TALLAHASSEE – “Slowly, then all at once,” is how Ernest Hemingway explains bankruptcy in his classic novel The Sun Also Rises.  These were also the words Rep. Jeff Brandes, R-St. Petersburg, used to describe what could happen toFlorida’s municipal pension plans if left in their current form. 

As of year-end 2011,Florida’s 100 largest cities oversee 208 separate pension plans for their employees. Of these, only 14 percent received a grade of “A,” or were at least 90 percent funded; 62 percent  received a grade of “C” or lower, and 15 percent were woefully underfunded. 

The grading system used to calculate pension funding was formulated by professional actuaries hired by pension plan governing boards across the state, and their findings were based on those boards’ assumptions – including some based on optimistic scenarios concerning their future return on their pension funds’ investments.

For many Florida taxpayers, these problems mean that they will be receiving less and less in the form of government services in return for their money. That’s because tax dollars will have to be diverted from other budget priorities so that municipal governments can cover the gap between existing funds in a particular pension account and the amount needed to fully fund it. The more underfunded the pension plan, the more taxpayer cash will be needed to keep the commitment.

Unfortunately, the funding gaps are not static. As pension plans — particularly the traditional “defined benefit (DB) plans” — become more generous, cover more participants, and even lower the age of retirement, the funding gaps continue to grow. 

Indeed, the DB plans are a huge drag on public finances.  These plans promise specific benefits to retirees. Most private businesses have long since shifted from DB plans to defined contribution (DC) plans — 401(k) type plans to which the employer and employee both contribute. Only 13 of Florida’s 100 largest municipalities have switched to DC retirement plans, though more now provide both DB and DC plans for employees to choose.

Many public employees rely on pension income after they stop working and typically plan their public sector careers taking their pensions into account. So it’s not entirely surprising that many are reluctant to risk what they view as secure retirement income by switching to a 401(k)-style plan that entails investing in financial markets.

Public employees’ general reluctance to switch has been evident in the relatively low number of state government workers who have chosen to participate in a 401(k)-style DB plan since it became an option for them a decade ago. This reluctance has persisted despite the potential for higher returns, the availability of safe forms of investment, and the DC funds’ portability – an advantage for those who do not remain in government service long enough to earn a traditional pension. In the 401(k) plans, the money the employee contributes belongs to the employee.

Even so, the well-publicized volatility of the stock market has created a climate of fear that makes the DB plans’ “guarantee” of a secure pension more attractive. The problem, however, is that many of the traditional DB plans funded solely by the taxpayers are no longer sustainable.

According to Representative Brandes, there are only two ways to solve the municipal pension problem in its current form: increase funding or reduce benefits. Increasing the funding would require raising taxes, increasing employee contributions, or both; decreasing benefits could be perceived as violating contractual obligations – and even ignoring a moral obligation to long-time municipal employees who had counted on a certain amount of income when they retired.

All of these are politically polarizing options that still fail to address the underlying structural problem: The incentives leading to a solution are not as strong as the political incentives to “kick the can down the road.” Rep. Fred Costello,R-OrmondBeach, explains:

“If DBs go bust and need more funding, the bargainers of DBs will feel no pain.”  In other words, those advocating larger government-guaranteed pensions stand to lose nothing if the pension plans go bankrupt. Unless the municipal governments go bankrupt, they will be obliged under the law to fulfill their pension commitments, even if it diverts scarce funds from other important municipal priorities.

As a result, the taxpayers will lose. They’ll pay more but receive less in return for their tax dollars. While these defined benefit plans are slowly straining municipal budgets and have the potential to break many of them all at once, the defined contribution plans are working quite well in the private sector.

While the legislative reforms of early 2011 made improvements in the Florida Retirement System, further work is needed to keep Florida on the right track and avoid the financial disasters experienced by other states. Five recommendations for further reform include:

• Make the defined contribution/investment plan the default option for new hires who don’t express a preference.
• Limit employees switching between plans to the first year of employment .
• Lengthen the defined benefit/pension plan vesting period to 10 years from 8.
• Increase the employee contribution rate to 4% from 3%.
• Apply the above reforms to municipalities.

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“It is clear to all that our nation and our state are facing potentially long-term fiscal crises. Voters are demanding that elected officials address the underlying causes affecting our financial stability and will not be satisfied with taking the easy way out by raising taxes.” –Dr. Robert McClure, President of The James Madison Institute

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How’s that working out for Uncle Sam? Not so good. As the week prior to Father’s Day began, the “official” national debt totaled around $14.36 trillion – about $46,210 per person. However, with the total increasing at a rate of $3.95 billion a day, it could be expected to reach roughly $14.39 trillion by Father’s Day. Indeed, to keep up with the total, you may need to peek at the “debt clock” from time to time. You’ll find it at http://www.brillig.com/debt_clock/.
 
Unfortunately, as a front-page article in the June 7 edition of USA Today pointed out, this $14 trillion-plus figure severely understates Uncle Sam’s obligations. If the federal government had to list its long-term debts the same way it makes businesses do on their balance sheets, the total would be closer to $62 trillion – about $534,000 per household. That $62 trillion figure is approximately what Uncle Sam is currently on the hook to pay when we add up Social Security, Medicare, the pensions and health care benefits promised to military veterans and retired federal employees, and interest payments on the skyrocketing national debt.

If current trends continue, how will our children and grandchildren meet these obligations we’re bequeathing them while also finding the funds to pay for vital purposes such as national defense, disaster recovery, and maintenance of our nation’s infrastructure? It won’t be easy. For a clue as to the difficulty, check your recent credit card bills. New federal regulations require your provider to tell you how long it would take you to repay your debt if you sent in only the minimum monthly payment. Short answer: Practically forever. Same goes for the feds’ indebtedness.

So maybe it’s time for Uncle Sam to heed another bit of fatherly advice from none other than the “Father of Our Country,” George Washington. Like Polonius, he was not fond of indebtedness. For instance, in an April 7, 1799 letter to James Welch, he wrote “To contract new debts is not the way to pay old ones.”  Then again, contracting new debts to pay old ones describes the current federal practice of raising the debt ceiling – borrowing more money, much of it from China, to repay previous borrowing while also covering the current budget’s deficit.  

Washington would be appalled. In his “Farewell Address” on September 17, 1796, he had this to say: “As a very important source of strength and security, cherish public credit. One method of preserving it is to use it as sparingly as possible; avoiding occasions of expense by cultivating peace, but remembering also that timely disbursements to prepare for danger frequently prevent much greater disbursements to repel it; avoiding likewise the accumulation of debt, not only by shunning occasions of expense, but by vigorous exertions in time of peace to discharge the debts, which unavoidable wars may have occasioned, not ungenerously throwing upon posterity the burthen, which we ourselves ought to bear.”

Unfortunately, the current batch of federal officials – in both political parties – have largely ignored George Washington’s wise advice on debt as cavalierly as they’ve ignored the checks and balances of the U.S. Constitution under which he served. Therefore, when it comes to the legacy they’ll leave the next generation, let’s call them what they are: deadbeat dads.

Until recently, Florida’s legislators have had little reason to notice the serious pension problems confronting several of Florida’s major cities. After all, the Florida Retirement System (FRS), which covers employees of the state government, counties, and school districts, is in reasonably good shape, especially compared to those in other states. Moreover, few can argue that the state government’s own employees or Florida’s schoolteachers are overpaid.

Granted, even the FRS could face problems in the future, especially if the state government’s legislative and executive branches ever came under the control of pro-union forces for even a couple of years – long enough to commit the state to the kinds of overly generous pensions that now plague other states. See currently the bankrupt retirement systems of California and Illinois as the proverbial “canaries in the coal mine.”

That’s why it’s important to require the state’s future hires to participate in 401k-style “defined contribution” plans rather than the traditional “defined benefit” plans, while also encouraging current employees to switch as well. Moreover, requiring those state employees who remain in the traditional plan to contribute a small percentage of their salaries could help encourage more of them to make the switch.   

Meanwhile, it’s not correct to assume that bloated pensions are a problem only in places such as California and Illinois. The South Florida New Times recently reported that a Miami Beach police officer received $99,700 in 2007 in overtime alone — plus a six-figure salary. In the nearby city of Miami, a 52 year-old police officer with 30 years experience can retire with a final salary of $94,000, and could be entitled to a lump sum payment of $832,000 plus an annual pension of $92,000.

There have been similar examples reported in numerous other state newspapers as well. The stories all point to one inescapable conclusion: These kinds of lavish benefits are not financially sustainable.

This doesn’t mean that taxpayers do not appreciate the work done — and the risks taken – by police officers and firefighters. However, these “first responders” will be among the first losers in the future if financial excesses cause the cities that employ them to go broke.

Granted, in the past, some public employees received generous pension deals in lieu of higher salaries. Subsequently, however, many received the higher salaries as well, especially in cities where the public employees’ unions exerted more clout than the taxpayers.

Moreover, in some cities the unions negotiated deals that also allow for “spiking,” a system where senior employees nearing retirement pile up overtime, vacation days, sick leave payouts, etc. in their career’s final year or so.

This bloated “final compensation” rather than their base salary then becomes a factor in pensions based on a formula that takes into account the employee’s salary times years worked times a percentage for each year worked.

There are two reasons why the Legislature has to be concerned, even if the Florida Retirement System is sound and most of the public employees who are covered by it are not among the conspicuously overpaid.

First, in some career fields — especially law enforcement — the state essentially competes with local governments. For example, the state invests a lot of money to train state troopers, then often loses them to local sheriffs and city police departments where the unions have won extremely generous contracts. Reining in the excessive salaries and benefits offered by local governments would benefit the state government.

Second, if any of these pension-strapped cities were to go belly-up and default on their debts, the state’s good reputation for fiscal prudence would be seriously damaged, and its own credit rating could be downgraded, thereby raising the cost of borrowing.

Concern for Florida’s fiscal reputation is why Gov. Lawton Chiles dispatched Lt. Gov.  Buddy MacKay to Miami to help straighten out that city’s precarious finances back in the 1990s, when that city was at risk of going broke.

Miami and several other major Florida cities – especially those in Southeast Florida that maintain their own pension plans separate from the FRS — are once again teetering on the brink of financial ruin, with the problem exacerbated by the steep drop in property values and, thus, property tax revenues.

For the state government to ignore the self-imposed plight of these cities would be akin to ignoring a malignant melanoma “because it’s only on my foot.” Therefore, meaningful pension reforms that address the cities’ problems as well as the state’s potential for problems down the road ought to be among this year’s must-pass legislation.

Why were so many of these cities’ residents blissfully unaware of what was happening? Here’s one factor: The news media haven’t been paying attention – especially in urban counties such as Miami-Dade, Broward, and Palm Beach, which together are home to more than 100 of Florida’s 400+ municipalities. In those three counties, the financially troubled daily newspapers have severely reduced their coverage of local government. They never covered the smaller cities very well anyway, and now they lack the staff to dig into mundane but important municipal issues such as budgets, bond issues, and labor deals.

As for TV, which surveys suggest most Americans regard a their primary source of “news,” a recent University of Southern California study of  TV news in the Los Angeles market revealed that local newscasts included an average of only 22 seconds of local government coverage per half hour. Rest assured that those 22 seconds were not devoted to the meat-and-potatoes of local government. A story about a police standoff or a minor city hall scandal is far more likely to be fodder for TV than a story about the aforementioned city budgets or bond issues.

Or their labor deals. Although much of the collective bargaining for Florida’s local government employees occurs behind closed doors, final approval must occur in open meetings following public hearings. Therefore, most of these problems are “hiding in plain sight” of the public. The trouble is that practically nobody is paying attention. These troubled cities’ hard-working residents – struggling to earn a living, raise their kids, and pay their taxes – are generally too busy to attend budget hearings held at inconvenient times.

Meanwhile, the labor deals attract media attention only if there’s a made-for-TV moment such as dissatisfied employees picketing city hall or showing up en masse at a budget hearing to intimidate taxpayers who might question the level of taxes and spending. So, with the public and the news media generally AWOL from these proceedings, the result in too many of Florida’s major cities is that pension problems have festered for years and now are approaching a tipping point. Indeed, the Legislature and some in the news media finally have been forced to pay attention.

They’re learning that public-employee unions and compliant elected officials in some of Florida’s major cities have quietly negotiated fiscally ruinous labor deals under which some city governments increasingly exist more for the benefit of the governing than for the benefit of their residents. The question now is what can be done to solve the many problems that this dysfunctional dynamic has spawned. On that score, Dr. Holcombe’s study “Protecting Florida’s Cities through Pension Reform” includes some helpful findings and recommendations.

The manufacture of “rights” is significant because their adoption, either formally or informally, impacts the integrity and authority of government.  James Madison, the father of our Constitution, understood this fact.  When Madison submitted the proposal for the Bill of Rights to Congress on June 8, 1789, he was careful to note that the revisal of the constitution should be “a moderate one.”  This was important, he said, because he was “unwilling to see a door opened for a re-consideration of the whole structure of the government, for a re-consideration of the principles and the substance of the powers given; because I doubt, if such a door was opened, if we should be very likely to stop at that point which would be safe to the government itself.”  Madison is not a lone voice from history.

In, A Disquisition on Government, John Calhoun described how human nature causes an individual “to have a greater regard for his own safety or happiness, than for the safety or happiness of others.”  Calhoun, having held the titles of Congressman, Senator, War Secretary and Vice-President, knew about self interest.  When individual or group interests oppose one another he said, they would naturally be prepared to surrender the interests of others in the hope of fulfilling their own.  This, Calhoun said, creates a state of constant tension and conflict and generates “suspicion, jealousy, anger and revenge — followed by insolence, fraud and cruelty.”

Such passions are on full display in Wisconsin today, where lawmakers face both physical and political intimidation by labor unions as they struggle to plug a gaping $3.6 billion hole in the state budget.

The extortive strategy employed by the unions offers a false compromise: take temporary pay and benefits cuts but insist on the right to renegotiate.  In a year or two, when states get their fiscal house in order, the bosses will return, collective bargaining hammer in hand, to begin anew the process of bankrupting the system.  This is why collective bargaining is sacrosanct to the unions.  They are willing to patch the sinking ship but not to fix it.  To do so would require permanent elimination of bloated salaries and benefits in places like Milwaukee, Wisconsin, where big labor has secured compensation of $100,000 per year in salary and benefits for the average teacher.

During a recent appearance on MSNBC’s Morning Joe, American Federation of Teachers President Randi Weingarten identified collective bargaining as part of the worker’s “right” to the “American dream.”  She described the union’s campaign to preserve collective bargaining in the soaring language of “economic dignity” and “income inequality.” Apparently, Weingarten’s version of the American dream is based on household income.

But the idea that some magic dollar figure can satiate individual needs and desires is inherently flawed.  William Graham Sumner addressed this ineffectual concept nearly 100 years ago in an essay entitled, Examination of a Noble Sentiment.  Published in 1914 by Yale University, where Sumner was a highly acclaimed professor, the essay poses this profound question:  “What is an existence worthy of a human being?”  The answer, according to Sumner, is that there is no answer.  A man making a dollar a day will ask for two, the man earning two dollars a day will say it costs three and if a man’s income is a thousand dollars he will say it costs $1,500 to have a worthy existence.  The same simple principle holds true today.  Ask the average person how much money they need to be perfectly content and they will probably give you a figure roughly double their current salary.  For most people, the idea that it will take “just a little more” to be happy is not uncommon.  This is true not just for Americans and not just in the West but everywhere civilization has developed beyond basic levels of subsistence.

Thus, Weingarten’s reasoning contorts the American dream into the functional equivalent of “keeping up with the Joneses.”  In her parallel universe, the modern labor boss is no longer responsible for preventing the exploitation of children in factories or fighting for a 40-hour work week.  Instead, she is responsible for stacking the deck in favor of her members, who represent only a small fraction of the total workers in our nation.   This is special interest politics at its worst.

The American dream is an open door.  It is the “pursuit” of happiness, rather than a guaranteed outcome.  The individual is free to build a business, write the great American novel or invent a better mousetrap; he may also attempt these things and fail miserably, or make no attempt at all.  It’s up to him, or her.  This is the only realistic alternative to the false promise of income equality.  Such a “right” would require unsustainable levels of social and economic engineering.  Financial woes in the states and our federal debt lay bare the fatal errors of this so-called “right.”

The American Dream is also deeply personal and different for all Americans.  Defining the Dream, as Weingarten does, in unexceptional and universal terms, smacks of the dictatorship of the proletariat.  Instead, the Dream is an opportunity, a process with ground rules that allow unprecedented numbers of citizens to compete on equal footing, using their gifts in a way that will benefit society and help a person to meet their own basic needs and the needs of their families.  If one pursues excellence, he or she might fulfill more than basic needs.  With hard work and a few breaks a person might reach a personal pinnacle of their own definition.  Such an outcome is not a “right” that appears in the U.S. Constitution or anywhere else.

Furthermore, if the American Dream were a “right,” it certainly would not require any individual pay protection money to big labor in the form of monthly dues.  Such a right, if it existed, would necessitate what John Calhoun described in A Disquisition on Government as a legitimate, “controlling power” – a functioning state government.  This is something currently denied the people of Wisconsin by legislators who scurried away under the glare of lights turned on them in Wisconsin’s capitol dome.  Proclaiming a mythical “right” to the American Dream, these duly elected, sworn representatives deserted their constituents to protect union bosses who contributed massively to their campaigns.

In Wisconsin, Governor Scott Walker should take comfort in the words of Madison, Calhoun and Sumner and allow them to further strengthen his resolve to stand up to the tactics of the unions. The “right” to an American Dream as defined by Randi Weingarten is not an innocent myth but a dangerous deception perpetrated for the mutual benefit of big labor and its legislative allies. 

Writing seventy years after Calhoun, Sumner said, “A criminal becomes a martyr if he can put his crime under some great generalization about rights.”  Manufacturing a “right” to the American Dream constitutes just such an attempt by big labor.  It stands as the epitome of self interest described by John Calhoun, and requires that government act as the “controlling power” in order to prevent the destruction of the bonds of society.