Uncharted Territory" in WA; Calpers Bargains with Schwarzenegger; "Fairy-Tale Promises" in NJ; "No Choice" in NY; Lawsuits in CO, SD, MN over Pensions

Pension and budget crises are hitting numerous states simultaneously. In some states lawsuits are flying. Here is a roundup sample that shows the crisis has reached critical mass.

Washington State in "Uncharted Territory"

KOMO News reports Washington State budget deficit hits $520 million, 6.3 pct cut next

Low tax collections are driving a new state budget deficit of about $520 million through mid-2011, leading to spending cuts of about 6.3 percent from Gov. Chris Gregoire.

Thursday's state revenue forecast showed continuing weakness in the national and state economies following the Great Recession. Arun Raha, the state's chief economist, said the economic picture is still in "uncharted territory."

Tax collections for the following two-year budget period are projected at about $670 million lower than previously expected. That makes the total drop in expected revenues about $1.4 billion, and the projected deficit for the upcoming 2011-2013 budget around $4.5 billion.

Spending cuts won't touch certain areas, such as basic education, pensions and debt service. But Marty Brown, Gregoire's budget director, said social services, corrections and community colleges will clearly face significant losses. That could lead to larger community college classes, fewer services for ill people and more.

Any plan that will not touch education or pensions is as advisable as pissing in the wind.

Schwarzenegger Proposes Calpers Loan $2 Billion to California to Balance Budget

Bloomberg reports Calpers in Talks With Schwarzenegger on $2 Billion Budget Loan

The California Public Employees’ Retirement System said it is in talks with Governor Arnold Schwarzenegger’s administration on a proposal to borrow $2 billion from the fund to help the state balance its budget.

Anne Stausboll, the fund’s chief executive officer, said her staff has been holding informal discussions with Schwarzenegger’s department of finance on a proposal that office has floated to credit the state with $2 billion this year as an advance on the roughly $74 billion the governor estimates the state would save during the next 30 years from his proposals to roll back pension benefits for government workers.

California has been without a spending plan since the July 1 start of its fiscal year as Schwarzenegger and Democrats who lead the Legislature remain deadlocked over how to fill a $19 billion deficit. The Republican governor has vowed not to sign any final budget unless it’s accompanied by legislation to permanently cut the state’s cost to finance workers’ retirement benefits.

Note: The $2 billion loan idea came from Arnold, not CalPERS. Jack Dean at Pension Tsunami says "Calpers has been (rightfully) skeptical, even reluctant to discuss it."

Borrowing $2 billion from a pension plan to balance a budget, when the pension assumptions are 8.5% is simply nuts.

Schwarzenegger has finally taken a tougher stance against unions, but it's a little too late now that he is a lame duck.

Minnesota Pensioners Sue State Over Cutbacks

The Wall Street Journal reports Case Tests Retirees' Pension Cuts

A Minnesota court on Wednesday will consider whether the state can curtail pension benefits for current retirees from state jobs, in a case that could affect struggling public pension funds nationwide.

States have responded to budget shortfalls by raising the retirement age and cutting pension benefits for new hires. Minnesota last year replaced its previous pension formula, which increased retiree benefits annually based on investment gains and inflation, with a flat 2.5% increase. This May, the state lowered that increase for some retirees and eliminated it for others, until the pension plans are 90% funded, a level that could take decades to reach.

A group of Minnesota retirees already receiving benefits under older pension formulas sued the state in May, seeking class-action status.

State courts generally have ruled that states can't reduce benefits for workers who already have retired. While a ruling allowing Minnesota's new pension formula to stand wouldn't establish a single legal precedent across the country, it could encourage other states, hit by deep budget deficits and a wave of baby-boomer retirements, to try to reduce benefits for current employees and retirees.

Cases similar to Minnesota's are pending in South Dakota and Colorado, and other states are watching the Minnesota case closely as they ponder solutions to their own pension dilemmas.

Stephen Pincus, a lawyer for retirees in the Minnesota, Colorado and South Dakota cases, said courts have ruled that benefits for current retirees can be reduced only when the employer funding the pension plans is on the brink of insolvency.

Minnesota says retirees have no legal right to expect a specific formula of benefits. "A retiree's future benefits and rights are subject to reasonable legislative actions that are intended to preserve the fiscal integrity and stability of Minnesota's public employee pension plans," the state said in a court filing.

Jennifer Munt, a spokeswoman for the Minnesota council of the American Federation of State, County and Municipal Employees, said the public-employee union "reluctantly" supported the pension changes "because it protected our defined-benefit pensions by taking responsible actions to stabilize the pension funds." The union believes the retirees' lawsuit is "without merit," she said.

This is an enormous case and the most amazing thing about it is support for the state from the American Federation of State, County and Municipal Employees. Hopefully, the judge will take that into consideration.

"No Choice" in New York - Governor Patterson Blames Unions

CBS News reports Gov: ‘No Choice’ But To Lay Off State Workers Early

Going back on a pledge not to layoff state workers before Jan. 1, Gov. David Paterson said Thursday a round of layoffs will begin before the end of 2010 to close New York’s massive budget gap.

It’s always that last question that produces the bombshell: “Why aren’t you calling a spade a spade and talking about the unions in this state?”

And Paterson did not hesitate.

“They have left us no choice. We will probably, in fact, we will lay off workers before the end of the year,” Paterson said.

Patricia Baker is the VP of the Public Employees Federation, which represents 59,000 New York State professional, technical, and scientific employees. The state unions have a written agreement with the governor that he will not lay off workers before Dec. 31.

“We do have an agreement with the governor and we’re gonna hold him to that agreement,” Baker said.

“They have fought and tried to restrain our administration at every turn,” Paterson said.

“They will blame the layoffs on me, but in their hearts they know their failure to come to the table and give the slightest bit of concession is the reason that we are in the situation we’re in now,” Paterson said.

Indeed. This is the unions' fault. However, Patterson was a fool to make a promise he should have known could not be met.

New York Comptroller Projects Pension Fund Need 37% Taxpayer Boost

The Times Union says New York Pension Fund Drop = Tax Rise

Mandatory pension contributions for the state as well as municipalities -- including cities, towns and counties -- will jump 37 percent within two years thanks to a drop in the value of the recession-battered pension fund, Comptroller Thomas DiNapoli said Thursday.

And that likely means higher property taxes, deep cuts, or a combination of the two are just around the corner.

"Unfortunately, it takes the economy a lot longer to climb out of a hole than it takes to fall in it," DiNapoli said when he announced the rising contributions.

The percentage of their payrolls that governments will have to pay toward pension benefits will rise from an average of 11.9 percent to 16.3 percent for the payments due in February 2012. Many municipalities make that payment several months earlier to get a modest discount.

For police and firefighters, who are in a different, more generous pension system, the contribution will go from 18.2 percent of payroll to 21.6 percent. That's a 19 percent rise.

The bad pension news was pounced on by Republican Harry Wilson, who is challenging Democratic incumbent DiNapoli for the comptroller's job.

"I think we need to continue with the defined-benefit plan," DiNapoli said.

DiNapoli is incompetent and should be voted out of office.

"Fairy-Tale Promises" in New Jersey, Legal Battles in CO, SD, MN

Yahoo!Finance reports NJ gov. decries generous `fairy-tale promises'

After telegraphing his intentions for months, Christie spelled out the details of his proposal Tuesday. They include: repealing an increase in benefits approved years ago; eliminating automatic cost-of-living adjustments; raising the retirement age to 65 from 60 in many cases; reducing pension payouts for many future retirees; and requiring some employees to contribute more to their pensions.

"We must reverse the damage caused by fairy-tale promises that have fattened benefits and pensions to unsustainable levels," the governor said.

Christie has warned that New Jersey's pension fund will go belly up unless something is done to close the $46 billion gap between how much the state expects to bring into the system and how much it has promised to workers. Other states' pension funds are in shaky condition, too.

Keith Brainard, research director for the National Association of State Retirement Administrators, says it may be unprecedented that so many states at once are raising employees' pension contribution rates.

Among the developments around the country:

-- In Mississippi, employees of state and local governments and school districts are now being required to put 9 percent of their pay into the state retirement system, up from 7.25 percent.

-- Rhode Island in 2009 reduced cost-of-living increases and tightened eligibility requirements for retirement. Previously, employees could retire with 28 years of service. Now, those already employed by the state will have to meet a new standard that takes both age and years of service into account.

-- In Wyoming, as of Sept. 1, employees will have to start paying 1.4 percent of their salaries into a pension fund -- the first time in a decade the workers have had to contribute anything.

-- Vermont earlier this year changed the retirement age for many current employees. They must be 65, or their age and years of service must add up to 90. Previously, retirees had to be 62 or have 30 years of service at any age.

-- Lawmakers in Colorado, South Dakota and Minnesota rolled back cost-of-living increases this year for public employees who already have retired. In Colorado, retirees had gotten 3.5 percent annual increases. They are getting no increase at all this year, and future ones will be capped at 2 percent.

Legal challenges to the cuts have been filed in all three states.

"Whether legislatures have the power to change benefits for people who are already in the system, that's a tough question," said Ronald Snell, an analyst for the National Conference of State Legislatures who monitors public pension issues across the country. "It's unresolved in a lot of places."

Public Reaches Boiling Point

As always, three cheers for Chris Christie. Three cheers also for the actions of Colorado, South Dakota and Minnesota. These are small step by those states (in monetary terms of what needs to be happen), but gigantic steps in terms of possibilities if the court upholds the actions.

The public has reached the boiling point with public unions, and rightfully so. Unfortunately, fear of losing their jobs is the only reason some politicians have seen the light. Nonetheless, these actions are a very welcome step in the right direction, regardless of how weak the political motivation.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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