Pension Puffery

Here are 12 half-truths that deserve to be debunked in 2012.

Girard Miller | January 5, 2012

This article was printed from: http://www.governing.com/columns/public-money/col-Pension-Puffery.html 

One of my pet peeves in the ongoing debates over public pension reform is the way partisans on each side try to pitch half-truths and myths to support their arguments. The other side seldom believes any of these, but they help rally the allies on the speaker's side. Sometimes the press naively re-circulates these fallacies, which leaves the general public even more confused about what to believe. There's an old saying in politics that if you tell the same lie long enough, the public will eventually believe it — and that apparently is the mentality of lobbyists on both sides. In an effort to start the new year with a clean slate for public debate, I'd like to set the record straight on a dozen of the most glaring fallacies and silly slogans.

So let's look at each of these myths, misrepresentations and slogans, one-by-one:

Half-truth #1: (Multiple-choice) "The pension mess was caused by greedy ... 

(a) Employees
(b) Unions
(c) Politicians

(d) Wall Street investors and bankers...and they are the ones who should pay to fix it."

There is a target for every finger-pointer. The truth is that the pension community has plenty of blame to go around. About half of the underfunding in most public pension plans is attributable to the six-sigma market plunge that nobody saw coming in 2008. When stocks declined by 55 percent in the last recession, more than double the average decline in the 13 previous recessions, that knocked a gaping hole in funding ratios and doubled the average plan's unfunded liabilities. I guess you could try to blame the big banks and the homebuilders and the money managers and the mortgage brokers and the speculators and hedge funds and the real estate industry and the CEOs of the Fortune 500 with their short-sighted stock options and Fannie Mae and Freddie Mac and the Congress that goaded them to lend to unworthy borrowers in the name of universal homeownership, for causing pension deficits. But I'm at a loss to see how that will ever help us fix the public pension problem.

Yet that is only half of the story. Long before the Great Recession, the seeds of today's mess were carelessly sown by politicians who declared pension holidays, unions that bargained for retroactive pension increases, trustees who assumed that investment returns would continue to grow to the moon, employers that granted early retirement incentives and gave away benefits to pass the buck to future taxpayers, pension administrators who were too timid to stand up to self-interested trustees or stakeholders and insist on more conservative practices, accountants who allowed unfunded liabilities to be amortized over two generations, and actuaries abetted by investment advisors who jiggered the investment portfolios toward ever-riskier allocations to enable disingenuous trustees to justify discount rates that would avoid the inevitably heftier contribution rates needed to assure intergenerational equity. Those who point fingers of blame should first look in the mirror.

Half-truth #2: "There is no crisis. Once the stock market recovers, there is no problem."

Some of today's pension Pollyannas claim that when stock-market trends return to their historical averages, everything works out. That is simply ignorance and puffery from people who don't even bother to understand pension math. The actuarial projections used by most public pension plans are already assuming that 85-year historical returns will continue indefinitely, even though many of the major investment consultants have already dialed down their projections for the next decade. Perpetual stock-market increases of 10 percent annually are already baked into the funding ratios that now hover just above 70 percent on average nationwide. Even if stocks return next year to their previous peak levels (DJIA 14,100), that wouldn't restore pre-recession funding ratios. That's because there have been no capital gains from equities for the five intervening years while the underlying liabilities have grown about 50 percent. Stocks may have good and bad growing seasons, but there is never a crop failure on the liabilities farm. As I explained last year, stock indexes would have to double in the next two years to restore most pension funds to their 2007 funding ratios. To return the average pension fund to full funding, stock markets would have to produce 14 percent compounded returns the rest of this decade, with no intervening recession. That would put the Dow Industrials at 30,000 in January 2020. I'll gladly give even odds against that scenario to anyone who wants to buy into that long-shot.

Half-truth #3: "The solution is to replace pensions with 401(k) plans, like the private sector."

First of all, new 401(k) plans cannot be instituted for state and local government employees under the 1986 tax act. Pre-existing "k" plans are allowed, but there is no ongoing federal tax authority to install these corporate-style, defined contribution (DC) plans for public employees. But there are 401(a) defined contribution plans that can be offered, so a DC option is still available by law. However, the creation of a new DC plan does nothing to eliminate or even reduce the unfunded liability of a pension system. In fact, it probably makes matters worse, as described in my earlier column on this topic.

Freezing an existing pension plan will compel prudent trustees to adopt a more conservative investment portfolio to manage its risks as retirees age (just like individuals must de-risk their own investments as they age), and that will reduce the discount rate which in turn increases the employer's contribution rates. This doesn't mean that DC plans should not be part of the solution, but a wiser approach is a hybrid structure with a smaller pension (using a 1 percent multiplier) with a companion DC plan — like the federal employees' system or the Washington state model. Rhode Island has officially figured this out, as did California Gov. Jerry Brown in his proposed reforms.

Half-truth #4: "Experts consider 80 percent to be a healthy funding level for a public pension fund." This urban legend has now invaded the popular press, so it's about time somebody set the record straight. No panel of experts ever made such a pronouncement. No reputable and objective expert that I can find has ever been quoted as saying this. What we have here is a classic myth. People refer to one report or another to substantiate their claim that some presumed experts actually made this assertion (including a GAO report and a Pew Center report that both cite unidentified experts), but nobody actually names these alleged "sources." Like UFOs, these "experts" are always unidentified. That's because they don't actually exist. They can't exist, because the pension math and 80 years of data from capital markets history just don't support these unsubstantiated claims.

With only one rare and fleeting exception (which occurs at the very bottom of a business cycle, similar to the green flash in a tropical sunset), 80 percent funding is not a sufficient, sound or healthy funding level for a pension fund. The only authoritative references to 80 percent funding ratios are the federal ERISA and pension protection act provisions which require private-sector pension plans below 80 percent funding to take immediate remedial action! (Remember that public plans are not even governed by these laws.) These statutes do not make funding ratios at 80 percent "healthy" or "good" or "sound" or "well-funded." Pensions funded at 80 percent are no different than a $400,000 house in a distressed neighborhood with a $500,000 mortgage — you can keep living there if you keep making the payments, but it's underwater and your balance sheet is now upside down no matter how much you try to double-talk it. The only difference is that state and local governments can't mail in the keys to the bank.

Until the last recession, respectable and world-wise actuaries would tell you privately that when a pension system gets its funding ratio above 100 percent, there is a political problem. Employees, unions and politicians suddenly become grave-robbers who invariably break into the tomb to steal enhanced benefits and pension contribution holidays. So these savvy advisors historically have tolerated modest underfunding, based on their recurring past experience with the forces of evil in this business. They figured the ideal public plan would drift between 80 to 100 percent funding over a market cycle, and nobody would be hurt if the plans were a "little bit underfunded" in normal times. Obviously that didn't work out so well in the Great Recession, which has forced us all to take a harder look at the math and this conventional wisdom.

As I have explained in one of my very first Governing columns in late 2007 (when the last business cycle was peaking), a fully funded pension plan must today have market-value assets of 125 percent of current accrued actuarial liabilities near the peak of an average business cycle — in order to offset the near-certain loss of stock market values in the following recession. Historically, that is because the 14 recessions since 1926 (including the most recent) have shrunk equity values by 30 percent on average, and equity investments represent about two-thirds of the average public pension funds' portfolio. Real-time pension funding ratios will therefore likely decline by about 20 percent in the average recession, depending on how much the bond portfolio offsets the stock losses and mounting liabilities. So there is not a major public pension plan in the United States today that can be described as "overfunded."

A pension plan that is 100 percent funded at the end of a business expansion will likely lose 20 percent of its value in an average recession, so 80 percent is the bare-minimum "healthy" funding level at the bottom of a recession — and only then. Once the economy begins to recover, it is mathematically necessary for a reasonable funding ratio to be higher than 80 percent and rising on a clear path to full funding. Otherwise, the plan is doomed to be chronically underfunded with current taxpayers supporting retirees who didn't ever work for them. A plan funded at 80 percent going into a recession will likely find itself funded at 65 percent at the cyclical trough — and that's a toxic recipe calling for huge increases in employer contributions to thereafter pay off the unfunded liabilities. That's why today's 70 percent funding ratios are a legitimate concern and a financial burden on younger generations who will inherit this problem that their elders keep sidestepping.

Just think for one minute about what would happen if Europe unravels or China lands hard and we suffer another average recession from today's levels. That would take most pension funding ratios well below 60 percent and trigger a more horrendous multi-year budgetary catastrophe for public employers nationwide. Pension trustees and plan administrators with funding ratios at or below today's national average should be asking that question on the record in formal board sessions — if they understand how fiduciaries are expected to perform their duties.

One can argue that a pension plan with 80 percent funding today can be deemed prudently funded if it adopts a more aggressive amortization schedule that defrays its unfunded liabilities over the average remaining service period of incumbent employees. That's essentially what the GASB's proposed service-life amortization guidelines would ultimately imply. Anything less should invite suspicion and deserves serious reconsideration of the plan's funding policies and benefits levels. And if employees put skin in the game by agreeing to hereafter bear one-half the cost of paying down the plan's unfunded liabilities during their working years, we can then talk about 80 percent funding as a logically "healthy" or "sustainable" number.

Half-truth #5: "Public employers and thus taxpayers only pay about 15 percent of the cost of public pensions. The rest comes from employee contributions and the investment income."

The idea that investment income comes out of thin air to pay the bills is disingenuous and deceptive. I'm all for actuarial pre-funding and using the power of compounding investment earnings to achieve intergenerational equity, but "interest follows principal." If employers/taxpayers hadn't made their contributions, there would be no investment income in the pension fund. Instead, the employers/taxpayers could have invested the money themselves and pocketed the earnings. Especially for police and fire funds and the majority of pension plans with serious underfunding, most public employers today continue to make the lion's share of total contributions — even though we are beginning to see worthwhile incremental increases in employee contributions toward normal costs in some states. But when you count employer contributions to pay for unfunded liabilities that are required (because investments didn't earn what these same pension advocates expect them to earn as part of this myth), the employers' share dwarfs most employees'.

If interest does not follow principal, then why do plans pay interest on refunds on unvested participants' contributions, and retirees' deferred retirement "DROP" accounts?

(Update: For more thoughts on this topic, see my subsequent column, One Pension Half-Truth That's Actually a Quarter-Truth.)

Half-truth #6: "This is a contract, protected by the federal Constitution's contracts clause. You can't reduce my pension." The federal Constitution also authorizes Congress to create bankruptcy courts, which routinely overturn contracts, although I doubt that municipal bankruptcy proceedings will be the solution to pension problems, as explained in an earlier column on bankruptcy and benefits reform.

There is no question that some state constitutions declare the pension promise to be inviolable, and some state courts have held that the pension promise is a contract. In "normal" economic times when the pension plan is properly funded, almost everybody would agree that contractual pension obligations should be fulfilled. But these are not ordinary times, and dozens of major public pension plans are facing the potential for depletion of their assets during the lifetimes of current employees if nothing is changed. Ultimately, some municipal employers will face a genuine financial emergency if they don't significantly revise their plans' benefits structures. We have already seen such actions upheld in Colorado and Minnesota, where courts held that benefits changes could be made, in order to preserve a reasonable benefit for everybody in the plan. Rhode Island just enacted a law to change benefits including the retirement age for incumbent employees. The city of Cincinnati took similar actions. In some states, these "breaches of contract" will go to court, but what the plaintiffs often do not understand when they file suit is that several courts have supported the police power of the state to make plan modifications if they are necessary — provided that the remaining benefits are reasonable, and if the plan change is the minimum change required to fix the plan. The simple economics of pension plans inform us that the sooner you fix them, the less pain the beneficiaries will suffer later on. This does not mean that every underwater pension plan should stiff its retirees; the plan must clearly be at risk and alternative remedies should be explored. In fact, the courts typically require such efforts before they impair contracts and reduce vested benefits.

Half-truth #7: "Many states have already adopted pension reforms. We can manage through this problem with some moderate consensus-based changes." As this editorial cartoon from California illustrates, the magnitude of the pension problem dwarfs the scope of reforms enacted in most state legislatures and proposed in others. Not that I would belittle the work done so far and the ongoing efforts of pension reformers nationwide. But the simple math is that, when you include both the pension and the retiree medical benefits (OPEB) obligations, we are facing a $2.5 trillion problem with state and local government retirement deficits. Most of the state reforms made to date focus on prospective benefits changes, often with increased employee contributions and sometimes with higher retirement ages for new hires. But they seldom address the massive unfunded liabilities of the plans. Very few states have seriously attacked the unfunded liabilities, which leaves the bills for these debts to the next generation — what President Obama rightfully calls "kicking the can."

What's worse mathematically, not even one state has adopted laws to require public employers to begin funding their OPEB plans on an actuarial basis. Not one. What are we waiting for? It's been 28 years since Massachusetts belatedly joined the other 49 states to require actuarial funding for pensions instead of pay-as-you-go. It's been 7 years since GASB issued Statement 45 to put OPEB liabilities on the books. The DNA tests are all positive: How much longer will it take the legislatures to admit paternity of this orphaned child?

Half-truth #8: "The necessary changes can be achieved through collective bargaining."

I'm quite impressed by dozens of public-sector unions that have stepped up and agreed to increase employee contributions to support their current benefits. Their leadership is directionally correct, and although their critics may quibble with the magnitude of their concessions, these specific unions deserve genuine praise for becoming part of the solution. They genuinely understand the value of the benefits, and their members are willing to pay a fair personal price to preserve them. I've even seen a few cases where unions have agreed to share some of the cost of contributions to their OPEB (retiree medical benefits) That was unheard-of in most localities before GASB shed light on the size of those liabilities seven years ago. So my hat's off to you folks: your hearts are in the right place, and your payroll deductions are too.

That said, most unions must still be dragged to the table to address retirement plan reform. When confronted with harsh reality, most will begrudgingly agree to plan changes for new hires. But in 2012, real change must begin with incumbent employees. At the very least, we must see more multi-year increases in employee contributions for both pensions and OPEB. Where state law permits prospective benefits reforms for future service of current workers, those must be included in the package as well.

The fallacy of the union mantra is their claim that piecemeal reforms can fix the pension problem. 

Municipal unions have learned over decades to wear down the public employers one by one. In many cases, the uniformed first-responders play the labor-arbitration game to use "comparable" benefits at other governmental employers — with no consideration of private-sector benefits levels. Perversely, the modest retirement benefits in the real-world local labor markets from which public employees are hired are ignored in this game. Thus, statewide pension reforms are required in many cases, and ultimately it may come through the ballot box in some states. My advice to the unions is to "walk the talk" in 2012 and make major multi-year concessions to put these plans on a sound financial footing. The public wants real reforms — although they have mixed views on what that should mean. Even Machiavelli would understand that a credible multi-year plan to make reasonable changes is what public-sector labor leaders need to put on the table, if only to deflect the mounting demands for even deeper reforms.

In states with consolidated pension plans, there is no way that most local government employers — and their counterpart unions — can achieve meaningful pension reform on their own at the bargaining table. 

Legislation will be needed to achieve minimum standards and uniform statewide reforms of (a) retirement ages, (b) maximum pension multipliers, (c) hybrid design options, (d) anti-abuse provisions, (e) rights of employers to modify retirement benefits prospectively, (f) mandatory minimum employee contribution levels, (g) mandatory actuarial employer and employee contributions to qualifying OPEB trusts where defined retirement health benefits are provided and (h) pension caps. Within that context, I would have no quibble about bargaining over the details of the benefit design at the employer level as long as the financing is contemporaneous.

Where unions can play a vital and positive role at the bargaining table is OPEB reform. Many retiree medical benefits are derived primarily from the union contract and can thus be modified more easily than pension benefits. In some states, collective bargaining could thus outrun legislation to achieve essential reforms and reduction of OPEB liabilities through shared actuarial contributions, reformulation of the benefits for incumbent employees, and parallel changes for retirees. But failure to address the OPEB issue sometime soon will ultimately invite legislative benefit limits and mandatory contributions by both employers and employees in order to make these plans sustainable.

Half-truth #9: "Pensions are actually a $3 trillion problem — using a risk-free discount rate."

They failed in their guerilla campaign to persuade the Governmental Accounting Standards Board (GASB) to institutionalize the academic thesis that pension fund liabilities should be discounted using a "risk free" rate. Yet, we still hear from researchers who insist that Treasury bond rates would tell the "true story." That just doesn't reflect how the world works. Pension funds are not going to invest their entire portfolio in 3 percent Treasury bonds right now — or ever — so the risk-free model is not even descriptive of reality and has little normative value.

In fact, that would be a stupid strategy to employ at the bottom of an 80-year interest rate cycle. As my research shows, today's odds of beating inflation with bond portfolios over coming decades are terrible and the expected returns from equities are actually higher than the conventional 85-year Ibbotson averages — once we get past 2020. As I've testified to the GASB during their public hearings, a risk-free discount rate would ultimately result in excessive burdens on today's generation of taxpayers and invite mischief in the future as this approach is a sure-fire way to produce over-funded pension plans in the long run. (I know this sounds laughable in today's funding environment, but that is the logical multi-generational result of the risk-free model.)

A more plausible argument can be made that current investment return expectations are too high for pension plans that face mounting levels of cash payouts coming due in the next decade for retiring baby boomers. Professionally, I have begun using two sets of investment-return projections to educate clients: one for the traditional, long-term, 30-year horizon and a second set that looks forward 10 to 15 years. Then the plan overseers can align their asset and liability streams to derive a composite discount rate to better understand their economics and portfolio risks. With bond yields at generational lows, even the 30-year projections have been dialed down by at least a half percentage point in recent years. The shorter, 10-15 year horizon projections are lower by about a full percentage point because of low interest rates for bonds with those maturities, and global growth prospects for equity investments are impaired for this coming decade because of the overhang of sovereign and consumer debt. I think the debate would be far more informed if trustees and actuaries begin to focus on the implications of lower, but realistic investment-return expectations. This is especially pertinent for liabilities coming due during the remaining service lives of current employees and the lifetimes of today's retirees who have attained age 65. Those are far closer to 10-15 years than the conventional 30-year horizon. The arguments posed by thoughtful critics who present centuries-long data for equity returns are far more compelling than the half-baked theories of the risk-free crowd.

For what it's worth, the risk-free estimates of the size of the deficit are not far off the mark, but their calculations overlook the elephant on the table — OPEB. Public pension deficits today are about $750 to $800 billion using mainstream assumptions and would exceed $1 trillion nationwide using the more conservative approach of credible commentators (or GASB's proposed methodology). What everybody engaged in this argument keeps ignoring are the $1½ to $2 trillion unfunded liabilities of state and local government OPEB (retiree medical benefits) plans, which are at least double the size of the pension problem and rarely mentioned in the popular press. Add in these almost completely unfunded plans that already use a nearly risk-free discount rate because of current GASB rules for unfunded plans, and we definitely have a $2½ trillion problem.

Where the risk-free school could offer a constructive insight is the calculation of employee contribution rates. A strong case could be made that employees who want a 100 percent guaranteed pension benefit (instead of a hybrid plan that shares costs and investment risks equally with employers) should pay at least half the normal cost of providing that fully guaranteed benefit using a government bond rate. This would align employees' expectations of guaranteed payments with the funding plan. Employers should not bear the investment risk for the employee's share of total costs, which this formula would achieve.

Half-truth #10: "We earned more than 8 percent in the past 25 years, and we'll surely do it again." The counter-argument we often hear to the risk-free approach is the cherry-picking use of multi-year data showing investment returns over a selected period that beat their plans' historical discount rates. Never mind that these periods include the equity markets' disinflationary P/E adjustment of the 1980s and the 1990s Internet bubble years in the stock market and ignore the market misery of the late 1960s and entire 1970s. A rear-view mirror with masking tape obscuring half of the surface would provide a similar view of market history. More importantly, these spin-doctor statistics ignore business, capital/debt and market cycles — especially the tidal results of long-term debt financing which artificially bolsters equity returns during boom phases and crushes them in bust periods such as the one we're enduring now. Sadly, it's payback time in the global financial markets and the international banking system, folks, and one need only study the independent long-term investment projections of the nation's major investment consulting firms to know that the good old days for pension funds are not a reliable model for the future.

For a blunt but thoughtful analysis of the components of long-term equity returns that are unlikely to recur in the near future in the wake of today's low interest rates and current market valuations, see Crestmont Research's report entitled Waiting for Average. I don't agree with every metric and assertion in that analysis, but the general themes must be considered by every pension board: long-term real-growth prospects; real returns on capital; probable future tax rates on capital; and market valuations (P/E ratios, for example) relative to long-term history. To illustrate two points in simplest terms, (1) markets are unlikely to achieve higher P/E ratios if capital gains and dividends taxes are increased materially, which is almost inevitable in coming years and (2) increased longevity creates more elderly investors including pensioners whose assets must be invested more conservatively. That increases demand for low-risk bonds at the expense of equity valuations, thus reducing investors' returns on capital globally at the same time productivity declines in aging Western populations.

To avoid extremism, I step aside from the camp that advocates severely lower actuarial discount rates like 6 percent for funding purposes. But, I do support the GASB's general concept of a lower blended rate for calculating pension liabilities and pension expenses in the financial statements when liabilities exceed portfolio assets. (You can't buy stocks with an unfunded liability.) For funding policy, it seems to me that the most realistic path for the assumed rate of investment returns is a nationwide average closer to 7 percent until the global economy clears its debt hangover in this "New Normal" market environment. Even that adjustment in discount rates would have profound implications for how we value pension liabilities and the annual costs to be borne by employers and employees.

Eventually, the industry will likely restore the more traditional long-term expected returns to levels in the mid-7 percent range and perhaps someday after 2020 we may even return to the traditional 5 percent real rate of return (8 percent nominal) for fully diversified global investment projections. But that really can't happen until the world's major economies complete The Great Unwind of the excesses of the past two decades. Trustees can't justify their rosy numbers right now in the middle of a Liquidity Trap. Just re-read your Keynes on that topic (General Theory of Employment, Interest and Money). Spend a little time looking at stock charts and commodity prices from 1936 to 1946, and then ask yourself how long it will take to recapitalize the G-7's largest banks that hold rotten assets, as Japan has shown. For pension funds that assume overly optimistic returns, this era is more likely to be the Lost Decade than a magic beanstalk.

Half-truth #11: "The average public pension is only $23,000." Sure, if you include part-time employees, short careers, elderly widows collecting 50 percent survivor benefits, and retirees who quit the workforce a decade ago with benefit formulas often 30 percent lower than today's employees. This smokescreen is a classic case of lying with statistics. Ironically, most citizens would be unperturbed by the real averages, because most public employees are not as grossly overpaid as some of the sensational headlines might suggest. For example, theCalifornia teachers' pension system reports candidly that its average pension for new retirees including administrators in FY 2010 was $4,250 a month. Even allowing for part-timers and short-termers, that is hardly a number that shocks anybody — and it's still 12 percent below average California household income. So I don't understand why pension Pinnochios resort to flaky statistics when the real numbers would be far more credible. The lowball numbers just emphasize that the lobbyists are trying to hide something. In 2012, the truth would be better served if pension systems started reporting numbers based on the averages for full-career workers who retired in the last year or two, more like CalSTRS. (I have since learned from page 149 of the latest CalSTRS CAFR that the average pension for their recent 30-year service retirees is $68,000 which would be the relevant number here.) I don't mind the lobbyists’ publication of the $23,000 cat-food numbers, but they obviously flunk the relevance test as misrepresentative.

Half-truth #12. The $100,000 pension clubs. From the pension antagonists, this is the flip side of the misleading lowball pension averages. The $100K Club isn't even a half-truth; it's a 4 percent truth presently (but growing rapidly, admittedly). Publication of California's "$100,000 pension clubs" lists has left a growing impression that hordes of public employees are all raking in benefits that make them multi-millionaires. Sure, there are now thousands of six-figure public retirees and legions of abuses that must be curbed by reform legislation, but the rank-and-file in most cases is not anywhere near these extreme benefits levels. The proper cures are (1) reasonable pension multipliers (see my previous column for viable metrics) and hybrid systems with a 1 percent multiplier for new hires, (2) longevity-adjusted retirement ages aligned with Social Security, (3) anti-spiking reforms on overtime and special pay and (4) absolute caps on the maximum pension allowable. Hard-dollar pension caps will force the higher-paid employees into a stacked defined contribution plan where investment risk is shared equitably when their compensation exceeds something like twice the statewide average household income. It will put an end to overtime and sick-leave abuse in public pension plans. What surprises me is the failure of the public pension community to pro-actively implement such reforms or to propose the necessary legislation. Some of the self-interested public managers especially need to put their personal compensation aside and guide their elected leaders toward the necessary changes for the public good and not their own pocketbooks.

For the record, I fully support the free-speech rights of those who have fought hard to obtain this public information. Without the data provided by these exposes, the dirt is too easily swept under the rug, and it's impossible to identify the now-obvious abuses. The public has a clear interest in this information with the possible exception of a handful of retired undercover cops needing identity protection; that's an easy carve-out for a board or a judge to order.

Returning to the financial analysis, it's worth noting that a $100,000 lifetime pension with a COLA benefit makes these folks millionaires: Using a 3 percent real rate of return for secure personal investments in the golden years, it's worth $1.4 million in present value at age 65 and $1.8 million at age 55 when many police and firefighters retire — far more than any private sector or nonprofit association worker can ever possibly accumulate over a 30 year career by saving for themselves the federal maximum in their 401(k) or 403(b) account. So these pension benefits are fair game for critics.

That said, I don't think we accomplish much by pointing fingers at the majority of honest public servants and career professionals who work all their lives for a secure retirement. Does anybody really care about a $100,000 pension for a 65-year-old judge or a 25-year urban police captain or fire chief who has personally protected hundreds of citizens in their careers, or a passionate big-city school principal working every day with tight budgets, stifling bureaucracy, urban gangs, indigent kids and intense multicultural challenges? Those folks are the true public servants and should be our society's heroes, not the scapegoats. If this were Japan, people would be bowing to these folks and honored to dine with them to discuss what is important in human society, so I would urge a return to values that matter most in the civil order. For purposes of reform, let's focus first on the weasels who go out early with guaranteed pensions that exceed their salaries, and the handful of connivers collecting fully guaranteed $200,000+ lifetime annuities (worth $3 million or more). Those are the rotten apples that spoil the barrel, incite pension envy in the populace, and really outrage the taxpayer watchdogs. Meanwhile, let's not forget that the entire $100,000 club's accrued liabilities are a small fraction of our $2½ trillion funding problem. We need to focus even more on solutions to the bigger fiscal problems.

State and local government retirement systems can be fixed, but it will take more than slogans and Band-Aids. Unfunded liabilities cannot be wished away, and it will take at least a decade of painful changes to benefits levels and higher contribution rates from both employers and employees. The longer we wait, the worse it gets, especially for the next generation. Let's stop looking for easy answers at the other guy's expense, and get to work on the repairs.

Build Up To The Coming War

From: LaborPains - February 1, 2012

War drums are beating all over the country as Big Labor gears up for the fight to stay relevant in the American political landscape. AFL-CIO President Richard Trumka began expanding his political operation last summer with a super PAC for the purposes of funding multi-cycle, issue advocacy as well as get-out-the-vote efforts. The new super PAC, “Workers’ Voices”, has announced its small, yet respectable haul with $3.7 million raised, and $3 million cash on hand.

The battle may be coming to a head in California, where labor organizations are fighting tooth and nail to protect their source of revenue. If a new ballot initiative passes this November, unions would need to get written permission from their members each year to use dues for political purposes.

“This could change the balance of power long after the governor’s taxes are expired,” said Thad Kousser, a political-science professor at UC San Diego. “Defeating this has got to be the top goal of labor. If they don’t, they could become almost extinct in California politics.”

At this point, unions are desperately looking for a win. Today, as thousands of protesters packed hallways and shouted their disapproval, the Indiana Senate voted 28-22 to pass a right to work bill. The bill will now go to Gov. Mitch Daniels for his signature.

On a national level, there is legislation with a similar provision. The Employee Rights Act, sponsored by U.S. Senator Orrin Hatch (R-UT) and U.S. Representative Tim Scott (R-SC) contains a measure that would give employees the right to require unions to get their approval before dues money is spent on behalf of political parties or political candidates.

It should be noted; exit polling from 2010 by shows that 42 percent of union households voted for Republican candidates, yet more than 93 percent of union political support went to Democratic candidates. There is a serious disconnect between Big Labor’s political agenda and the personal ideology of its members.

NH Bill Would Create New Public Pension System

January 23, 2012 10:15 AM

(AP)  CONCORD, N.H. — Last year, Republican lawmakers shifted more of New Hampshire's public pension costs onto workers to ease employers' expenses. Now, they're proposing a parallel plan for new employees that lacks a guaranteed lifetime benefit.

State Sen. Fenton Groen, a Rochester Republican, is sponsoring legislation to create a mandatory defined contribution plan for public employees hired starting Nov. 1. Such plans are relatively rare in state governments, though more states are looking at them as a way to shift the financial risks of traditional defined benefit plans from employers to employees.

Under Groen's proposal, employees and their employers would have to contribute to a system similar to a 401(k) where their money is invested and their retirement payment depends on their total investments when they retire.

Groen is confident workers will be able to retire with a comparable retirement. Their retirement payment will depend on the amount of risk the worker is willing to accept in his investments, he said.

"If he chooses to accept a higher level of risk, then the average return is likely to be higher," he said.

The existing system, which provides employees with a guaranteed retirement payment based largely on the employee's years of service and final salary, would not change, though labor unions representing workers worry the shift to a new system will weaken the old system over time.

The existing system covers more than 50,000 active and nearly 26,000 retired state and municipal workers, teachers, police and firefighters. It is funded by contributions from employees and employers and by the return on the $5.9 billion fund's investments.

Labor unions believe as more workers are required to enter the new system and workers in the old system retire, too few active workers and their employers will be paying into the old system to support it. They argue a recession like the one experienced in 2008 would hurt the pension fund's investments, putting pressure on employers to boost contributions or close the system.

"We're not howling at the moon. Clearly the thought is the old system will collapse," said Rick Trombly, director of policy and advocacy for the National Education Association of New Hampshire.

Labor groups are fighting Groen's proposal as too risky. They argue workers won't know what they can count on for a pension.

"Now it will be: A, they assume all the risk; and B, it will be an unknown number; and C, the risk that it will not be enough for them to live on," said Trombly.

Labor groups point to a study by the New Hampshire Retirement System's consultants that concluded transitioning to a defined contribution system will be more expensive for employees and employers than maintaining the current system. The study said that closing the old defined benefit system to new members would change its demographic makeup and require changing to a more conservative investment strategy. That would mean less investment income and require higher employer contributions.

The existing public pension system is only 57 percent funded. The study estimates the unfunded liability would increase from $4.3 billion to $5.5 billion if the system is closed to new members and a parallel defined contribution system implemented.

Colin Manning, spokesman for Gov. John Lynch, said that given "the estimates of a significant increase in costs, the governor has some very real concerns about the legislation."

Over the past few years, the Legislature has taken a series of steps to fully fund the system. A portion of employers' rates go toward funding the unfunded liability gap with a goal of closing it in 26 years. The study said if lawmakers close the existing system to new workers and increase the unfunded liability, employer rates would increase. The gap was created both by employers not paying enough into the system and union-backed withdrawals from the fund to improve pension benefits.

"A key difference between (defined benefit) and (defined contribution) is that the investment risk is borne by the employers in a (defined benefit) plan and by the participants in a (defined contribution) plan," the study said.

New Hampshire AFL-CIO President Mark MacKenzie said he worries that the employees will find themselves facing what millions of other Americans faced when the stock market crashed four years ago. He also questions if enough regulations are in place to protect employees' money.

Under Groen's bill, workers would pay the same amount into both plans. For example, a teacher would pay 7 percent into whichever plan he or she was enrolled in. The employer would pay into each plan as well. Employers also would contribute to the old plan for workers in the defined contribution plan to help close the old system's unfunded liability gap.

Workers would be gradually vested in the new plan over eight years, at which time they would be fully vested.

"After the eighth year, all the money belongs to them and can be taken to another employer," said Groen.

Labor groups who fought last year and failed to block changes to the existing system that increased their contribution rates to ease the costs to employers say they're wary of Groen's proposal. Last year's changes also required newly hired workers to work longer for reduced benefits.

"I think the intent is to set up the defined benefit plan for failure under the guise that the defined contribution plan is better for new workers. I don't think their intent is to do right by workers," said Diana Lacey, president of the State Employees' Association which represents most of the state's roughly 10,500 workers.

Groen disagrees and argues a defined contribution plan ultimately is better for workers because they gain more control over their money. If workers leave public employment, they can take the money with them, he said.

"The money will go out to the employee and not be subject to the whims of politicians seeking to have lower employer rates or unions seeking higher benefits," he said.

© 2012 The Associated Press. All Rights Reserved. 

Buffalo Teachers Are Charging Plastic Surgery To Taxpayers Thanks To This Loophole

Jill Krasny | January 18, 2012

What began as a rider to cover reconstructive surgery in the 1970s has evolved into a perk for teachers wanting "a little work done" at the expense of Buffalo, New York taxpayers. 

The school district foots the entire bill and the teachers taking advantage of the rider aren't on the hook for so much as a co-pay.

But taxpayers are, reports the Buffalo News, and the Board of Education, namely member Christopher Jacobs, isn't pleased. As Jacobs told the paper in October, the way these costs have skyrocketed "smacks of abuse." 

Though Buffalo's teachers earn around $52,000 a year, their "plastic surgery tab (nearly $9 million last year) would pay salaries for 100 educators," wrote Jordan Weissman in the Atlantic. What's more, the millions spent on these surgeries could have spared layoffs that have hampered the district's morale. 

So why is Buffalo footing these costs? 

Part of it has to do with the Triborough Ammendment, a 1982 state law that allows employees working under expired contracts to continue under its terms unless their union negotiates a new agreement with the state, said Weissman. 

In the Buffalo teachers' case, this translates to working under a 2004 contract, with 2.5 percent yearly salary increases—unheard of in this economy—and little incentive to make any changes. 

Said Amber Dixon, the interim superintendent Weissman spoke to: "You get to keep your benefits. You get to keep your cosmetic rider. You get to keep your 2.5% step increase. It makes getting back to the table difficult."

A near-fatal car crash involving a school employee's daughter in 1996 also fortified arguments for keeping the rider at a time when the board wanted to do away with it. 

For now the rider still stands, despite the board's pleading with the union to end it in an effort to retain more jobs.

The union waved away the offer last year, reports Buffalo News, though the Buffalo Teachers Federation president Philip Rumore did agree to return to the issue next year when a more "comprehensive agreement" might be on the table. 

Gov’s Public Pension Bomb

By ERIK KRISS Bureau Chief - NEW YORK POST

Last Updated:5:28 AM, January 18, 2012

Posted:1:50 AM, January 18, 2012

ALBANY — Gov. Cuomo lobbed a political grenade at New York’s powerful public-employee unions yesterday, proposing a radical pension overhaul for future city and state workers as part of his $132.5 billion state budget plan.

Cuomo said the plan would save New York City $30 billion in pension costs over 30 years, while saving $83 billion for the state and local governments outside the city over the same period.

“We can no longer sustain the current pension system,” Cuomo said, citing a projected 185 percent treasury-busting increase in pension costs from 2009 to 2015 if nothing is done.

“This is devastating to the state and the local governments,” he said of the rising costs.

“We need pension reform. We need it desperately.”

Under the proposal, Cuomo would add a new pension tier for new employees that would raise the retirement age from 62 to 65 and increase worker contributions from the current 3 percent to 4 percent for lower wage earners and as much as 6 percent for higher wage earners.

The new pension tier would include an option for 401(k)-style “defined contribution plans.”

New employees would be able to vest after one year — rather than 10 for current state employees — under the defined contribution plan, which would be portable.

“All the private-sector companies are doing it, and the person has the option,” Cuomo said of the 401(k)-style option. “Why wouldn’t you want to give the person the option?”

The governor said the new pension tier would be 50 percent cheaper for government.

Mayor Bloomberg, who has long called on Albany for pension reform, said, “Pension costs are killing us.”

But, he added, “It’ll be a long time before you get any benefit out of this because we’re not hiring anybody new.”

Getting the reform through the Legislature will be a heavy lift, particularly the Democratic-controlled Assembly, where unions have close ties to leaders.

While Senate Majority Leader Dean Skelos (R-LI) predicted, “We’re going to get it done,” Assembly Speaker Sheldon Silver (D-Manhattan) said it remains to be seen “whether one-year vesting is an attraction.”

He acknowledged the option “saves a significant amount of money” and “is significant to some people who may not intend to be in government until they’re age 65.”

Unions gave every sign they plan to fight Cuomo tooth and nail.

Uniformed Firefighters Association President Steve Cassidy charged the new tier would “throw the widows and children of future firefighters killed in the line of duty under the bus.”

Patrolmen’s Benevolent Association President Patrick Lynch said pension reform “would jeopardize the effective delivery” of city police services.

Civil Service Employees Association President Danny Donohue, whose 66,000-member state-worker union swallowed an austerity contract last year with three years of basic wage freezes, called Cuomo’s proposal “an assault on the middle class and a cheap shot at public employees.”

The budget would gradually eliminate increases in the city’s and counties’ costly Medicaid bills — picking up $824 million in costs for New York City over five years.

But Cuomo is tying a promised 4 percent increase in school aid, $805 million statewide, to the approval of teacher-evaluation plans within a year, as first reported by The Post.

The spending increases for health care and schools are funded in large part by $2 billion in new revenue from last month’s hike in taxes on million-dollar earners.

Pension reform is aimed at long-term costs. But yesterday, Cuomo also made more immediate moves to control spending — his new plan is $225 million less than the current budget.

But Cuomo also made good on promises he made last year to boost school aid and health-care spending.

In other cost-cutting moves, Cuomo wants to merge the Lottery Division and Racing and Wagering Board into a new state gaming oversight agency while consolidating and streamlining other agencies and eliminating 25 “inactive” boards and commissions.

Cuomo’s budget proposal also calls for:

* $15 billion in infrastructure projects through $1.3 billion in new and existing state funds, $9 billion in public-authority money — including $5 billion for a new Tappan Zee Bridge — and $12.8 billion in federal aid to leverage $3 billion in private-sector investment.

* Suspending $15 million for a new New York City eviction- and homelessness-revention program until it is reviewed.

* Requiring commercial health insurers to cover early-intervention services.

* Replacing lost federal funds with state money to keep 19,000 child-care slots for working families.

* Creating a federally funded state Health Benefit Exchange to buy and sell health insurance the governor says would insure 1 million more people and cut small business premiums by 22 percent.

NEW YORK POST is a registered trademark of NYP Holdings, Inc.

America’s Atlas Generation – The Forgotten 33%

BY EDITOR, ON JANUARY 9TH, 2012 - unionwatch.org

Much has been made of the 1% vs. the 99%; the “super-rich” vs. the rest of us, who are presumably the hard working, loyal Americans who’ve been left behind. But who are the rest of us, and how does who we are affect how much we pay in taxes, and how we may vote?

The chart below depicts the American electorate divided not into two groups – the 1% vs. the 99%, but four groups – the 1% super-rich, then 20% representing government workers, 46% representing citizens who either pay zero taxes or negative taxes (ala the “earned income credit”), and the remaining 33% who are neither super-rich, government employees, or not paying taxes. One might term this group the forgotten 33%, because no special interest will speak for them. They have neither the numbers nor the financial wherewithal to decisively influence elections.

The choice of colors – red for the 20% political class AND for the 46% entitlement class, is not accidental. These voters have an identity of interests that automatically inclines them to favor more government spending; government workers because more government spending means more job security, higher pay and benefits, and more expansion of their organizations, and citizens who pay no taxes because their economic status is enhanced through receiving entitlements for which they bear no share of the costs. This identity of interests between the political class and the entitled class has created a supermajority of voters in America who have a self-interest in supporting big-government.

Perhaps the most appalling – and unchallenged – fallacy promoted by the big-government supermajority, primarily through their spokespersons in the public sector unions, is that the super-rich are “trying to destroy the middle-class by pitting the private sector workers against the public sector workers.” Nothing could be further from the truth.

The middle class can indeed be represented by the 20% of the population who works for the government, combined with the 33% of the population who works in the private sector and make enough money to pay income taxes. But the similarity ends there. Government workers have pay and benefits that are, on average, twice what private sector workers earn. Their pension funds offer defined retirement benefits that are literally five times better, on average, than what private sector workers collect from social security.

While the government worker union spokespersons want us to believe that Wall Street is trying to divide and conquer the middle class by pitting private sector workers against government workers, the truth is this: Government workers have joined with Wall Street and turned against the private sector taxpayers, because it is in their mutual economic interests to do so. Nothing illustrates this fact more clearly than the existence of nearly $4.0 trillion in government employee pension fund assets, paid for by taxpayers, invested and managed by Wall Street, with taxpayers guaranteeing the returns (if the investments fall short, taxes go up), and government workers guaranteed the defined benefit that allows them to retire, on average, 10-15 years earlier than private sector workers, with pensions that average 3-4 times as much money as social security.

The “super-rich” embody, of course, more financial interests than just those of Wall Street bankers. But Wall Street bankers, who used their bipartisan political influence to over-build America’s financial sector and defer any sort of meaningful regulations that might have introduced competition and accountability into their industry, are the ones who most deserve the ire of the American electorate. They are also the ones who are most co-dependent with the political class, because there is no source of money pouring into Wall Street that comes anywhere close to the hundreds of billions each year that taxpayers have to fork over to the public employee pension funds.

To turn around and suggest that somehow the super-rich are aligned with the forgotten 33% – those middle-class private sector workers who make enough to pay taxes – strains credulity. Both the super-rich as individuals and the super-rich to the extent they are associated with corporations or financial institutions are completely bi-partisan in their political contributions. For that matter, Republicans are only scarcely less addicted to big government programs and higher taxes than Democrats. Many of the super-rich are not capitalists in the most virtuous and productive sense of the word – they aren’t trying to altruistically imagine innovations that will make our lives better, then fighting to convince people to voluntarily purchase these products – they are using their political influence to lock out competitors, access government subsidies, and force people to purchase their products through laws and regulations.

America’s forgotten 33%, those who are neither entitled to avoid all taxes, nor members of the political class who pay no taxes, nor the super-rich, might be called “The Atlas Generation.” They carry the world on their shoulders. Their challenge is daunting – they must convince the political class to support sustainable taxpayer funded benefits under formulas that apply equally to ALL workers, public or private, without relying on Wall Street speculative investments to pay for this. Equally challenging, they must convince the entitled class that there is an alternative to identity politics, the politics of envy, and the cycle of government dependency. And they must convince a critical mass of the politically influential super-rich to embrace and advocate a political economy that nurtures competition instead of crony capitalism.

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The Excellence Gap

Our public schools are shortchanging their best students.

By SOL STERN

From City Journal

If an out-of-control national debt weren't reason enough to worry about America's global competitiveness, here's another. Virtually all education reformers recognize that America's ability to remain an economic superpower depends to a significant degree on the number and quality of engineers, scientists, and mathematicians graduating from our colleges and universities—scientific innovation has generated as much as half of all U.S. economic growth over the past half-century, on some accounts. But the number of graduates in these fields has declined steadily for the past several decades. A report by the Information Technology and Innovation Foundation concludes that "bachelor's degrees in engineering granted to Americans peaked in 1985 and are now 23 percent below that level." Further, according to the National Center for Education Statistics, only 6 percent of U.S. undergraduates currently major in engineering, compared with 12 percent in Europe and Israel and closer to 20 percent in Japan and South Korea. In another recent study, conducted by the Conference Board of Canada, the U.S. scored near the bottom relative to major European countries, Canada, and Japan in the percentage of college graduates obtaining degrees in science, math, computer science, and engineering. It's likely no coincidence that the World Economic Forum now ranks the U.S. fifth among industrialized countries in global competitiveness, down from first place in 2008.

Making matters worse is mounting evidence that America's best students—kids we're counting on to become those engineers, scientists, and mathematicians—have had a drop-off in academic performance over the past decade. A recent Thomas B. Fordham Institute study finds that the country's highest-performing students in the early grades are losing some of that advantage as they move through elementary school and into high school.

Ironically, one reason for their slipping performance is almost certainly the 2002 No Child Left Behind Act, the most significant federal education-reform legislation of the past half-century. Partisan squabbling has stalled congressional reauthorization of NCLB for two years. But NCLB became law thanks to a rare bipartisan consensus that U.S. public schools were failing to turn out high school graduates who could flourish in a technology-based economy. Democrats and Republicans need to reunite and recognize that federal support for elite education—above all, in math and science—is essential for advancing America's economic success.

No Child Left Behind was propelled by a moral imperative best expressed by President George W. Bush's call to overcome the "soft bigotry of low expectations." The new law's "civil rights" component shaped some of its unique features, including holding states and school districts accountable for their success in narrowing racial achievement gaps. Before NCLB, the federal government had sought to achieve some degree of educational equity through the Title I compensatory funding program, which sent nearly $200 billion to the nation's highest-poverty schools over four decades. Title I yielded meager results, however, and suffered from lack of accountability. With NCLB, the federal government took a new, interventionist approach to education reform, requiring states and school districts to meet certain goals and mandates in return for Title I funds. The states henceforth had to conduct annual tests in reading and math for all children in grades three through eight, with the results—broken down by race, sex, and socioeconomic status—made public.

Unfortunately, NCLB also left the door wide open to the corruption of educational standards. The law demanded that all American students be "proficient" in reading and math by 2014 and imposed increasingly onerous sanctions on districts and schools that failed to make adequate progress toward that goal—but then let each state set its own proficiency standard. To look good to the feds and the public, education authorities unsurprisingly lowered standards and found other ways to game the tests (see "Can New York Clean Up the Testing Mess?," Spring 2010).

But NCLB's accountability system led to another distortion, this one harming top students. Because the law emphasized mere "proficiency," rewarding schools for getting their students to achieve that fairly low standard, teachers and administrators had an incentive to boost the test scores of their lowest-performing students but no incentive to improve instruction for their brightest. Robert Pondiscio, communications director for the Core Knowledge Foundation and a former New York City Teaching Fellow, describes how the process worked at his South Bronx elementary school. "Eighty percent of the kids in my fifth-grade class were scoring at the two lowest levels on the state reading and math tests," he recalls. (Each student in New York State receives a test score from 1 to 4, with 1 signifying performance far below grade level, 2 below grade level, 3 grade level, and 4 advanced.) "Early in my teaching career, an assistant principal told me that the kids in my class already scoring a 3 or 4 'are not your problem.' In other words, my goal should be to move the kids scoring at the lower levels up a few points on the scale. I was not specifically ordered to do this, but the message was very clear. My job was to get more kids over the lowest two hurdles, because that's how the school was rewarded for good performance in the city's accountability system."

As a result, Pondiscio says, the few gifted minority students in his class didn't receive any extra attention—attention that could have given them a better chance to pass the rigorous test for admission to one of the city's elite specialized science and math high schools. That's especially sad when you learn that the percentage of black students passing the admissions test for top-ranked Stuyvesant High School has dropped steadily over the past decade. Last year, it fell below 1 percent.

Writing in the Washington Post, California educator Susan Goodkin similarly showed how NCLB's requirements were undermining high achievement in her state. "Teachers must contend with constant pressure to focus their attention simply on bringing all students to proficiency on grade-level standards," Goodkin wrote. "My district's elementary school report card vividly illustrates the overriding interest in mere proficiency. The highest 'grade' a child can receive indicates only that he or she 'meets/exceeds the standard.' The unmistakable message to teachers—and to students—is that it makes no difference whether a child barely meets the proficiency standard or far exceeds it. Not surprisingly, with the entire curriculum geared to ensuring that every last child reaches grade-level proficiency, there is precious little attention paid to the many children who master the standards early in the year and are ready to move on to more challenging work."

And so, in the No Child Left Behind era, America's elite students have often found themselves left behind—or at least taken for granted. "Let's be honest about the trade-offs," said Fordham Institute vice president Michael Petrilli, commenting on the institute's study. "We've been making good progress for kids at the bottom and for poor and minority kids—that's important. It just can't be the only thing that we do."

Though I was among the education writers who enthusiastically supported No Child Left Behind, I should have realized that by focusing almost exclusively on the educationally disadvantaged, yet ignoring the country's future scientists, mathematicians, and engineers, NCLB—despite its framers' best intentions—would damage America's competitiveness. As noble as combating "the soft bigotry of low expectations" is, America's global standing and economic well-being are more likely to be improved by nurturing a culture of academic excellence and creating programs that support elite education in math and the sciences.

NCLB could easily have included reforms to benefit academically gifted students—for example, using financial incentives to encourage states and school districts to expand programs for gifted kids in the early grades and to create more merit-based science and mathematics high schools. The idea of strengthening elite education never entered the NCLB conversation, however; the civil rights agenda pushed everything else off the table. With Republicans trying to establish their civil rights bona fides, a bipartisan consensus formed to focus the new legislation almost exclusively on shrinking the racial achievement gap.

A decade later, despite indications of academic decline among the country's top students, education policymakers still haven't expressed much interest in improving instruction for high achievers. Look on the website of the U.S. Department of Education, and you'll find the usual impossibly optimistic boilerplate about bridging achievement gaps. "Under the Obama administration," says one report, "education has become an urgent priority. By 2020, we will close the achievement gap so that all students—regardless of race, income, or neighborhood—graduate from high school ready to succeed in college and careers." Meanwhile, Congress eliminated $7.5 million in funding for the Jacob K. Javits Gifted and Talented Program earlier this year.

Regrettably, the states haven't done much better in helping gifted youngsters achieve their best. Perhaps the best indicator of the states' neglect is that fewer than 100 science and math high schools currently exist across the country, and they enroll only 47,000 students. This is an absurdly low number, particularly when you consider the declining number of American students pursuing advanced science and engineering degrees. Yes, there are lots of good comprehensive high schools, primarily in wealthy suburbs, that provide top science and math students with opportunities to excel, to take college-level courses, and to compete in contests like the Intel Science Talent Search. But as the Information Technology and Innovation Foundation report points out, graduates of dedicated science and math high schools are, on average, better prepared for advanced college-level academics and far more likely to pursue undergraduate and advanced degrees in "STEM studies," as educators have dubbed the fields of science, technology, engineering, and math.

Many states lack specialized math and science public high schools altogether. New York City, though, has eight, with admission to each determined entirely by the applicant's score on a competitive exam. These eight schools present a model that, were it replicated throughout the country, would almost certainly raise the level of instruction for the nation's elite students. The three largest of the schools—Stuyvesant, Bronx Science, and Brooklyn Tech, with a total enrollment of about 10,000 students—have been around for a century. So has another, Hunter College High School, which begins in seventh grade. Three new schools, each with about 400 students, opened in 2001 on campuses of the City University of New York. And five years ago, a regular high school upgraded to specialized status.

It is remarkable that these schools have been able to maintain their uncompromising meritocracy. In the 1970s, New York's quintessentially liberal mayor, John Lindsay, tried to get their admissions policy changed by claiming that the entrance test was "culturally biased." (All the schools, Hunter excepted, use the same eighth-grade exam.) But parents at the schools pushed back and successfully petitioned the state legislature to preserve the test as the sole basis for admission by writing it into New York's education law. Periodically since then, advocacy groups (including Acorn) have made similar charges that the admissions tests are biased and should be scrapped.

The specialized high schools, though, have repaid the city, state, and nation time and again by turning out thousands of extraordinarily talented graduates, some of whom have gone on to make great contributions in science, engineering, medicine, and the law. Bronx Science boasts seven Nobel laureates among its graduates and Stuyvesant four. Supreme Court Justice Elena Kagan is a Hunter graduate.

This success has come despite the schools' having to operate in less than ideal conditions. (I know this partly because both my sons attended Stuyvesant and my wife teaches in one of the new specialized high schools.) The 41-year-old state law that preserved the elite science and math schools as a meritocracy offered them no relief from the bureaucratic regulations and corrosive work rules that hamper every public school in the city. Among the worst regulations is the prohibition against hiring instructors who, though they may have advanced science or math degrees, lack the useless graduate-level education courses needed to qualify for a state teaching license. The single pay schedule mandated by the union contract is another obstacle to success. Thanks to it, a gym teacher at top-rated Stuyvesant will earn the same salary as a colleague with a mathematics Ph.D. teaching college-level calculus. In fact, the gym teacher will earn more if he has more experience or has taken 30 extra college credits in any subject. (The teachers' union offers many of the courses that he can take to qualify.)

A decade after passing No Child Left Behind, Congress needs to correct one of the law's most damaging oversights. An amended NCLB could direct the federal Department of Education to offer financial incentives to states to boost the number of competitive, specialized high schools like Gotham's, but free of their bureaucratic and union constraints—just as the department already rewards states for such reforms as increasing the number of charter schools and creating new teacher evaluations based on students' test scores.

These specialized high schools, in fact, could be charter schools. Education reformers under the sway of NCLB's reigning philosophy have viewed charters almost exclusively as a way to lift up the educationally disadvantaged. But charters could also play a constructive role in improving instruction for the smartest students. Why shouldn't we encourage universities' engineering schools, say, to create charter engineering high schools? Competitive entrance exams for such a school could take place at the sponsoring university's campus. Top students at the school could take college-level engineering courses and even obtain early admission to the university. Companies like IBM and Microsoft could sponsor similar charter schools for science and math.

America will gain if school reformers get over the idea that elite education is undemocratic or comes at the expense of the disadvantaged. Education scholar E. D. Hirsch recently reminded me that Thomas Jefferson, in his Notes on the State of Virginia, laid out an education blueprint that included a separate, dedicated instructional track for the most academically gifted. "The ultimate result of the whole scheme of education would be the teaching all the children of the state reading, writing, and common arithmetic," proclaimed the Founders' greatest democrat, "turning out ten annually of superior genius, well taught in Greek, Latin, geography, and the higher branches of arithmetic: turning out ten others annually, of still superior parts, who, to those branches of learning, shall have added such of the sciences as their genius shall have led them to." The next iteration of No Child Left Behind should have a great deal more of this Jeffersonian belief that, though America's schools should educate all children well, they should also nurture academic excellence for the good of our democracy.

Mr. Stern is a contributing editor of City Journal and a senior fellow at the Manhattan Institute.

Copyright 2011 Dow Jones & Company, Inc. All Rights Reserved

Editorial: Quinn Finally Admits It: Time For a Pension Fix

Editorial - CHICAGO SUN-TIMES

Last Modified: Jan 12, 2012 02:15AM

Gov. Pat Quinn this week finally found his voice on the most important issue facing the state of Illinois: a gargantuan pension bill that threatens to gobble up dollars needed to finance the most basic of state services — schools, prison guards, state troopers, universities, human services and more.

Quinn on Tuesday pledged to reform the public employee pension system “once and for all.”

“This is a major mountain to climb this year and I’m willing to lead the expedition,” Quinn said. He is setting up a pension working group to produce a bill that can pass this spring. This is a tall but vital order as every legislative seat is up for grabs this year.

It’s also long overdue. We’ll now see if Quinn’s actions are as bold as his words.

Illinois’ pension bill is $85 billion, so large that left unchecked it will either devour an unsustainable portion of the state budget or bankrupt the pension system itself, putting at risk hard-earned pensions for thousands of state workers and teachers. This year’s pension bill will be $6.8 billion out of a roughly $33 billion budget.

“I think it’s important that all of those who are in the system understand that if the system isn’t there, then there’s no pensions whatsoever,” Quinn said, finally speaking a hard truth without equivocation. These are words everyone in Illinois needs to hear.

Quinn’s comments come after Moody’s Investors Service downgraded the state’s rating last week, giving Illinois the worst rating of any state. Moody’s cited the state’s failure to “implement lasting solutions to its severe pension underfunding or its chronic bill payment delays.” A downgrade almost certainly means Illinois will pay more to borrow.

This editorial page has come around, reluctantly, to the view that the only way out of the pension mess — caused not by overly-generous benefits but by the state’s failure to pay its share each year — is to reduce pensions of current employees going forward.

We haven’t heard yet of a workable alternative, though we remain open to what Quinn’s working group comes up with so long as it’s bold and aggressive.

The days ahead likely will be bitter, nasty and partisan. Gov. Quinn must hold firm, guided by one simple truth: Cleaning up Illinois’ pension mess cannot be put off for another day.

Copyright © 2012 — Sun-Times Media, LLC