do now, but something about the facile arguments of Howard Jarvis struck me as false.  I was sure that city halls weren’t perfect, but neither did I believe that they were an inept as Jarvis argued.

More recently, I’ve often expressed concern with the fixed pension model.  Watching old-line U.S. industrial powers succumb to pension plans, I worried about the impacts it might have elsewhere.

So my arguments above aren’t the result of a late conversion, but of decades of questioning the conventional wisdom.

Having placed myself securely on my philosophical soapbox, I’ll remain there for my next post.  I’ll opine on the role of neighborhood input into land-use actions.

As always, your questions or comments will be appreciated.  Please comment below or email me.  And thanks for reading. - Dave Alden (

No comments:

Post a Comment