Amid backlash and budget deficits, government workers' pensions are targets

By Michael A. Fletcher
Washington Post Staff Writer
Wednesday, October 6, 2010; 2:45 AM

PHILADELPHIA - Faced with deep budget deficits and overextended pension plans, state and local leaders are increasingly looking to trim the lucrative retirement benefits that have long been associated with government employment.

Public employees are facing a backlash that has intensified with the nation's economic woes, union leaders say, because of their good job security, generous health-care and pension benefits, and right to retire long before most private-sector workers.

In California, where an estimated 80 cents out of every government dollar goes to employee pay and benefits, Gov. Arnold Schwarzenegger (R) has proposed a two-tier system of pensions that offers new state workers reduced benefits with tighter retirement formulas. He also wants state workers to kick in higher pension contributions to help deal with California's staggering deficit.

New Jersey Gov. Chris Christie (R) calls reform of public employee pensions essential to fixing the state's enormous fiscal problems. Michigan Gov. Jennifer M. Gran-holm (D) recently signed a change to her state's teacher pensions that increases employee contributions. Illinois has pushed back the retirement age for new employees. Detailing his agenda for New York, Democratic gubernatorial nominee Andrew M. Cuomo has said, "We simply can't afford to pay benefits and pensions that are out of line with economic reality."

Locally, a special commission is scheduled to meet Thursday in Annapolis to examine options for Maryland's $34 billion pension fund, which is just 65 percent funded and has been called a "credit challenge" by Moody's. The state has not yet gone after public employees; neither has Virginia, where the state pension fund is projected to be underfunded in the near future.

Here in Philadelphia, Mayor Michael Nutter has proposed ending a popular pension enhancement called the Deferred Retirement Option Plan, which has allowed many city workers to walk away from their jobs with six-figure payments in addition to their pensions.

"Government workers are the new privileged class," said James E. MacDougald, a retired business executive who formed a research and activist group, Free Enterprise Nation, to call attention to the financial burden posed by government workers.

Benefits to envy

The move to curtail retirement benefits for public-sector workers is fueled both by stark budget realities and by the resentment felt by private-sector workers who have seen their pay diminish in recent years.

Public employment was once viewed as less rewarding than work in the private sector, but that has changed. State and local government employees earn an average of $39.74 an hour in wages and benefits, about 45 percent more than private-sector workers, whose total compensation averages $27.64 an hour, according to the Labor Department.

The difference reflects the higher proportion of professional jobs in the public sector, the Labor Department says. Government workers tend to be better educated than private-sector workers, unions add. And public employees typically receive better retirement benefits than their private-sector counterparts.

The vast majority of private workers rely on defined-contribution retirement plans such as 401(k)s, while 84 percent of public-sector workers have access to guaranteed pensions, which are more expensive to employers.

Mayors, governors and other political leaders have long avoided cutting the benefits of government workers, whom they often rely on for political support. But now the benefits are often seen as overly generous in a time of scarce resources.

Studies have found the nation's 2,500 public employee pension plans to be underfunded by as much as $3 trillion. Steep investment losses during the recession have left less than half of the state retirement systems adequately funded, according to a recent report by Bloomberg.

Even as they trim vital services, state and local governments are devoting an increasing share of their budgets to paying for employee retirement costs.

Meanwhile, a long-running series of Gallup polls has found slowly eroding support among the public for labor unions, which represent many government employees. That support dipped markedly in the past two years, a decline that Gallup analysts attribute to a belief that President Obama's policies preserved public-sector jobs while private-sector workers endured punishing cuts.

"A lot of people are saying: 'Wait a minute. I lost my benefits, and these guys who work for the city still have theirs,' " said Bill Rubin, an adviser to the president of the American Federation of State, County and Municipal Employees District Council 33 in Philadelphia and a vice chairman of the city's pension fund. "We have to educate people."

Union leaders say their members are being asked to pay for the mistakes made by politicians who chose not to adequately contribute to pension plans and by Wall Street firms whose disastrous bets led to big investment losses.

Philadelphia's problems

Philadelphia's pension plan is only about 45 percent funded, a shortfall that has caused Nutter to question the viability of the guaranteed pensions enjoyed by the city's 24,000 employees. "We can no longer sustain a defined-benefit pension program," he said last month at a conference in New York. "We're trying to move to a defined-contribution plan."

In the meantime, he wants to end the Deferred Retirement Option Plan (DROP), a proposal being weighed by the City Council. A recent study - disputed by Philadelphia's municipal worker unions - found that the program has cost the city's already dangerously depleted pension fund $258 million since its inception 11 years ago.

DROP allows employees to pick a retirement date up to four years in the future. That decision freezes workers' pension benefits but allows them to begin accumulating payments that are set aside in an account that pays 4.5 percent interest while they continue working. When they retire, they get the money in the account and start collecting their monthly pensions.

Many Philadelphia retirees see the payouts as compensation for a career of mediocre pay and raises.

"This allows the working-class and middle-class person to get a little something before they retire," said Dianne Gatson, who retired this year after 24 years, most of them as an analyst in the city's AIDS program.

Gatson, who has a master's degree and is working on her PhD, said her top salary was close to $60,000 a year. When she retired, she received a DROP payment of about $100,000 to go along with her $2,000-a-month pension.

Union leaders say many Philadelphians developed a dim view of the program after learning that some top officials had received or were in line for exorbitant payouts. Half a dozen City Council members are in the program and are eligible to collect a total of $2.3 million, according to local news reports.

Those extreme cases may rile the public, union leaders say, but they do not reflect the benefits received by most workers, whose DROP payments average just over $100,000.

Chuck Donaldson, 62, a retired recreation supervisor who started out as a middle-school English teacher, retired three years ago. He received a DROP payment of $176,000 and a $3,300-a-month pension after a 37-year city career in which he earned a top salary of $63,000 a year.

"I remember a lot of years when we got zero as a raise," he said. "It's all relative. This is nothing like the golden parachutes all those executives get. Although it probably looks pretty good to someone who is not working."

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