Public pensions must be on the table

It appears that Ohio and Wisconsin may have overstepped what their citizens thought necessary in trying to restrict collective bargaining rights for public workers.

Earlier this month Ohio voters repealed a new law that would have done just that. Now in Wisconsin a petition drive is trying to force a recall election next year to remove from office Republican Gov. Scott Walker, who championed a similar restriction on public employees in that state.

But those events don’t necessarily reject a key goal of these pieces of legislation: to get a handle on the surging costs of pension plans for state workers.

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Together US states face a monumental $1.26 trillion gap between the cost of benefits they’ve promised to their public employees and the funds they’ve set aside to cover those costs, according to the Pew Center on the States.

Losses in investment values, state revenue shortfalls, and soaring pension costs are making pension plans quickly untenable in many states. In Rhode Island, for example, the unfunded liability for public employee pensions is $7 billion, only a little less than the entire annual state budget.

While the Ohio and Wisconsin efforts were spearheaded by Republicans, the situation has gotten so bad that even Democratic governors and legislatures, which count on the political backing of public unions, are looking at ways to adjust public pensions.

In California, Democratic Gov. Jerry Brown has proposed a 12-step plan to reform the state’s pension system. It’s won applause from both the California Chamber of Commerce and the California Business Roundtable.

The plan includes measures that are being tried or considered in many states across the country. Among the provisions is an end to “spiking,” determining pension amounts based on a single high year of pay. Many states are moving to base pensions on an average of as many as five years of service, as often happens in the private sector.

Governor Brown’s plan also would require employees to pay into the plan, establish longer periods of service before retiree health benefits kick in, limit the ability of a retiree to collect a pension and keep working for the state in another position (“double dipping”), and raise the age of eligibility for full retirement to 67 years, reflecting today’s longer life spans.

In all, 40 states have enacted some kind of significant revision to state retirement plans in the last two years, says the National Conference of State Legislatures.
The savings can be significant. In Maryland, a new pension plan is expected to save $320 million in fiscal 2012 alone, with savings growing to $602 million by fiscal 2022.

Many of the changes in these new or proposed plans apply only to new hires, the easiest concession to win. Making changes to agreements with existing employees will be more challenging but necessary. Workers are more likely to accept changes that are gradual, transparent, and sensitive to the life-changing effects they could produce.

State budgets are being finely combed over in the search for savings. Skyrocketing state costs for retirees threaten to take funds from vital services, from education to public safety.

Modest, thoughtful, and fair adjustments to pension plans have a role to play in helping states find their way to fiscal solvency.