Belmont Club

Out of Money

In December of 2010 the NYT ran an article describing what happens when a government runs out of money to pay pensions that are required to be paid by law.

PRICHARD, Ala. — This struggling small city on the outskirts of Mobile was warned for years that if it did nothing, its pension fund would run out of money by 2009. Right on schedule, its fund ran dry.

Then Prichard did something that pension experts say they have never seen before: it stopped sending monthly pension checks to its 150 retired workers, breaking a state law requiring it to pay its promised retirement benefits in full.

Since then, Nettie Banks, 68, a retired Prichard police and fire dispatcher, has filed for bankruptcy. Alfred Arnold, a 66-year-old retired fire captain, has gone back to work as a shopping mall security guard to try to keep his house. Eddie Ragland, 59, a retired police captain, accepted help from colleagues, bake sales and collection jars after he was shot by a robber, leaving him badly wounded and unable to get to his new job as a police officer at the regional airport.

Far worse was the retired fire marshal who died in June. Like many of the others, he was too young to collect Social Security. “When they found him, he had no electricity and no running water in his house,” said David Anders, 58, a retired district fire chief. “He was a proud enough man that he wouldn’t accept help.”

Such dire scenarios were brought to mind by a California commission’s report that in order to save the State’s public pensions, California state and local governments had to “roll back pensions for existing employees, dump guaranteed retirement payouts and put more of the pension burden on workers”. This, despite the fact that the “Courts have ruled that pensions are legally protected property and that government has a contractual obligation to follow through with them.”

The message is clear. In any collision between the laws of government and the laws of arithmetic, arithmetic wins. So California Governor Jerry Brown told the Legislature that unless taxes were increased, he would have to find some way to cut $25 billion from the State’s budget.

For the first time Thursday, Brown seemed ready to include discussion of pension changes as part of the budget negotiations. He sparred with Assemblywoman Diane Harkey (R-Dana Point), asking if she would support the tax package if it were coupled with a plan to curb pensions.

Meanwhile, the public sector unions said they would take their fight to keep the pensions behind closed doors because they have “friends in high places” they do not want to embarass. Reuters reported “California state employee unions will fight bills aimed at cutting their pensions, but will wage battle behind closed doors, unlike the public struggle over collective bargaining rights in Wisconsin.” And they are confident that, despite the financial difficulties of the state, some way may be found to square the circle.

Steve Maviglio, a Democratic consultant and former aide to top lawmakers, said the bills were “dead on arrival.” “The notion that there will be wholesale change to the pension system is a political nonstarter,” he said…

Despite the sense of urgency, California’s public employee unions can rely on the support of Democrats to block proposals for major changes to pensions.

In addition to the support of Democratic lawmakers, the unions have a friend in Democratic Governor Jerry Brown. But he has signaled support for some pension changes.

And with good reason too. Brown, having ruled out additional borrowing to cover budget shortfalls, knows that if the pensions are held sacrosanct then the pain of covering the shortfall must be spread over everyone else. That means Brown can only buy peace with the unions at the price of starting a beef with the rest of the State’s stakeholders.

Rahm Emmanuel in the other Blue stronghold of Chicago was saying things that could have come directly from California’s Little Hoover report. Emmanuel was said to favor cutting benefits not just for new hires, but for existing employees.

while nobody expects a showdown with the unions as bitter as the one gripping neighboring Wisconsin, observers see coming painful negotiations with municipal unions similar to those other Democratic-leaning big cities and states have had to engage in recently.

According to published accounts, the 51-year-old Mr. Emanuel, who takes office May 16, said in a private meeting with union heads in December that he favors cutting pensions of all city employees, not just the new hires.

Like their California counterparts, the Chicago unions expressed the hope that they would be but lightly touched for political reasons.

“Emanuel is a good Democrat. We know that President Obama has spoken out in support of collective bargaining for the union and has come out in opposition of Gov. Walker of Wisconsin,” said Ken Janda, a professor emeritus of political science at Northwestern University in the Chicago suburb of Evanston. “He’s not likely to take any action that will result in any substantial balancing of the budget on the backs of labor unions.”

And that means, according to the iron laws of arithmetic, that the budget has to be balanced on the backs of someone else, probably the tax payers. Neither Chicago nor California may see a replay of Wisconsin, but it will see something. Tolstoy, had he been a professor of political science, might have observed that “all solvent governments are alike; but all bankrupt governments are bankrupt in their own way.”

But the best commentator on humanity’s curious power to believe that patronage can triumph over nature is Mario Puzo. In the Godfather, Don Corleone visits a henchman who is dying of cancer. Yet Genco continues to believe that his disease can be “fixed” — he believes it because everything in his life hitherto could be “fixed”.

GENCO: Godfather, Godfather, it’s your daughter’s wedding day, you cannot refuse me. Cure me, you have the power.

DON CORLEONE: I have no such power…but Genco, don’t fear death.

GENCO: (with a sly wink) It’s been arranged, then?

DON CORLEONE: You blaspheme! Resign yourself.

GENCO: You need your old Consigliere. Who will replace me?

Stay with me Godfather. Help me meet death. If he sees you, he will be frightened and leave me in peace. You can say a word, pull a few strings, eh? We’ll outwit that bastard as we outwitted all those others.

(clutching his hand)

Godfather, don’t betray me.

But there are somethings nobody can really fix. And one of them are inexorable sums of positives and negatives. We all of us wished we could make the totals read what we want. But we can’t. Like Genco, the day comes when the fires of financial hell cannot be held back.

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