Public pension pain
THE ELECTORAL map turned redder in 2010, as Republicans swept not only the U.S. House of Representatives but also statehouses across the country. But there were big exceptions: Voters in deep-blue California, Illinois and New York once again picked Democratic governors to run some of the most populous — and financially troubled — states in the union.
Republicans won by promising to restore fiscal stability — and set about taking on public-employee unions to make it happen. There was no political hesitation for them; to the contrary, in some states they relished the chance to weaken the Democratic Party’s key constituency. Democratic governors, by contrast, faced a special challenge. They would have to show that they could cut costs despite their ties to unions. And a central issue would be states’ huge public-employee pension obligations.
There’s been some progress. In Illinois, where state public-employee pension plans have a worst-in-the-nation $80 billion unfunded liability, Gov. Pat Quinn and the Democratic legislature raised the retirement age to 67 and limited the maximum salary on which pensions can be based to $106,800. But Illinois pension funds still rely on an unrealistic average 8.25 percent projected rate of return.
In New York and California, Govs. Andrew Cuomo and Jerry Brown, respectively, have proposed changes to their states’ benefit structures. Both courageously address real issues: They raise retirement ages; curtail the practice known as “spiking,” under which employees can base pensions on one unusually high annual salary; cap six-figure annual payouts; and, most significant, increase current employee pension contributions.
And while Mr. Cuomo and Mr. Quinn have adhered to the union-blessed defined-benefit model, Mr. Brown, who unveiled his plan Oct. 27, offers an innovative, mandatory, hybrid benefit composed of a 401(k)-type plan, Social Security and a smaller guaranteed pension.
But there’s a catch: Except for increased employee contributions, the reforms mainly apply to new hires, not to the existing state workforce. This was apparently a bridge too far, politically and also legally, because state constitutions and court decisions make it difficult to reduce current pensions. That the governors’ new ideas apply mostly to future hires limits their short-term financial impact.
A similar assessment applies to the reforms adopted in another blue state that kept Democrats in power in 2010: Maryland. Gov. Martin O’Malley and the legislature imposed somewhat higher contributions on existing employees and trimmed benefits for new hires but left the plan’s defined-benefit structure in place.
No one said that it would be easy to take on public-sector unions; nor are pensions the sole cause of state and local financial distress. The Democratic governors who have acted, even tentatively, deserve credit.
But the problem is so big that they will eventually have to do more. Sooner or later, state and local governments must further rein in benefits for current employees — so that the cost of providing for public servants tomorrow does not make it impossible to provide actual public services today.