Making Good on Bad Promises
Hardly a day goes by without some headline about a town or city struggling to bridge the gap between the retirement promises it made to its employees and the reality of its budget. But what has received comparatively little attention is the shape of the solution that is emerging for these shortfalls.
Consider first the pension problem itself. According to a 2013 Pew Foundation study of 61 key American cities -- the most populous in each state plus all other cities with over half a million people -- the gap between promises to municipal workers and what has actually been saved is more than $217 billion. Pew has estimated the total underfunding for all of America's towns, counties, school districts, and other non-federal government entities at $1.38 trillion, a figure that is expected to rise sharply when new bookkeeping guidelines from the Government Accounting Standards Board are fully implemented.
Less well-known is the fact that many cities once dismissed as fiscal basket cases have actually found a way out of their pension problems, showing us what the future might look like. In 2011, Atlanta mayor Kasim Reed and his city council negotiated a plan that saves $25 million annually. A year later, Lexington, Ky., municipal officials and union representatives came to an agreement that was passed by the city in January of 2013 and later ratified by the state legislature. In Jacksonville, Fla., a task force recently announced a settlement, and the city's public-safety workers appear on track to ratify it.
The agreements vary in many ways. But there's a common denominator: a guarantee of previously promised pension payouts in return for substantial concessions from new hires. The Atlanta reform, for example, extends the retirement age for new employees and combines a smaller defined benefit with something similar to a private company's 401(k). Lexington's future hires will be on the job five years longer, must put in 25 years before benefits vest, and will face declining cost-of-living adjustments (COLAs). Jacksonville's new employees are slated to get a reduced pension package as well.
Even in Detroit -- a financial disaster area if ever there was one -- existing pensions were just cut 4.5 percent, while new hires who retire after 30 years will receive pensions worth 40 percent less in inflation-adjusted dollars than those who retired in 2011. In other words, new hires gave up about ten times as much.
What such agreements reveal is that public labor is indeed willing to help resolve the pension crisis, but only as long as past promises are enshrined with what David Draine, a senior researcher at the Pew Foundation, euphemistically calls "a credible and achievable plan to pay down any existing pension debt." As a practical matter, this means disproportionately burdening new hires with benefit plans that have larger co-pays, longer requirements for vesting, and/or an emphasis on contributions over payouts.
After years of statistics showing that public employees are better compensated than comparable private-sectors workers, fiscal hawks might initially celebrate this tradeoff. After all, the revised terms for new hires are probably closer to what current and retired public employees should have been offered all along. But it is hard to view this solution in the context of larger political trends without coming to some very disturbing conclusions.
First, consider that current public employees have clearly emerged as the biggest political winner of the 2008 financial crisis. The 2009 federal stimulus package, advertised by President Obama and the Democratic Congress as an infrastructure program but in reality a subsidy for state and city employment, allowed local governments to leave previously contracted pay and benefit increases intact. In effect, Washington increased compensation for public workers with seniority at a time when private-sector employment was stagnant or declining. The current thrust of pension reform will now make these gains permanent.
Second, bear in mind the insidious coalition of union leaders and blue-state Democrats, in which the former subsidized the campaigns of the latter in exchange for excessive benefit increases. Public employees in a few of the most troubled states may eventually lose a fraction of their retirement benefits, but most existing promises will be kept -- meaning that the union tactic of financially compromising elected representatives has, in the end, proved depressingly successful.
From the taxpayers' perspective, it might be acceptable to make good on the inflated pensions of present and previous government workers if this means an improved methodology for providing public services in the future. Unfortunately, the partnership between labor and the Democratic party is far from destroyed, and thus it is far from clear that these cuts will be maintained in the future.
In their defense, most municipal officials who have signed on to the emerging pension-reform template do boast of adopting more stringent budgeting policies. We can only hope these policies prove stringent enough, for the current expedient of making good on bad promises gives union leaders and their elected allies every hope of one day doing it again.
Lewis M. Andrews is the senior policy analyst at Connecticut's Yankee Institute for Public Policy.