The Political Rumble Over Pension Costs
Unfunded retirement benefits have become an election issue, and unions are fighting back
by Ben Elgin (San Francisco), Chad Terhune (Miami), Christopher Palmeri (Los Angeles) and Dunstan McNichol (Trenton, NJ)
Business Week
October 14, 2010
If anyone fits the profile of a San Francisco Democrat, it's Jeff Adachi. In 2004 the elected public defender volunteered to officiate at ceremonies of same-sex couples during the city's short-lived attempt to legalize gay marriage. This year, though he is running unopposed, he is drawing scorn from fellow Democrats for spearheading a ballot proposition that would force city workers to pay more of their growing pension and health-care costs. "How dare you take it off the backs of city workers," Leland Yee, a Democratic state senator from San Francisco, thundered into a microphone at an Oct. 5 protest rally.
Taxpayers face as much as $3 trillion in unfunded state workers' retirement liabilities, according to a study by the University of Rochester and Northwestern University. As pension costs soar, they're igniting political fights nationwide. Voters in nine California cities and counties will decide next month whether to curb benefits for current or retired police officers, firefighters, librarians, and janitors.
Beyond November, the cost of government pensions could become one of the defining policy issues of the coming decade. Civil servants are trying to protect what they believe is a social contract with taxpayers, whose retirement benefits are often far less generous. (State and local governments paid $3.04 per hour toward each employee's retirement in 2007, according to U.S. Labor Dept. data. Private employers paid 92¢ per hour.) At the same time, elected officials and taxpayers are desperate to find reductions in state and local budgets without further cutbacks in services.
Funding Squeeze
More than 80 percent of the nation's 27 million state and local government workers and retirees are covered by public pensions. The median state plan had enough money to pay just 76 percent of its obligations as of Aug. 20, according to data compiled by Bloomberg. Six cities—Boston, Chicago, Cincinnati, Jacksonville, Fla., Philadelphia, and St. Paul, Minn.—will run out of pension money by 2020, according to the Rochester and Northwestern study released Oct. 12. "The bills that weren't paid a decade ago are coming due," says Patrick Murray, director of the Monmouth University Polling Institute in West Long Branch, N.J.
The Service Employees International Union is dispatching members to town hall meetings to defend pensions. They hand out literature arguing that 7 out of 10 retired public employees receive less than $30,000 a year in pension benefits. The American Federation of State, County, and Municipal Employees is calling politicians "deadbeats" for trying to walk away from promised pensions. "This is deferred compensation that is owed to workers," says Steven Kreisberg, director of collective bargaining for AFSCME, which has 1.6 million members. "Some of the politicians demagoguing on this issue are losing sight of their moral and legal responsibility."
While unions once counted on Democrats for support, gubernatorial candidates Jerry Brown in California and Andrew Cuomo in New York are vowing to get tough on pensions. The fight has turned nasty in California, where Brown's opponent, Republican Meg Whitman, is proposing to exempt public-safety workers from her proposal to convert public workers to 401(k)-style retirement plans. That prompted a Brown associate, who suspected Whitman of cutting a backroom deal to get an endorsement, to call her a "whore" in a recording posted online by the Los Angeles Times on Oct. 7. Darrel Ng, a spokesman for Whitman, says she proposed her pension reform five months before she won an endorsement from Los Angeles police. Brown apologized to Whitman in a televised debate.
Already this year, 16 states have required public employees to pay more into retirement plans or cut benefits for new hires. Nine states increased the number of years new hires must work to earn full retirement benefits. Two states, Missouri and Illinois, raised the retirement age to 67. California's new budget requires current state workers to contribute more toward their retirement and rolls back new hires' pension benefits to 1998 levels.
Bailout Concerns
U.S. Representative Darrell Issa (R-Calif.), who would chair the House's oversight committee if his party regains control in November, is drafting a report about underfunded state and local pension plans. Spokesman Kurt Bardella says Issa is concerned "that calls for a federal bailout to avert a fiscal disaster for state and local governments may be just over the horizon."
Fueled by reports of six-figure retirement benefits for firefighters, city managers, and other civil servants, public sentiment is turning hostile. Seventy-six percent of Californians polled in June said public pensions were a big problem or "somewhat of a problem," according to a poll by the Pew Center on the States and the Public Policy Institute of California. In Illinois, 83 percent of respondents answered the same way, as did 79 percent in New York.
"Pension envy" among private-sector workers is justifiable in some cases but goes too far, says Alicia Munnell, director of the Center for Retirement Research at Boston College. The average annual benefit for public retirees was $22,780 in 2008, according to the center's study of the 126 largest public retirement plans. "It's surprising our teachers, police officers, and firefighters are Public Enemy No. 1," Munnell says.
Adachi, 51, says pension obligations are forcing city cutbacks in programs such as drug-treatment centers and after-school activities. "All of the progressive programs that we fought so hard for over the years are getting crowded out by rising pension costs," he says.
The bottom line: Battles over the cost of public pensions could dominate government at all levels for the next decade.
