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Time for Government Pension Reform

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From New York to California, there is a ticking time bomb set to go off at any time. Unfunded public employee pension liabilities are choking governments, preventing investments in education and transportation, creating the need for tax increases and jeopardizing compliance with balanced budget laws.
Fortunately, some in Virginia are taking steps to prevent the Old Dominion from falling into such a morass.

The public pension morass is bigger, more wide ranging, and ultimately more costly than the financial crisis that prompted billions in bailouts. For years, elected officials have quietly succumbed to lobbying pressure by ASFCME, SEIU and other public sector worker unions, to, as Fortune magazine put it, “allow workers to dramatically spike their pre-retirement compensation, to retire on more than 100 percent of their pay, and to draw both their salaries and pensions, with guaranteed market returns, simultaneously.”

According to the Federal Reserve, the obligations of state and local governments have doubled in the past decade, to $2.4 trillion, a figure that excludes more than $1 trillion in unfunded pension and retiree health-care liabilities.

The Pew Center on the States looked at 231 state employee pensions and found the total required employer contribution in 2008 was $64 billion.
To pay this debt, taxpayers will have to spend $1 million a day for the next 2,740 years. That’s about $8,800 for each American household, on top of an estimated $120,000 share of the national debt.

Recently, outrageous government employee pension packages were exposed in the news media.  Not only was there fraud among employees of Bell, California, but it was revealed that the city administrator of Vernon, California, population 91, earned  $510,000 a year, not including health benefits. Imagine what his pension benefit will be.

After the revelation of these outrageous compensation packages, MSNBC asked viewers to submit other examples. The network received more than 1,000 tips in less than two weeks. The twenty most egregious were published.

In Virginia, a new law took effect July 1 that requires new state employees to contribute 5 percent of pay toward pensions, but gave local governing bodies the option of covering the cost for new hires. The General Assembly will consider new legislation in 2011 that would require all public employees — not just those hired after last June 30 — to pay 5 percent of their salary toward their pensions.

The fact is, taxpayers are faced with an enormous bill for the luxury of having too many government employees, making too much money (salary and benefits), for too long. The consequence is not only a stifling financial liability, but a government too big to succeed.

What should be done?  Here are a few common sense steps:

  • State employees should be transferred to a defined contribution, 401(k)-style plan, like those in the private sector, they can manage themselves, rather than a defined-benefit plan run by the state.
  • Government compensation at all levels needs to review compensation plans to make certain they are at parity with the private sector.  The heritage Foundation estimates that such a move by the federal government would save taxpayers $47 billion a year.
  • A true pay freeze, not the Swiss cheese plan recently announced by President Obama, should be imposed at every level of government.
  • A government hiring freeze should also be imposed.  Reductions can be achieved through attrition.  A employees leave the government payroll, they positions should not be filled.
  • Restrictions on “double-dipping” should be enacted.  The MSNBC expose found the Phoenix, AZ police chief retired in 2007 with a one-time payment of $562,000 and an annual pension of $90,000. Two weeks later, he was rehired by the city rehired him as its “public safety manager” – essentially the same job he just left – at a salary of $193,000 per year.
  • Government should govern, not run businesses.  Commercial activities have no place in government.  That is why ABC privatization is a must.  The Commonwealth Competition Council must get back to its core mission of identifying Virginia activities that duplicate and compete with the private sector.  At the federal level, 850 employees out of 1.9 million (not including Postal Service or uniformed military) are in positions that are commercial in nature.  These jobs should be privatized.  So, too, should the Postal Service, which last year lost $8.5 billion (UPS had first-quarter profit in 2010 of $533 million, or 53 cents a share, up from $401 million in the same period in 2009).

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