One little-noticed result of the Nov. 2 elections – the first since the Great Recession of 2007-09 – was greater voter pressure for capping a giant gusher of government red ink: the $4 trillion in pension liabilities for state and municipal workers.
Few politicians, even Democrats backed by the public-worker unions, could afford not to propose reforms for these retirement benefits that are often abused, underfunded, and usually far more generous than those in private business.
In two key states, California and Illinois, voters approved many local ballot initiatives calling for pension reform. And in six states, newly elected governors have proposed one of the most radical steps: 401(k)-style plans for government employees as an alternative for traditional guaranteed pensions.
Such victories will build on pension changes already begun in a handful of states, where reform has been mainly directed at new hires. In two states, Missouri and Illinois, the retirement age was recently raised to 67, while 16 states have either cut benefits for new employees or required current workers to pay something for their benefits.
Many cities are also being forced to act in order to avoid big cuts in spending. In Los Angeles, for instance, Mayor Antonio Villaraigosa has announced that pensions would be lower for new fire and police workers.
Moving to “defined contribution” plans like 401(k)s will help public pension plans recoup the massive losses from the 2008 financial collapse on Wall Street. Too many states were too generous in retirement benefits, believing their investments on behalf of workers would bring 8 percent returns for decades. Two states, Alaska and Michigan, have already adopted 401(k)-style systems, and others are sure to follow.
A question remains over whether reforms will need to cut the pensions of current public workers. If unemployment persists and the stock market doesn’t do better, more governments will need big cuts. But the powerful American Federation of State, County, and Municipal Employees is ready to go to court if any government breaks an agreement on benefits.
The usual partisan politics, however, tend to fail in the face of the need for reform. “This is not a conservative-versus-liberal issue; this is a reality issue,” says Dan Liljenquist, a state senator in Utah who champions such reform.
Elected leaders would be best to work with unions initially to design changes in benefits. But ultimately, politicians are accountable to taxpayers to put public-sector pensions on a solid footing.
States collectively face a $72 billion shortfall in their budgets this coming year, according to the National Conference of State Legislatures. And they have enough money to cover only 76 percent of their pension obligations.
With many lean economic years likely still ahead, state lawmakers need to look again in their 2001 sessions at the generous benefits given too easily during the fat years – often under union pressure. With future taxpayers in mind, they will need to ask civil servants to be compensated at levels similar to the people they work for.