States in Peril Must Cut to the Bone?

Leo Kolivakis's picture

Via Pension Pulse.

The
WSJ reports that U.S. House Republicans said Wednesday they are
concerned about a "looming fiscal crisis" in state and local finances
but ruled out any federal bailouts for states. This is placing pressure on states to introduce tough budget measures, pitting states against public unions:

Lawmakers
around the country are looking at new ways to prevent budget disasters
by changing the rules for overburdened state employee pension funds.
But they are meeting stiff resistance from public employee unions.

 

Two
Arizona state lawmakers this week, including the speaker of the House,
introduced their plan to salvage the state's budget by significantly
changing the public retirement system.

 

Following the lead of Gov. Chris Christie,
R-N.J., a pair of New Jersey assemblymen on Monday put forth their
legislative solution to make solvent a fund that's $54 billion in the
red.

 

Also on Monday, in his first budget address as governor, Florida's Rick Scott announced his effort to "stabilize and secure" government employee pensions.

 

The
moves are part of a larger battle over pension reform between
conservative budget hawks and government worker unions. And the
public-sector employees are fighting back hard.

 

"We're
working in partnership with affiliates around the country to wage
full-scale battleground campaigns -- to defend our pensions, to fight
budget cuts and privatization, to protect collective bargaining and our
political power," said American Federation of State, County and
Municipal Employees Secretary-Treasurer Lee Saunders at a public
pension leadership meeting in Washington late last year.

 

Saunders's
union, a vocal and powerful political force, often in support of
Democrats, represents more than 1.6 million state, county and municipal
workers who will be directly affected by the reforms proposed
nationwide.

 

The fight for pension reform was certainly a political winner in 2010 for Wisconsin's Scott Walker
and Ohio's John Kasich. The Republicans each championed the cause on
the way to becoming governor of their respective states.

 

On his first
day in office, Kasich sent a letter to state employees explaining how
"like any organization, state government has, over time, slowly become
too bureaucratic. Together we'll recharge it, reform it, modernize it
and, yes, in some cases, make it smaller."

 

Ron
Snell, who keeps track of pension legislation for the National
Conference of State Legislatures, said lawmakers are motivated by a
double squeeze on pension systems -- the investment market collapse of
2008 and a glut of retirements as Baby Boomers move into their 60's.

 

The
economic difficulty of finding solutions to balance the ledger is
matched by the hard political effort that will be needed to take away
or curtail benefits for state union employees. Lawmakers who support
such plans risk the label of "anti-worker politician" from labor
leaders like AFSCME President Gerry McEntee -- a sobriquet often
matched with big campaign spending.

 

"I
think what you were hearing from President McEntee was a very
legitimate concern that the problems that public employee pensions are
facing because of the economic downturn are really being exploited by
some politicians who want to use this as an opportunity to attack
working families in this country," Scott Wasserman, political director
of Colorado WINS, which represents public employees, told Fox News.

 

Wasserman
also attended the December union summit and says states can look to
what Colorado accomplished in 2010 as a model for success. "I think
there was universal recognition on both sides of the aisle that this
was an important problem to fix, " Wasserman said. "And that if we all
work together and if there was shared sacrifice from employees and from
taxpayers and from retirees that we could actually put out fund on the
track to solvency."

 

Colorado
lawmakers passed a plan that increased the employee contribution rate
while the state share of retirement contributions decreased. The deal
also increased age and service requirements especially for younger and
future state workers.

 

But not
everyone in Colorado thinks the deal is a swell compromise.
Approximately 100,000 retirees are asking a state court to invalidate
the law claiming that another part of the plan illegally lowers future
cost of living adjustments.

 

In
Florida, Scott said the hard decisions that have been made in the
private sector must be made in his state. He's asking workers to
contribute 5 percent of their income toward the retirement fund.

 

"We
cannot ask Florida taxpayers, most of whom have no pension at all, to
bear all the costs of pensions for government employees," Scott said.
"By modernizing the Florida Retirement System, we will save taxpayers
$2.8 billion over two years."

 

Even
if states are able to solve the political problems with employee
pensions and pass reform legislation, the actual economic benefit from
their hard work will not be readily seen.

 

"Over
time, the systems will cost the public substantially less. It won't
show up quickly, but it will certainly take care of the problem in the
long run," Snell said.

There
is no question that state pensions need to be reformed. The question is
what type of reforms and how will they benefit all stakeholders? I
think there needs to be some give and take from all sides. The fact
remains that state pension funds used rosy investment projections and
have been neglected for far too long. Nobody bothered putting money in
them, and their governance model left them vulnerable to fraud and
mismanagement.

And now states are getting squeezed by the credit
agencies. CNN reports that Standard & Poor's lowered its credit
rating on New Jersey's debt to AA- from AA, citing concerns about its massive retirement obligations:

"The
lower rating reflects our concern regarding the stresses from the
state's poorly funded pension system, substantial post-employment
benefit obligations, and above-average debt levels," said Standard &
Poor's Credit Analyst Jeffrey Panger.

The state has nearly $33
billion in debt, among the highest in the nation, according to S&P,
which rates the state's outlook as stable because it believes it will
"continue to manage its structural budget imbalances proactively."

 

New Jersey has long skimped on funding its pension, leaving it with a current unfunded liability of $54 billion.

 

Gov.
Chris Christie, who took office in 2010, has taken an aggressive
approach to handling the Garden State's financial problems. He closed a
fiscal 2011 deficit of $11 billion, which was equal to 37% of the
budget, by deeply cutting spending and suspending a property tax rebate.
He also deferred $3.1 billion in pension funding.

 

The state
faces a budget gap of $10.5 billion for fiscal 2012, which starts July
1, according to the Center on Budget and Policy Priorities. The
governor is expected to release his budget in coming weeks.

 

Responding
to the S&P downgrade, Christie called on lawmakers to overhaul the
state's retirement system. He wants to raise the retirement age,
require workers to contribute to their pensions and curb the annual
cost-of-living increases that retirees receive.

"Governor Christie's
pension and benefit reforms are necessary to manage the state's
pension liability and ensure long-term stability," said Press Secretary
Michael Drewniak in a statement responding to the downgrade.

I
have no problem with Governor Christie's recommendations but they're
missing something important. Reforms are also needed in the governance
of the state pension plan. Get rid of rosy investment projections,
appoint an independent board, hire seasoned money managers and
compensate them properly, aligning their interests with stakeholders'
interests. And for Pete's sake, stop skimping on funding your pension!

It's
easy to cut, cut, cut and demonize public pensions. Much harder to
build and improve on the current retirement system. That's why I get so
annoyed with rating agencies and what looks to me like an obvious
ideological war on public unions/ pensions (to weaken them so private
sector interests can benefit). All these angry people in the US who
attack public employees and their "generous benefits" should ask
themselves what will happen to their vital services when states cut to
the bone.