Winning the Battle, Losing the War: Part I

The current political dispute between Wisconsin Governor Scott Walker and the state’s public employee unions is the first battle in a struggle that will dominate the public policy arena at all levels of government in the next 10 years -- how to pay for public employee retirement benefits, what role public employee unions will play delivering government services and their role in the future of the Democratic Party.

I seek to explore these ideas in a series of forthcoming posts. My initial post will cover the cost of retirement benefits to state and local governments (SLGs). Future posts will cover what Walter Russell Mead calls the blue model, the problems of federal deficit spending and the how these disputes will change the political environment of America. Although I expect battles between Republican governors and public employee unions to energize the base of the Democratic Party in the 2012 elections, helping Obama secure his second term, the core public policies in dispute threatens to tear apart the Democratic Party – and will force a substantial political realignment.

Pensions & Unfunded Liabilities

Unlike the federal government, every state in the union (except for Vermont) has a legal requirement of a balanced budget. Although this can be offset in deficit years by relying on the bond market to cover shortfalls SLG’s don’t have the luxury of printing the world’s reserve currency to keep interest rates low, much less pay back the loans.

The wretched standing of SLG budgets has been a victim of the Great Recession. California alone saw revenues fall from $103 billion in 2007-08 to $83 billion in 2008-2009, and will only recover to an expected $94 billion in 2010-11. Revenue figures will improve as our nation’s economic recovery continues. Nevertheless, larger budget problems have been exposed during the crisis and loom ominously in the future.

Rather remarkably, the money discussed in the Troubled Asset Relief Program (TARP) is just a mere fraction compared to the amount of money needed to right SLG pension obligations. Originally estimated to cost taxpayers $300 billion, recent Congressional Budget Office (CBO) figures estimated TARP will end up costing taxpayers $25 billion. This does not include bailing out Fannie and Freddie Mac, which has cost $153 billion so far with the potential of an addition $68-$210 billion needed by 2013.

Estimates on the unfunded liabilities of the states vary. The Pew Center recently estimated the total to be $1 trillion at the end of fiscal year 2008, yet this study used the accounting standards of state pension boards. Using standards required by the private sector the total could be as much as $3 trillion – and this doesn’t even include local governments! These unfunded liabilities has been recognized from figures across the political spectrum, from Reason to the Heritage Foundation to Washington Post progressive pundit Ezra Klein.

As the daunting dilemma has revealed itself investors and public officials have taken notice. Moody’s, the rating agency that rated junk housing derivates as AAA, recently announced they would factor in pension obligations into their credit ratings – even though these figures are not listed on their audited financial statements. This will certainly lower state credit ratings, increase interest rates on state issued debt and augment the strain placed on state budgets. An additional long term issue SLGs will have to confront is increasing health care costs for retired employees; not only will the number of retirees increase, so has the inflation rate for health care.

The same New York Times article linked above revealed states already have $2.8 trillion worth of outstanding bonds. This set of financial realities doesn’t paint an appealing picture for the future of state government budgets.

What in the World to Do?

Reserve Chairman Ben Bernanke: "We have no expectation or intention to get involved in state and local finance.” The states "should not expect loans from the Fed."

Felix Rohatyn, the longtime advisor to the Democratic Party and legendary financier who helped save New York City from bankruptcy in the 1970’s, recently told the New York Times “it seems to me that crying wolf is probably a good thing to do at this point.”

Former Los Angeles Mayor Richard Riordan: “throughout the country, 90 percent of cities and states are going to go bankrupt within the next five years, many of them sooner.”

SLGs are looking at financial armageddon in the next 10 years and the Fed won’t bail them out. What we are about to witness is best describe by astrophysicists as an “Impact Event.” The governance and political alliance structure of SLGs will never be the same after the dust settles.

Losing the 60th Seat

Imagine if the ghost of Election Future told Teddy the day after the '08 election that he would die soon and that the fate of health care reform depended on the results of the special election to replace him. I'm quite sure the lion of the Senate would've slammed down a scotch in celebration (or equivalent)!

It is absolutely remarkable how the Democrats have revived a completely disorganized, dysfunctional political party. It really comes down to the "economy stupid". Three major mistakes were made by the Obama administration and the leadership of the Democratic Party:

1. pushing health care ahead of economic reform, including financial regulation;
2. trusting that Keynesian economics work; and
3. realizing, because of the branding efforts by the Obama Presidential campaign, voters projected their own interpretations of him, and often times with radical different results.

Obama and his campaign made a very conscious effort to prevent the brand of Obama from becoming labeled by traditional political definitions. Although he had a perfect liberal rating as a U.S. Senator and was known for advocating rather liberal beliefs such as expanding the rights of Americans to health care and other social justice issues, he avoided being categorized as a traditional liberal through advocating for a "realist" foreign policy, a more efficient, results oriented approach to government services, charter schools and praising Ronald Reagan.

While this was a brilliant campaign strategy that was incredibly effective, it was extremely vulnerable once public policy was made and the vision of brand Obama was clarified by American voters. This vulnerability was further compounded by, frankly, the arrogance of the Obama administration. We saw this after Iowa, when team Obama was overly confident about New Hampshire. This overconfidence led to numerous mistakes and nearly cost him the nomination.

I would speculate team Obama became enamored of their poll numbers early on and sought to strengthen the depth of positive sentiments towards Obama by continually keeping Obama front and center of the media cycle. What ensued was overexposure. Press conference after press conference, announcement after announcement... it was soon all Obama all the time... even more that it would already naturally be as the first minority President that was the hope of saving the country from the previous administrations seemingly disastrous policies.

Furthermore, this overexposure was compounded by an apparent supreme confidence that his policies would turn around the economy and unemployment rate. This is where mistake #2 enters.

In many ways Obama is extremely fortunate to even be where he is at right now. Imagine if that jihad advocating cat from Nigeria had actually succeeded in blowing up that plane during the holidays. Obama's rating would be in the low 30's and next November would be a complete bloodbath at the polls.

At the end of the day I'm still quiet stunned how Obama managed to destroy so much of the good will he accumulated with the American people.

Political Tone Deaf Award (Bailout Nation)

This week's political tone deaf award goes to House Speaker Nancy Pelosi spokesman Brendan Daly who, when asked why 11 Democrats did not vote for the "economic stimulus package" when it was on the House floor last week, stated:

The speaker has said many times that the members are representative of their district. Many of the districts are more conservative, and they campaigned on fiscal responsibility, and we understand that.

When relaying remarks to media outlets a press spokesperson must not only deliver a comment that advances the narrative of the article -- they must provide a quote that will be seen by listeners, readers and/or viewers as authentic while enhancing the long-term brand perception of the organization within targeted audiences.

Daly completely fails in this regard. Although he is being authentic he is damaging the political brand of the Democratic House leadership by being honest on the reality that "liberals" or "progressives" are simply not fiscally responsible. While this quote is not going to change any swing voters minds in the 2010 election cycle it is important to ALWAYS stay on message to ensure the strength of the political brand long-term.

If the leadership of the Democratic Party wants to expand the scope of government involvement in the economy they better get a grip on their PR flacks.

A better statement from Daly would have been:

The speaker has said many times that the members are representative of their district. She respects the diverse views within the Democratic House caucus and will continue to work with the entire caucus to address the massive challenges that confront our nation.

I like this statement better for a number of reasons:

1. This statement does not damage the public's image of the Democratic Party or the rebranding campaign from the word "liberal" to "progressive."
2. Although she seems accepting of the votes against the "economic stimulus package," their is a subtle threat in the latter part of the statement that members shouldn't get too comfortable voting against her on legislation.
3. I included the line "diverse views within the Democratic Party" from a branding perspective... to contrast the ideological purity current being enforced within the GOP. It is important for swing voters (moderates and independents) to see the Democratic Party as open to diverse ideologies to find solutions to the problems of America.