Is Rick Perry’s $92,376 pension the harbinger of a major fiscal crisis?
Critics of government aid to public employees have a new favorite target for the system’s largesse to retiring federal workers: Governor Rick Perry. This year, the 2012 Republican hopeful took advantage of Texas’ generous pension rules to begin receiving a $92,376 annual pension even before leaving office and giving up his $150,000 annual salary as governor.
Texas’s “early retirement” rules allow for state employees with many years of military and public service to receive pension benefits even before they retire, the Texas Tribune explains. Perry insists that his early benefits are nothing “out of the ordinary.” Critics say that’s precisely the problem, arguing that such perks to government workers are bankrupting taxpayers and saddling states with pension obligations they won’t be able to meet.
States were short at least $1.26 trillion in funding their public employees’ retirement benefits in fiscal 2009, according to the Pew Center on the States. That was a whopping 26 percent increase over the previous year, in part because the recession pushed down stock market returns and reduced payroll contributions as public workers were laid off in droves. About $660 billion of the funding gap is because of pension shortfalls, while unfunded retiree health-care costs made up $607 billion.
A vocal cadre of Republicans, led by Sen. Jim DeMint (R-S.C.), are arguing
that state public pensions are now the country’s next great “debt crisis.” In a new report titled “States of Bankruptcy,” they point out that 11 states are projected to run out of money to pay for pensions by 2020 if they don’t take further action. And they argue that special accounting rules that states use grossly underestimate the liabilities they actually face. By the private sector’s accounting standards, states are actually facing a $3 trillion total pension gap—more than twice the standard estimate. DeMint claims that the funding gap could lead to major tax increases and possibly “the Mother of All Bailouts” by the federal government as unfunded pensions come due.
That said, not all states are standing idly by while this happens. Since 2008, when the economy started going south, the majority of states have already passed legislation to rein in pension costs. According to the Center for Retirement Research, a non-partisan organization at Boston University, 23 states have increased employer and/or employee contribution rates, typically by about 2 percentage points. Thirty-two states have slashed benefits for new hires. And finally, four states — Colorado, Minnesota, Rhode Island and South Dakota — have suspended the cost-of-living adjustment, a major cost-cutting move that reduces liabilities by 10 to 15 percent. Some of these COLA suspensions have already been challenged in courts, but the rulings so far have favored the state governments.
Though there’s disagreement about the magnitude of the funding gap, “people have recognized this problem have to be resolved,” says Alicia Minnell, director of the Center for Retirement Research. The problem is, the economic downturn has made “the game of catching up even harder. You have state and local budgets decimated by this recession. They can’t solve this problem overnight,” she explains.
Certainly, fiscally crippled cities such as Central Falls, Rhode Island, have gone bankrupt because of poorly funded local pensions. That said, “no state is near that position, even the worst funded states have much better funded pension systems — they are more broadly better managed,” says David Draine, a senior research associate at the Pew Center for the States. He points out that Rhode Island, one of the most underfunded states, proved willing to pass controversial state pension reforms to get its fiscal house in order, suspending COLA adjustments and partly shifting to a 401(k)-style plan. As a result, Rhode Island reduced its unfunded liabilities by $3 billion — nearly half the gap — and improved the pensions’ long-term fiscal health.
Not all states have been as aggressive, and some of the recent reforms might not be enough for states to honor their commitments in the short- and medium-term. There still aren’t any good estimates of how much these reforms are helping states close the funding gap. But contrary to DeMint’s statement, states aren’t expecting the federal government to provide them with “the Mother of All Bailouts.”
“No one I talked to on the state level expressed an interest or desire for that to happen,” says Draine. Likewise, Michael Bird of the National Council of State Legislators says that statehouses don’t want the federal government to intervene. “Who’s looking for any kind of federal assistance on this?” he says, pushing back against the idea that pensions are bankrupting states nationwide. “In individual states and localities, there are bad actors, and some decisions are finally coming to bite some folks in the butt. But that’s all there is to it,” Bird says. “The rest will stay the course and make the changes.”
Even Perry’s Texas managed to passed pension reform in 2009 that increased the retirement age and service-eligibility requirements for new employees, and reduced the benefit for those who take early retirement, like the governor himself. The legislation helped the state pay improve its ability to pay public-sector employees, the Pew Center for the States explains. But that hasn’t been enough for some in the state who are now lobbying for Texas “to get the hell out of this [pension] business completely,” Bill King, a Houston lawyer pushing for privatization, told the Austin-American Statesman. Texas’ 2009 reforms may have shrunken Perry’s retirement benefits, but in the eyes of some critics, the governor’s early-arriving pension is just the latest symptom of excess.