Union contracts driving pension crisis

Maryland’s $37 billion public pension system earned a pitiful 0.36 percent return on its investments last fiscal year.

How embarrassing is that? Even the fiscal basket case that is California was able to eke out a 1 percent return. Indeed, the news for Maryland looks “like a minor disaster for fiscal 2011,” in the prosaic words of Jeff Hooke, chairman of the Maryland Tax Education Foundation. That’s a lot like saying the Trojan War was a minor disagreement over a girl.

Sadly there’s no brave and clever Odysseus waiting in the wings to save Maryland. Instead, state officials continue to wrap themselves in delusion. State Treasurer Nancy Kopp, for example, who chairs the pension system’s trustees, explained, “The board continues to focus on long-term performance. Taking the long view, the system has on average exceeded the assumed rate of return over the last 25 years, which is a more appropriate measure of performance.”
Nothing to see here, folks.
The truth is that things are even worse than official numbers suggest, both in Maryland and across the country. As a new report from State Budget Solutions notes, government accountants have a way of cooking the books.
“The accounting rules followed by U.S. public sector pensions are more forgiving than those required for private sector pensions,” the report states. “So-called ‘fair market valuation’ more fully reveals the value of public sector plan liabilities and shows that the average public employee pension plan in the United States is only around 41 percent funded while total unfunded liabilities as of 2011 are roughly $4.6 trillion.”
That is a very large and very scary number. For the average citizen, it will eventually mean higher taxes, cuts in government services, or both. After all, you can only fudge those numbers for so long before the bill comes due, and when it does, the money has to come from somewhere. That somewhere is the taxpayer’s wallet, the font of all government expenditures.
How did it get so bad? The Great Recession (2008-present) is receiving a lot of the blame, but that is really only the proximate cause. Ultimately it is the collective-bargaining agreements of public employee unions that are responsible for our dangerously large pension obligations. The obligations leave state budgets weakened to such an extent that they are particularly vulnerable to unforeseen crises like the one we experienced recently.
It all stems from an open yet corrupt bargain: Unions spend millions to help elect labor-friendly politicians. Once in office, the politicians repay them with bountiful benefits for government workers. Everyone wins except the taxpayer, who is effectively sidelined as the public pie gets carved up between the politicians and unions.
So it’s really no surprise that the states with the worst pension problems are also some of the states where public-sector unions wield the most power, such as Maryland. According to labor analyst James Sherk of the Heritage Foundation, 47 percent of Maryland’s state workers are covered by union contracts. In the Competitive Enterprise Institute’s 2012 Big Labor vs. Taxpayer Index, Maryland ranks 41st — in other words, only nine states have laws more favorable to labor bosses in their taxpayers.
As my CEI colleague Ivan Osorio observes, “Pension underfunding will remain a problem as long as politicians can fudge the numbers for political advantage.” True, but as cities and states all across the nation stare into the gaping chasm that is bankruptcy, the day may soon be coming when it is no longer politically advantageous to hide the truth from taxpayers. Or so we can hope, anyway.
Matt Patterson ([email protected]) is a senior fellow at the Center for Economic Freedom at the Washington-based Competitive Enterprise Institute.