The specter of unfunded pension liabilities is haunting U.S. state and local government. These liabilities were an underlying factor in recent municipal bankruptcies in California. They hover over Pennsylvania, which is pondering pension reform while trying to rescue distressed cities. Anxiety over pension costs helped save the job of Wisconsin Gov. Scott Walker in a recall election on June 5, the same day voters in the California cities of San Jose and San Diego overwhelmingly approved ballot measures to cut retirement benefits of municipal workers.
In an election year dominated at the presidential level by personal attacks and economic issues, pension reform has emerged as the unwelcome elephant in the room of American politics. The Pew Center on the States estimates that a $1.26 trillion gap exists between the promises states have made to retirees in pay and health-care benefits and the money set aside to pay for them.
The National Conference on Public Employee Retirement Systems, a trade association representing unionized employees, disputes the Pew report, but its own estimate of the gap is hardly trivial. Hank Kim, the organization’s executive director, puts the figure at $800 billion — assuming invested funds earn between 7 and 8 percent over the next two decades.
The actual gap is a moving target that depends on how the economy performs. Few economists accept the rosy scenario of the union estimates, but it may be possible to contain the pension crisis with less. Ron Snell, a respected pension expert with the nonpartisan National Conference on State Legislatures, believes that states and cities should be able to muddle through on pension liabilities if the U.S. economy grows 3.5 percent annually over the next 20 years. Current annual growth is less than 2 percent. The California Public Employees Retirement System, the nation’s largest, posted a 1 percent return on investments for the fiscal year ending June 30, missing its target by a wide margin.
Snell sees a ray of hope in the increased willingness of previous resistant Democratic legislators to join their Republican counterparts in passing pension-reform laws. Even in an election year in which party lines have hardened on most issues, seven states approved pension-reform bills, bringing to 38 the number that have acted in the last two years. Among other changes, these laws have increased employee contributions, reduced benefits, and increased age and service requirements. What is particularly encouraging to reformers is that states with Democratic majorities and powerful public-employee unions such as Illinois and Rhode Island have joined the reform parade.
Still, there are other states where public unions have opposed all but the most minor reforms and virtually paralyzed Democratic legislators who depend upon them for campaign contributions. California is notable. Gov. Jerry Brown, appreciative of economic realities, has offered a 12-point pension-reform package that fellow Democrats in control of the Legislature have ignored. On this issue, unlike any other, Brown has the backing of Republicans, who attempted without success to move his reform plan through the Legislature.
Jerry Roberts, a veteran political journalist who operates the Calbuzz website, believes that the Democrats should listen to the GOP minority — and to their own governor. Roberts says that unless the Democrats pass a significant pension reform bill in August the issue is likely to have a spillover effect on Brown’s bold attempt to solve California’s budget woes with an initiative on the November ballot that would raise income taxes on high earners and the sales tax on everyone. Opponents of this measure are already saying that voters shouldn’t bail out a profligate state government that refuses to face up to pension reform.
Pension liabilities played an important role in the bankruptcies of Stockton, a city of 300,000 at the north end of the Central Valley, and San Bernardino, a city of 211,000 in the vast Southern California suburban area known as the Inland Empire. Stockton offered generous pension benefits to city employees and built an elaborate marina and other expensive development projects on credit during the boom years. When Stockton declared bankruptcy in June, pension-related costs were 18 percent of the budget. In San Bernardino, which went belly up this month, pension-related costs were projected at 15 percent of the budget.
Pension-related costs are higher in San Jose — 20 percent — than in Stockton or San Bernardino and have increased threefold in the past decade. This has forced the city to cut back on library, parks and other services, fueling anger among San Jose residents. Mayor Chuck Reed, a Democrat, responded to this anger with a plan that the City Council, over the opposition of public-employee unions, placed on the June ballot as Measure B. Its highlight provision allows current employees to keep pension credits they’ve already earned but requires them to pay up to 16 percent of their salaries to continue benefits at the present level. Alternatively, they can pay less and choose a more modest plan for their remaining years on the job. Another provision requires future hires to pay half their pension costs. Democrats outnumber Republicans 2-to-1 in San Jose, but math trumped partisanship and Measure B won with 69 percent of the vote. Alice Munnell, director of the Center for Retirement Research at Boston College, told The New York Times that the San Jose vote was “a harbinger of things to come.”
The overwhelming votes in San Jose and San Diego for reducing retirement benefits of public employees were helped by a 5-year-old state Supreme Court ruling that these benefits were a public record. (This information is protected by privacy laws in many states.) Pension-reform advocates in San Diego and San Jose circulated this information, which showed public employees retiring earlier than private-sector workers with much higher retirement benefits. Traditional pensions, called defined-benefit plans, provide retirees with a fixed monthly pay based on age and length of service. These pensions are vanishing. Nearly half of American workers in the private sector had traditional pensions in 1980 compared to about 20 percent of workers today.
Few states have been as bold as San Diego and San Jose in reforming pensions. Most state reforms have preserved defined-benefit plans in some form while upping the costs for public employees. But in an encouraging sign, six states — Kansas, Louisiana, Michigan, Rhode Island, Utah and Virginia — have moved to hybrid plans or cash-balance alternatives to traditional plans. All these states except Rhode Island have Republican governors.
Pension reform can — and should — be accomplished without demonizing public employees, many of whom have suffered during the Great Recession and its aftermath. During the last three years, some 700,000 state and local government employees have lost their jobs, accounting for a full percentage point of the unemployment rate. Some public employees do not receive Social Security. Teachers, who often receive less in retirement pay than other public employees, have lost 100,000 jobs in the last year alone. Municipal jobs, once considered recession-proof, have declined in each of the first three years of the Obama administration — the only time this has happened since the first three years of Ronald Reagan’s presidency in 1981-1983.
Nonetheless, the necessity of pension reform has become evident even to politicians who previously ignored the issue. The amount of pension debt in California has been calculated at $30,500 for every household, one of the reasons that Brown is urgently advocating reform. In Illinois, another Democratic governor, Pat Quinn, has proposed requiring current and retired public employees to choose between health insurance or a cut in cost-of-living increases in their pensions. Illinois has an $83 billion pension gap.
“The bottom line,” said Quinn, “is that this is the moment of truth for our state when it comes to pension reform.”
His words apply to many cities and nearly every state.
— Summerland resident Lou Cannon is a longtime national political writer and acclaimed presidential biographer. His most recent book — co-authored with his son, Carl — is Reagan’s Disciple: George W. Bush’s Troubled Quest for a Presidential Legacy. Cannon also is an editorial adviser to State Net Capitol Journal, which published this column originally.