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California's Cities Aren't Alone – Unions Trample Finances in Scranton, Pennsylvania

The city of Scranton hiked property taxes 57% and garbage collection fees 69% to shore up a police and fire pension funds that will run out of money anyway, in 5 years and 2.5 years respectively.

Amusingly (to outsiders) but certainly not to Scranton taxpayers, Scranton Pensions Increased as Much as 80 Percent as a result of inane mayoral promises.

 The 2011 court ruling that awarded huge raises and millions of dollars in back pay to Scranton firefighters and police officers was a windfall for retirees too, with some seeing a more than 80 percent hike in their pensions between 2008 and 2012, a Times-Tribune investigation found.

The increase, most of which was paid in 2011, made the retirees among the highest paid in Pennsylvania, the newspaper’s review of the Public Employee Retirement Commission records revealed.

The increased pensions come at a time when Scranton, in distressed status since 1992, is struggling to survive. Faced with a $20 million deficit, council enacted a 2014 budget with massive tax increases — hikes of nearly 57 percent in property taxes and 69 percent in garbage fees. The recently passed 2015 budget hiked property taxes 19 percent.

The plans’ actuary, Randee Sekol, recently cited the raises as one of the key factors that have pushed the funds closer to insolvency. With a deficit of $78.8 million as of 2012, the fire fund is projected to run out of money within about 2½ years, while the police fund, with a deficit of $62 million, has less than five years left.

The city had no choice but to approve the pension hikes, issued under former Mayor Chris Doherty’s administration, because they are contractually obligated under the union contracts, said city solicitor Jason Shrive.

No Choice?!

Of course the city had a choice. Actually, the city had two reasonable actions and curiously, Shrive even mentioned one of them.

 Last week, the city asked the fire and police pension boards to forgo that increase. Both boards rejected the request.

Mr. Shrive made the request based on a section of the Class 2A city code that states no increases can be granted to retirees if an actuary determines the fire and police funds are not actuarially sound. Scranton is the only Class 2A city in the state.

Mr. Shrive acknowledged that the union contracts obligate the city to pay the retirees’ raises, but he said he believes state law, which mandates the city follow the Class 2A code, takes precedent.

Tell, Don’t Ask

Given Class 2A law, you don’t ask police and fire for cuts, you tell them. Then if they fight, you make the final step:

Declare Bankruptcy on the Spot 

The police and fire departments would have to plead their case in federal bankruptcy court, most likely getting haircuts of 50% or more.

Ultimately, bankruptcy is where all these cases are headed. Taxpayers certainly don’t deserve preposterous tax hikes while inept politicians look for ways out, because there are no ways out.

In the meantime, collective bargaining of public unions needs to go the way of the dinosaur. Public unions and the hack politicians who support unions have wrecked more city and state budgets than the next 10 things combined.

About the Author:  Mike Shedlock is the editor of the top-rated global economics blog Mish’s Global Economic Trend Analysis, offering insightful commentary every day of the week. He is also a contributing “professor” on Minyanville, a community site focused on economic and financial education.

More Pension Truths and Why You Should be Very Angry

How much is that sweet retired teacher who lives down the street draining from your bank account? As the public employee pension mess worsens in California, little Rhode Island shows a way out.

In last week’s post, I focused on “air time,” a little known scheme in California and 20 other states that allows teachers and other public employees to pad their pensions at taxpayers’ expense. Also, not very well known is just how many of Joe and Jill Taxpayer’s tax dollars are going into the pockets of retired teachers.

In California, teachers contribute 8 percent of their pay to their retirement system. Where do the rest of the contributions come from? The current rates include 8.25 percent from the teacher’s employer and 2 percent from the state. But wait a minute. Who is the teacher’s employer? It’s the school district. In Los Angeles, for example, most school district money comes from the state, some from the federal government and the rest is local revenue. Hence, the employer’s contribution is all really the taxpayer’s burden, as the state, city and feds generate no money on their own. So it would be much more honest to say that 10.25 percent comes from the taxpayer.

Let’s look at the taxpayer’s responsibility another way. Sandy, a teacher I know, worked for 24 years in CA and retired at age 61. The amount of money she contributed into the system at retirement (including interest accrued along the way) was about $150,000. Sandy started collecting a pension of about $40,000 year (plus a yearly 2 percent COLA increase) for life. Whatever interest this money accrues over the next few years, Sandy’s contribution will have evaporated in about four years. So, at age 65 she will start living off other people’s money – whatever the “employer” (i.e. taxpayers) kicked in, whatever the “government” (i.e. taxpayers) kicked in and whatever is left, the taxpayers will have to fork over.

Should Sandy live to be 80, 15 years of her pension will be coming from the taxpayer – about $600,000 worth. (Note: there are about 755,000 current and retired teachers in the state as well as another 1.6 million in the California Public Employee Retirement System who can and are taking advantage of this system.)

Can anyone justify this? Hardly. The question then becomes what to do without impoverishing retired teachers and other public employees, while at the same time stopping the rip-off of taxpayers.

First, those who are retired need to show good will and agree to take a cut in their pensions. Additionally, those districts offering virtually free health care for life – many teachers are required to contribute only miniscule co-pays — need to curtail their generosity.

An example of what can be done just took place in Central Falls, Rhode Island. About to go under due to its suffocating union contracts, the city convinced firemen and cops to agree to accept a cutback in their pensions. Accomplished in a Democrat controlled state, maybe there is some hope for the rest of the country. Rhode Island State Treasurer Gina Raimondo recently gave a talk at the Manhattan Institute where she explained that they pulled off such a feat with “political nerve and good judgment.

“The plan enacted in November cuts $3 billion of the state’s $7 billion unfunded liability by raising the retirement age, suspending cost-of-living increases until the pension system is 80% funded, and even moving workers into a hybrid plan that has a smaller guaranteed annuity along with a 401(k)-style defined-contribution plan.

“‘We decided we owe each other a bright future,’ said Ms. Raimondo, who said she and fellow Democrats (as well as Independent Governor Lincoln Chafee) came to the conclusion they could no longer afford the lavish promises made to state workers without destroying economic opportunity for everyone.

“‘More government revenue wasn’t an option because Rhode Island already suffers from the nation’s 5th highest state and local tax burden—a full 10.7% of per capita income, according to the Tax Foundation. Everyone in the pension system had to give something, from new employees to retirees.’ But a key to reform, Ms. Raimondo said, was to avoid blaming these beneficiaries for the mistakes of the past. ‘No finger pointing’ was her mantra, along with a corollary: ‘Math, not politics.’

“The first step was an education campaign to explain why a tiny state could not afford an unfunded liability that was more than $7 billion and headed north. This also helped to blunt union opposition. Once there was a consensus that the problem was real, citizens were ready to consider solutions.

“Ms. Raimondo said those solutions had to be discussed openly. Rhode Island’s reform process was so transparent that even when a draft bill to implement the changes leaked to the press before its formal introduction, it was essentially a nonstory because the reforms had already been discussed publicly.”

Those of us in California need look at what has happened in Rhode Island – recognition of a big problem, honest dialogue about it, transparency, shared sacrifice and a move to privatization – and start the ball rolling in that direction. Teachers and other public employee pensioners need to come forth and be a part of the process. They need to recognize that pension fund managers are clueless Pollyannas and that their unions have conned them by insisting that the current system is sustainable. This cannot happen too soon. If we don’t do something in the near future, the state could conceivably go into default and we could see the current exodus of business owners and taxpayers become a full-fledged stampede if California’s fiscal malaise gets any worse. I wonder how many Californians can fit into sensible little Rhode Island?

About the author: Larry Sand, a former classroom teacher, is the president of the non-profit California Teachers Empowerment Network – a non-partisan, non-political group dedicated to providing teachers with reliable and balanced information about professional affiliations and positions on educational issues.

State Sponsored Thievery Continues in Plain Sight

Teachers and other public employees use “air time” to pick your pocket. The California State Teachers Retirement System tries calming words. David Crane tells the truth and loses yet another job.

Saying that the state teachers’ retirement system is underfunded is the understatement of this or any year and now, CalSTRS is giving us specifics. On December 27th, it said,

“Recent media reports have suggested that to solve the unfunded liability the state will have to increase CalSTRS funding by $3.8 billion a year for 30 years for a total of more than $114 billion. Although this is an accurate statement based on current projections, achieving adequate funding can occur several ways that would be phased in over time. The CalSTRS $56 billion funding shortfall can be managed, but it will require gradual and predictable increases in contributions.”

In fact, saying that the shortfall has to be “managed” is like saying that World War II had to be managed. No, the reality is that there has to be major destruction and rebuilding, no matter how unpopular this will be with the beneficiaries of the theft, their unions and their kick-the-can-down-the-road buddies in Sacramento who are occasionally known as legislators. Tinkering around the edges and “managing” the problem will do little.

But even before we start dealing with the restructuring, we must stop the rampant gaming-the-system that continues to make a horrible situation even worse. We’ve all heard stories of public employees who retire, collect a big disability pension, but take another job at full pay displaying no signs of their disability. Even a healthy teacher can retire, still continue to work and collect $31,200 a year while receiving a full pension.

But there is one abuse that has received very little attention: purchasing service credit or “air time.”

Air time fleeces taxpayers in 21 states including California. It means very simply that public employees can plunk down some cash and purchase “years on the job” which can add a significant amount of money to their pension. In fact, pensions can be boosted up to 25% using this scam. Dan Pellissier, a adviser to California’s previous governor, Arnold Schwarzenegger, paid $75,000 in 2004 for five years of work credit. When he turns 55 in 2015, he will get a pension of $61,536 a year — almost $13,000 more than if he hadn’t bought air time. That’s $320,000 extra by the time he is 80.

For teachers, the results can also be dramatic. The CalSTRS website does a bang up job letting teachers know how best to game the system and screw the taxpayer…er, I mean, the website does an excellent job of explaining teachers’ “air time” rights. In a simple two page document, they explain just how it works for “Rick.”

“This year, if Rick purchases one year of service credit when he is 32 and his highest annual earnable compensation for the last three years is $35,000, his $100 extra a month will cost $5,950.”

So if Rick retires at 55, he will get a $100 extra a month for the rest of his life. The $5,950 he paid to buy air time will be recouped after just five years of retirement. So beginning at age 60, the taxpayer begins to pay Rick that extra $100 a month. If Rick lives to be 80, the taxpayer will be on the hook for an extra $24,000. Keep in mind that there are 755, 000 potential and actual abusers in CalSTRS and another 1.6 million in the California Public Employee Retirement System (CalPERS), where air time is also a reality. Hence while that $24,000 might not seem like an outlandish figure, there are over 2.35 million people in CA with the ability to take advantage of this state sponsored thievery. If just 10 percent of the states’ workers do what Rick does, the taxpayer is dinged for another $5.65 billion.

That the pension mess in California is spinning out of control is a given, but if you are in a position of power and dare to talk about it, be prepared to lose your job. David Crane, a Democrat, was appointed to the CalSTRS board by Arnold Schwarzenegger, but was denied confirmation in 2006 after repeatedly questioning the solvency of the system. He was told that the job of trustees is “only to protect members’ benefits,” not to worry about the long-term effects of the benefits on the state budget.

The nerve of Crane!

Then, a year ago, Crane was appointed as a University of California Regent but was just excused from that position because of his incorrect thoughts on the importance of curtailing some collective bargaining “rights” for public employees.

David Crane is a latter day Paul Revere. But if the American Revolution took place in modern Sacramento, he’d be tarred and feathered for essentially not minding his own business. Never mind the looming fiscal disaster that is around the corner for all of us in California. Let’s just not talk about it.

About the author: Larry Sand, a former classroom teacher, is the president of the non-profit California Teachers Empowerment Network – a non-partisan, non-political group dedicated to providing teachers with reliable and balanced information about professional affiliations and positions on educational issues.