Pension reality check

Wednesday, December 8, 2010

STATE AND local government spending stands at 12.6 percent of U.S. gross domestic product - the highest share ever. To be sure, this largely reflects the recession, during which state and local spending has been growing more slowly than it did earlier in the decade while GDP has been falling or stagnant. Still, long-term state and local financial commitments, above all for pensions and health-care benefits of public employees, are driving much of the cost. And since states have to balance their budgets, spiraling employee compensation threatens to crowd out the provision of public services such as education, recreation and road maintenance.

Getting states, counties and cities back on a sustainable budget path is primarily their own responsibility. But federal policies can help - or hurt. At the moment, Congress is considering one of each type. On the helpful side, a trio of Republican members of the House - Paul Ryan (Wis.), Darrell Issa (Calif.) and Devin Nunes (Calif.) - have proposed a bill that would require all state and local governments that issue federally tax-exempt bonds to file accurate annual reports of their pension liabilities with the Treasury Department.

Public-employee pension funds are notorious for understating their liabilities through the use of vague projections and rosy investment-return assumptions. This proposal would force pension funds to show what they would earn if invested only in super-safe Treasury securities - a reasonable point of comparison given that pension benefits are usually guaranteed by law. And the bill would declare that the federal government is not liable for covering state and local pension fund shortfalls, another incentive for such plans to enact reforms.

Unfortunately, the Senate is about to take up a measure that might compound the financial predicament of state and local governments. Pushed by Majority Leader Harry M. Reid (D-Nev.), the Public Safety Employer-Employee Cooperation Act would require all states to give police and fire unions "adequate" collective bargaining rights - as determined by the Federal Labor Relations Authority. Unions could sue states deemed "inadequate" in federal court. Mr. Reid is trying to get this measure through the lame-duck Congress as a reward to the firefighters' union, which backed his reelection campaign. But it also enjoys support from several key Republicans.

We share the sponsors' high regard for first responders. But this measure would trample long-standing state autonomy in public-sector labor relations, to no obvious national purpose. Of the 10 states with the lowest violent crime rates in 2008, three did not require collective bargaining for police and one, Virginia, forbids it for all public employees.

The bill could disrupt the law in both Virginia and Maryland, the latter of which lets counties decide whether and how to bargain with employees. The predictable result would be higher costs for employee contracts or legal bills - or both - at precisely the moment when cash-strapped states and localities can least afford them.

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