Monday, September 10, 2012

More on the Chicago Teachers Strike and Public Sector Pension Underfunding ... It's Either Fraud on the Taxpayers or Generational Theft

Ever wonder why we have at least $3 trillion in unfunded public pension liabilities throughout America, exclusive of Social Security and Medicare at the national level? And an acknowledged $83 billion in Illinois alone?

Well, let me explain what's been a shared dirty little secret between public sector union officials and their government negotiating counterparts who are purportedly representing the taxpayers. It's at best generational theft and at worst fraud, depending on how you choose to look at it.

I won't attempt to sway your pick of which --- generational theft or fraud. I'll just report; you can decide.

First, let's review briefly a bit of accounting that's mostly specific to the public sector and unlike that employed throughout the private sector. Government uses the less reliable and less informative cash method while most of the private sector uses the accrual method.

What that means to unfunded public sector pension funding is actually quite simple. Government doesn't accrue for its future outyear cash outlays and therefore doesn't count as expenses promises about the future. It only counts when the money is spent despite the fact that it has made firm and largely irrevocable promises for future spending commitments. Thus, not funding its pension obligations enables government and union leaders to act as if they don't have those obligations. That keeps taxpayers in the dark. Shameful, yes, but that's how it's done.

Now let's move to the bargaining table. Simply stated, the union and government negotiators load up on future outyear commitments, don't fund them and then spend all the taxpayer allotted money on wages and current cash outlays.

As a result, when the public sector union leaders and government negotiators over the years discussed and agreed upon future pension benefits for public employees, they didn't have to "trouble" the taxpayers with the future obligations they were undertaking on behalf of those taxpayers, present and future. It was "free," at least for the time being.

In other words, the elected representatives of the taxpayers, aka "public servants," only costed out and therefore only counted the money actually to be spent during the life of the union contract.

So if We the People as taxpayers believe we've signed up to spend $100, what matters is how the $100 is counted. If public officials agreed to give $100 in salaries, that's an easy one. $100 = $100. Done deal.

But what if the negotiators agreed to give $80 in cash on salaries, $20 in current benefit cash outlays and another $25 in future payment obligations? $125 is more than $100.

Despite that simple truism, most governments go ahead and count that as only $100 in spending, since that's the expected total current cash outlays for the budgeting period under review.

When $125 is counted s $100 in a year, counting that way for a few decades is how we get to trillions of dollars in unfunded public sector pension liabilities.

Of course, the government and union co-conspirators don't want to awaken the taxpayers to this little bit of fraud or generational theft, as the case may be, so they keep it a secret between themselves as long as possible. Until someday the elephant in the room is full grown and can't be kept a secret from the taxpayers and teachers any longer.

So here are a few relevant and timely questions du jour: Are the teachers union leaders and government officials in Chicago coming to grips with and negotiating in earnest with respect to their piece of the $83 billion in total unfunded liability for Illinois public sector pensions? I'll bet they're ignoring it, as has long been their custom and habit.

But even if they are, despite my being convinced that they're not, how will they plan to pay for it? Of course, they won't bother with that little detail. That will remain the taxpayers' problem.

And that's why the cash method of government accounting is generational theft at best and fraud at worst. And that's also why we have trillions of dollars in unfunded public sector pension liabilities that aren't "owned" by anybody. Other than the taxpayers, of course.


Thanks. Bob.

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