Mitch McConnell to State Pension Funds: Drop Dead
The Senate Majority leader Mitch McConnell today said there would be no bailout for state pension funds and states should declare bankruptcy instead. His remarks were no doubt meant to apply to any municipalities that were hoping to get rescue money and direct some of it to their pensions. From Bloomberg:
Senate Majority Leader Mitch McConnell said Wednesday he favors allowing states struggling with high public employee pension costs amid the burdens of the pandemic response to declare bankruptcy rather than giving them a federal bailout….
“You raised yourself the important issue of what states have done, many of them have done to themselves with their pension programs,” he said. “There’s not going to be any desire on the Republican side to bail out state pensions by borrowing money from future generations.”…
McConnell may also find himself in conflict with President Donald Trump. The president said Tuesday after meeting with New York Governor Andrew Cuomo that states will need assistance. “And I think most Republicans agree too, and Democrats,” Trump said. “And that’s part of phase four.”
It’s ironic to see McConnell’s media interlocutors single out California, Illinois and New Jersey as profligates when McConnell hails from Kentucky, which the most spectacularly underwater major pension system in the US. Perhaps one motivator for McConnell is that any allocation of Federal monies to other pension systems could stabilize them a bit, while Kentucky is a goner. It is also ironic that New Jersey, with one of the biggest gaps in terms of the dollars involved, is in its sorry state because Republican Governor Christie Todd Whitman chose to starve it, a decision that was widely criticized at the time.
There is more and less to what McConnell said that one might think. First, his statement got pushback not just from Democrats but even Republican senators and even a bit from Donald Trump, so he might not be able to muster the votes to be as punitive as he’d like. For instance, from a New York Republican:
.@senatemajldr McConnell’s dismissive remark that States devastated by Coronavirus should go bankrupt rather than get the federal assistance they need and deserve is shameful and indefensible. To say that it is “free money” to provide funds for…
— Rep. Pete King (@RepPeteKing) April 23, 2020
Second, money is fungible. States and municipalities do appear likely to get some sort of fiscal injection. The way government entities deal with underwater pensions is typically by increasing contribution levels over time. It would seem hard to prohibit various states and cities from continuing their current pension contribution levels even if they include amounts meant to address underfunding. For instance, the CalPERS system consists of 2200 pension plans. CalPERS provides the employers a schedule of payments based on that plan’s membership, terms, funding level, and CalPERS’ return assumptions. There’s no breakout of “Here’s the part of that payment that covers the underfunding”. And I can’t imagine any public pension would make that computation. It would only fan the flames of resentment.
However, McConnell appears intent to assist states and cities only with coronavirus costs, and not address the huge hits their revenues will take from collapsing employment, business failures, and falls in property values. Again from Bloomberg:
Later, on Fox News, McConnell said that any state or local aid must be specifically linked to the pandemic and shouldn’t be viewed as an opportunity for “revenue replacement.”
Honestly, I don’t see how this could be policed once the funds were deployed. In addition, the Administration appears to appreciate that having the country collapse isn’t such a hot idea, even if their idea is to first rescue the well off and treat everyone else as an afterthought.
The third issue, however, is that despite indignant squeals about McConnell’s attack on the virtue, um, solvency, of many public pension plans, the fact is that many are so deeply underwater that they won’t be able to earn their way out of their hole given the certainty of a continued low return environment. Even in the optimistic scenario that asset values recover fully, CalPERS has only got as high as 70% funded, and that came about in part due to two mini-bailouts by the state in the form of pre-funding the shortfall. CEO Marcie Frost more recently said CalPERS was about 63% funded, and I suspect she picked a relatively good day on which to have the numbers run. CalSTRS, which has had better investment performance than CalPERS, is nevertheless more underfunded because the legislature has been unwilling to make high enough current contributions. So the war over who gets what will only become bloodier.
There is a bigger philosophical problem: that having investments pay for retirement results in overallocation of resources to societally unproductive secondary market trading and manager fees, and also encourages policies to favor capital over labor, which in the long run hurts growth (assuming no resource constraints, another looming issue). We see what perverse behavior this creates, with public pension funds eagerly investing in private equity….which among other things, slashes employment, hurting the state and municipal revenues which fund pension contributions, and breaking private sector pensions, which makes it harder to justify having them for government workers. The best solution is a vastly more generous Social Security system. But to vary an old Yankee saying, I don’t see how you get there from here.