There was a good article this weekend in the Washington Post about the State of Virginia, where collective bargaining for public employees is illegal. And yet, lo and behold, Virginia 1) provides a defined benefit pension plan for its employees and 2) that pension plan is significantly underfunded. (The state employees pension fund is about 74% funded and the teachers pension fund is about 69% funded -- pretty normal for pension plans at this moment.) This in turn seems illustrative to me of two points -- first, that offering people pensions as a way of attracting them to state employment is pretty much the norm, even in a non-unionized environment; and second, that pension plans are underfunded pretty much across the board, be they private or public, the product of collective bargaining or not. And it's that latter point that just doesn't seem to be getting communicated to people. Pension funds are underfunded not because of unions and their rapacious demands -- they are underfunded because the investment returns of the last decade have sucked. It's that simple. Well that and the fact that some states have shortchanged their contributions to the plans in order to make their balance sheets look more favorable.
At the risk of being repetitive, pension plans are funded based on the assumption that they will have long term annualized earnings of approximately 7% to 7.5%. (CALPERS, the primary California state employee pension plan is a little more optimistic -- they use 7.75%). In order to achieve these results plans typically hold at least half of their assets in stocks. So when the broad stock market is negative -- as it was in 2000, 2001, 2002, and 2008 -- by 37% alone in 2008 -- and when it is cumulatively negative for a nine year period, as it was from 2000 through 2008 -- pension plans will not be able to meet their funding targets. It's just not possible. But, contrary to what some have been claiming, these assumptions are not historically unreasonable -- we've just lived through a period of extraordinarily bad markets.
The thing is, though, unions have had virtually no impact on pension plan funding as is illustrated by the example of Virginia. Yes, there are the odd police and fire pension plans where abuses occur -- usually related to disability claims or manipulation of overtime -- but they in no way explain the existence of funding problems. Pension plans will return to sound health when markets have recovered sufficiently to make up these shortfalls -- a little inflation and higher interest rates would help. In the meantime, most places, again whether unionized or not, will find it necessary to trim future benefit obligations and to increase the amount of money put into the plans, whether via the state or through employee contributions to help bring liabilities and assets into balance.
Similarly, the presence -- or absence -- of unions does not explain state fiscal problems. They stem plain and simply from the recession and, again, have affected states with both strong unions and no unions at all. Revenues are down because income is down, property values are down, and sales were down, attacking the three sources of revenue typically available to states. At the same time, expenditures on things like unemployment insurance and Medicaid have gone up. Put people back to work and resolve the mortgage crisis and state finances will largely take care of themselves. Unfortunately, the requirement that states balance their budgets is prompting layoffs and large scale expenditure cuts, just the opposite of the expansionary policies that should be dictated by the recession. If we had a decent news media -- especially in television -- these facts could be conveyed to the public in an easily understandable fashion. Instead, however, there seems to be a deliberate attempt to misinform the audience while stoking resentment and confrontation. It makes for good television I guess, but lousy public policy and an ill-informed electorate.
