Public Unions' Katrina

There is a fiscal Katrina – from unfunded promises to public union employees for generous pensions and health benefits -- that will overwhelm most cities and states finances, and thus wipe out either or both their taxpayers or their social services and infrastructure.

On top of the roughly half-trillion dollars of underfunding in city and state defined benefit pension plans, they have incurred an even larger unfunded liability for their employees’ retiree health costs.

I’ve written on this twice recently. First, I reminded readers how this came to pass. Here, I recounted what legendary Transport Worker Union founder Mike Quill told me in the late 1950’s:

“At the table, Mike Quill explained to me how government works: It’s all just politics among friends, all out to make their constituents happy, and to hell with the beancounters…”

Then, I pointed out here that:

“[Democrats] are so beholden to public unions as to bear almost the entire responsibility for the breakdown of the social contract with the rest of the urban citizenry through oversize public union wages and benefits starving the budgets for other needs.”

Today’s New York Times reports “Huge Rise Looms for Health Care in City’s Budget.” New York City and State face having to reveal on their books an annual liability five to ten times larger than they have been, on the order of $10-billion a year and more, for the promises of retiree health care they’ve made. “These are huge numbers, not a one-time cost.” Across the country, such huge unfunded liabilities must be revealed over the next several years by cities and states, under new accounting rules for public entities.

As I wrote, and the New York Times repeats, “a failure to find a way to finance the yearly total will eventually hurt their ability to borrow money affordably.” This 5-10% of city and state budgets for retiree health care, plus huge amounts for funding pension promises, must either be funded by higher taxes, curtailments of services, and – after colossal battles with public unions, who are not backing down – increased contributions toward their own retirement by the tens of millions of civil service workers.

If you think the domestic battles and divisions over Iraq, or the search for fault after Katrina, are something, just stand by for far larger battles over public pensions and healthcare.

UPDATE: My posts on the liabilities for public employees’ pension and health retirement plans drew many comments. Two are particularly interesting.

Mark Tapscott reminds us that the federal civil service retirement system initiated reforms several decades ago to move toward a more defined contribution arrangement, so the federal liabilities today are not so crushing as at the city and state levels. The cities and states cannot expect, for this and other reasons, a federal taxpayer bailout.

Dana, at Common Sense Political Thought, seems to agree with me about the magnitude of the problem, but appears defeatist as to solving it because civil service workers can’t be replaced or competed with from abroad. I beg to differ. At some point, locality-by- locality, private sector replacements will be found for many civil service workers, and much non-front line functions can be outsourced, even overseas, or automated. Some functions can be privatized. Sure, police and firefighters won’t be replaced or outsourced, but even some of their back office work can be. It may take months to train safe bus drivers and train conductors, and they will be, and as the NYC MTA already is aiming to toll takers and others can be automated out.

Dana also posits that bankruptcy is not an option, as with private companies. Again, as in NYC during the '70's and Orange County in the '90's, and San Diego functionally today, this is not so. When Wall Street refuses to underwrite profligacy and the bills for payrolls and public services can't be met, radical reforms are forced upon ostrich-like mayors and city and county councils.

In the interest of disclosure, both my poor mother and her better off sister are retired NYC workers, whose retiree benefits have been wonderful, for them and their children not having to step in. There will be many Republicans, as with the much smaller battles over PBS funding, who will find it self-servingly comfortable to buck restraints. However, the buck must stop somewhere, and will.