The Tenth Amendment.

Part Two of Mary's guide to public pensions.

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Mary Williams Walsh has been covering public and private pensions for much of her professional career, at The Wall Street Journal, The Los Angeles Times and, most recently, The New York Times. Few, if any, have done it better.

Long-time News Items subscribers will recall this newsletter’s long-running fascination (some would say “ morbid obsession”) with “unfunded pension liabilities,” a room-emptier at a dinner party but an issue of enormous importance in the realm of non-performative politics and public policy.

Below, is the second part of Mary’s two-part report on public pensions and why they haunt (and will continue to haunt) state and local governments. It’s all about the 10th Amendment. Who knew? — John Ellis

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Foreward:

We’ve been explaining why public pensions evolved so differently from company pensions over the years. To a surprising degree, it’s been shaped by the Tenth Amendment — the amendment that limits federal power over the states. This explains why companies have to jump through all sorts of hoops to comply with the federal employee-benefits law, ERISA, but states and cities do not. Congress tried many times to enact a “PERISA” for the public sector, but it got nowhere. The states also demanded their own accounting rules-making board. It decided, in 1994, that government pension obligations should not be disclosed, because they were just “actuarial estimates” that “might mislead” the public. The omission helped set the stage for large, expensive public pension increases during the dot-com bubble that could not be reversed after the bubble burst. The resulting obligations are taking decades to work their way through the system. 

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Chapter 8: Pensions Sink a City.

By June 2007, GASB (Governmental Accounting Standards Board) was having second thoughts about its decision to keep public pension obligations hidden away, off government balance sheets. It said its research showed that it would be “highly valuable” for stakeholders to be able to check how well public pensions were being funded. It told states and local governments to disclose, in the footnotes of their financial statements, how completely the assets in their pension funds covered their obligations.

Government pension obligations would finally come out of the shadows. 

But there would still be those dicey “actuarial estimates,” not the precise numbers the SEC called for companies to report in 1994. And they would appear in the footnotes, not the financial statements.

Still, it was a big step.

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By 2007, the U.S. economy was in another bubble. Housing prices had peaked. So had household debt. Homeowners everywhere had been using second mortgages and home-equity loans to pull cash out of their overvalued houses. Now many were running into trouble repaying all that debt. Waves of foreclosures began. This was very bad news for cities. They had grown accustomed to ample property tax revenues when home prices were high. Now the revenue was drying up, and whole cities were starting to teeter.

Vallejo, Cal., couldn’t make ends meet. In May 2008 the city went bankrupt. A big part of its problem was underfunded pensions. 

Remember those dot-com-era pension increases, straining local finances as they work their way through the system? Vallejo provides a good example. In 1999 the California legislature offered local governments the chance to increase their workers’ pensions, promising that the increases wouldn’t cost “a dime,” thanks to soaring investments at Calpers, the state pension system. Calpers drew up a menu for localities to choose from. Since it wasn’t going to cost “a dime,” Vallejo chose the richest option for its police: retirement at age 50, with pensions of up to 90 percent of their final pay, and annual cost-of-living increases every year for the rest of their lives.

Vallejo went bankrupt planning to cut back its pensions. Bankruptcy is all about “shared sacrifice,” the idea that everybody should bear some losses for the good of the whole. But Calpers took pensions off the table. If Vallejo touched anybody’s pension, Calpers warned, it would sue and tie the city up in court for years. Instead of saving millions on pensions, Vallejo would spend millions on legal fees. 

Rather than fighting Calpers, Vallejo decided to leave pensions alone and cut other things, like street repairs, fire service, retiree health care, and the interest on its bonds.