State and Local Governments Are Finding Ways to Scale Back Pension Promises

If You Think Your State is Broke Now, Just Wait Until the Public-Sector Pension Bomb Detonates!

At least 39 states have imposed cuts that hurt vulnerable residents ...The crisis in state budgets is not an accident, and it wasn't unforeseeable. If they had known the revenue flood wasn't a permanent fact of life, governors and legislators might have prepared for drought. Instead, like overstretched homeowners, they took on obligations they could meet only in the best-case scenario—which is not what has come to pass. Over the last decade, state budgets have expanded rapidly. We have had good times and bad times, including a recession in 2001, but according to the National Association of State Budget Officers, this will be the first year since 1983 that total state outlays have not increased. - A Hole They Dug for Themselves, Reason Magazine, July 30, 2009



Across the country, government workers’ pensions are protected by guarantees even stouter than those on pensions in the private sector. The legal promises, often backed up by union contracts, cover more than 15 million people. Years of supporting court interpretations have enshrined the view that once a public employee has earned a pension, no one can take it away. Even during New York City’s fiscal crisis 30 years ago, no existing pension promises were reduced. But now a number of state and local governments are quietly challenging those guarantees. Financially troubled San Diego is the highest-profile example, but a handful of states, cities and smaller government bodies have also found ways to scale back existing promises and even shrink some current payments. While still only scattered cases, these examples may be an early warning sign of what could be coming elsewhere. As local officials take stock of unexpectedly large obligations to retired public workers, some are starting to question whether service cuts, sales of government property, and politically acceptable tax increases can ever go far enough to bring things into balance. - Once Safe, Public Pensions Are Now Facing Cuts, The New York Times, November 6, 2006

August 27, 2010

Reason Magazine - Unless you've been pulling a Rip Van Winkle for the past few years, you know that your state is more busted than Larry Craig in an airport toilet. The only possible exception is the state of Denial, and it closed its borders to new arrivals sometime in late 2008.

One of the main drivers of this sorry state of affairs is the massive disparity between public-sector and private-sector compensation, especially when it comes to benefits such as pensions. Various studies have found anywhere between a 70 percent and a 34 percent differential in total compensation, with public-sector employees getting not just more pay and benefits but near-absolute job security and early retirement. Consider California:

A bipartisan bill...passed virtually without debate unleashed the odious “3 percent at 50” retirement plan in 1999. Under this plan, at age 50 many categories of public employees are eligible for 3 percent of their final year’s pay multiplied by the number of years they’ve worked. So if a police officer starts working at age 20, he can retire at 50 with 90 percent of his final salary until he dies, and then his spouse receives that money for the rest of her life. Even during the economic crisis, “3 percent at 50” and the forces behind it have only become more entrenched.

In the midst of California’s 2008–09 fiscal meltdown, with the impact of deluxe public pensions making daily headlines, the city of Fullerton nevertheless sought to retroactively increase the defined-benefit retirement plan for its city employees by a jaw-dropping 25 percent. What’s more, the Fullerton City Council negotiated the increase in closed session, outside public view.

More on that here.

Unfunded state pension liabilities run in the neighborhood of $1 trillion. To understand just how this sorry state of affairs came about, read this report from ALEC.

There is a solution to this mess, the same solution that has been adopted by the private sector over the past several decades: switching from defined-benefit retirement plans to 401(k)-style defined-contribution plans. In a state such as Ohio, which is facing a $8 billion budget deficit and where state and local employees earn about 34 percent more in total compensation than their private-sector counterparts, bringing public-sector compensation into line with the private sector would cut the state's deficit by about 28 percent.

The alternative? Well, there isn't really one, other than destroying your state's economy. The politics of cutting public compensation are never easy but they have also never been more critical.

Reason on pensions.

Video produced by Josh Swain.

Subscribe to Reason.tv's YouTube channel and receive automatic notification when new material goes live.

Go to Reason.tv for HD, iPod, and audio versions of all our videos.

Pension Watch
That approaching wave of pension debt is a lot bigger than it looks. The purpose of this site is to provide an overview of the multiple pension crises that are about to drown America's taxpayers. Our primary focus is on California, but we also track other states, corporate pensions, social security and international trends.