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Lou Cannon: The Public Pension Time Bomb

Pension obligations are shortchanging states’ future prosperity

By Lou Cannon, State Net Capitol Journal |

Public employees are under the microscope as states struggle for the third consecutive year to balance budgets with below-normal revenues during a weak and slow economic recovery. Wisconsin, it turns out, was a sign of the times. When Wisconsin Gov. Scott Walker and his Republican legislative majority succeeded over noisy protests in trimming the pension benefits and restricting the collective-bargaining rights of public employees, they set the stage for similar battles in a score of other states where Republicans control both the governorships and the legislatures.

The latest eruption, small by Wisconsin standards, occurred March 15 when 1,000 people, mostly seniors, rallied outside Michigan’s state capitol in Lansing to protest a pension tax increase proposed by Gov. Rick Snyder. Republicans are also pushing pension issues into the spotlight in states where Democrats rule the roost. In California, where Democratic Gov. Jerry Brown has put forth an ambitious program of budget cuts and tax extensions, Republican legislators who oppose the package are making pension reform a condition of putting Brown’s plan before the voters.

Pensions owed to 80 percent of the nation’s 27 million state and local government workers and retirees are ticking time bombs. Estimates of the combined shortfall in pension liabilities are too wide-ranging — from $1 trillion to $3 trillion — to be useful, but are worrisome even at the low end. In plain language, state and local governments are shortchanging present public services to meet future pension obligations.

Los Angeles Mayor Antonio Villaraigosa, a liberal Democrat in a nonpartisan office, wants to trim pension benefits and increase the retirement age for civilian city workers. Otherwise, he says, pension and health costs for retirees will consume a third of the city’s budget by 2015.

Villaraigosa, who was elected with union support, believes that pension reform is a matter of common sense rather than partisanship. But in a time of belt-tight budgets and persistent unemployment, the issue has irresistible political appeal for Republicans. Several Republican gubernatorial candidates, Walker and Snyder among them, promised pension reform in last year’s election campaign, which ended in a GOP landslide.

Their campaigns were bolstered by a finding of the Pew Center on the States that unfunded pension liabilities in the states were increasing because of poor management and lack of discipline. According to the Pew report, only four states had fully funded pension plans. One, ironically, was Wisconsin.

Republicans in 2010 campaigned on a panoply of issues, headed by opposition to the Patient Protection and Affordable Care Act passed by a Democratic-controlled Congress and signed into law by President Barack Obama.

At the state level, many Republican candidates also pledged immigration clampdowns patterned after a controversial Arizona law empowering police officers to check the immigration status of those they detain.

But in 2011, with states feeling the impact of continued revenue shortfalls, fiscal concerns have pushed pension and health care costs to the forefront at the expense of other issues. The supposed hot-button issue of immigration, for instance, has proved a dud. Although a number of bills are still pending, no state has yet copied Arizona, and six states have rejected Arizona-style measures outright (although bills have cleared at least one chamber in Georgia and South Carolina). Utah gave police officers additional authority to check the immigration status of those they arrest (HB 497) but also approved a progressive measure providing for “guest workers” and identification cards for them and their families.

In contrast, Republican state legislators have aggressively pushed for pension reform, usually in the form of requiring employees to contribute a greater share of their pension and health costs. Some states and cities are also adopting or exploring a two-tier system in which new employees would obtain their retirement through 401(k) accounts now common in the private sector.

Tim Storey of the National Conference of State Legislatures says Republicans have gained traction on pension reform because of the sweeping nature of the 2010 election, in which the GOP wrested control from the Democrats of both the governorship and the legislature in states such as Michigan, Ohio and Wisconsin.

Governors in these states may have been emboldened by Indiana Gov. Mitch Daniels, a Republican who without fanfare in 2005 issued an executive order eliminating collective bargaining for state employees. The order had a broad impact, doing away with seniority preferences and giving the governor greater freedom to consolidate state operations or outsource them to private companies. State employees had a mixed reaction to the changes: some of them have prospered under a merit-pay system introduced by Daniels while others have had few pay raises. Overall, the policy contributed to a turnaround in Indiana state government that has bolstered Daniels’ status as a potential 2012 candidate for the Republican presidential nomination.

Current battles in the Midwest over collective bargaining for public employees have broken down along party lines, but that was not always the case. President Franklin D. Roosevelt, a Democratic icon, and even labor leader George Meany were skeptical that public employees should be unionized. Later, however, collective bargaining for public employees became widely accepted in large urban states; Gov. Ronald Reagan, a conservative hero in 1968, signed a bipartisan bill permitting collective bargaining for local public employees in California.

Twenty-four states currently restrict or deny collective bargaining for public employees. Opponents of such bargaining point out that unions in the private sector organize to obtain better wages and working conditions from a specific employer. They have no say on how the company is run. Public employees, on the other hand, help elect those they bargain with and their support or lack of it at election time can be crucial. So state and especially local officials have an incentive to give employees generous benefits in order to win re-election.

But public officials may demonstrate such unwarranted generosity whether or not their employees are represented by a labor union. A recent study by economist Sylvester J. Schieber, and reported in The New York Times, found no apparent relationship of collective bargaining to the benefits received by public workers. He used a measurement called pension replacement rate, which is the percentage of a worker’s income that he receives in retirement. To take only two examples from this complex study, the pension replacement rate is virtually identical in Ohio and Georgia, where public worker retirees receive two-thirds of their pre-retirement income. Nearly half the public employees in Ohio are covered by collective bargaining agreements; in Georgia fewer than one in six public employees has a union contract.

This study lets public unions off the hook to a degree but provides no comfort to private employees who have seen a steady erosion of pension and health benefits and must work into old age to make ends meet. The sticking point is the early retirement age enjoyed by public employees.

“By the time the typical private-sector worker has retired, the teachers, the highway patrolmen and these (other public employee) folks have already gotten $200,000, $300,000, $400,000 in pensions,” Schieber said. “Plus they’re getting a pretty rich retiree health benefit. That’s why these benefits are so expensive.”

Scott D. Pattison, executive director of the National Association of State Budget Officers, believes that generous retirement and health benefits for public employees were widely tolerated by officeholders and the public alike until the recent Great Recession. Then, he said, workers in the private sector who were struggling economically began to resent the favored treatment of neighbors in the public sector. This has made pension reform a powerful political issue.

In the wake of Walker’s ham-handed effort to jam his reform package through in Wisconsin, public unions rallied and are now viewed in some Democratic circles as a potent counter-force in the 2012 election campaign. Maybe so, but Pattison believes that the math favors the pension reformers. Pension liabilities of the current magnitude for public workers are unsustainable, and state and local officials of both parties are going to have to face up to this reality.

— 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.




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