Causes of Public Pension Underfunding Are Not Hard to Identify

As if on cue, nearly every time state and local government officials try to rein in public employee pension costs in order to bring their budgets under control, government unions decry such efforts as  “scapegoating” of public employees. Which is rich, considering that most reform efforts mainly consist of bringing public sector pay and benefits in line with those in the private sector.

As I’ve noted before, deficits bear no party label, so lawmakers across the nation, both Republican and Democrat, are working to address their pension liabilities in varying degrees of boldness. But unions are opposing even modest reforms. Consider Illinois, which, as The Wall Street Journal describes it, “makes California look tough.”

Maybe the embarrassment of being compared to Greece is finally getting to Illinois Governor Pat Quinn. Last month the Democrat proposed to increase worker pension contributions by three percentage points of their pay to 11% from 8% for most state employees, raise the retirement age to 67 from 60 and modestly reduce cost-of-living raises. The changes would be voluntary, though Mr. Quinn wants to rescind retirement health benefits for workers who reject his plan.

Unions say they’ll sue if lawmakers approve the Governor’s reforms. They argue that reducing pensions for current workers and retirees is illegal and that the “voluntary” plan is coercive. But state and federal courts have ruled that lawmakers can tweak benefits if necessary to protect public welfare. Minnesota and Colorado defended their reductions in cost-of-living increases on such grounds.

Rather than try to appease the unappeasable, Illinois and other states in similar dire straits should look to Rhode Island, which enacted far-ranging — and much needed — pension reforms. Boldness pays because unfunded pension liabilities are often due to deep-seated structural factors which must be tackled head-on. If there is a silver lining in that, it is that in many cases the specific roots of the problem are easy to identify. Bloomberg outlines those for two states facing huge pension deficits.

First, Providence, RI, where politicians have finally gotten serious about pension reform.

Providence, established in 1636 and home to Brown University, was typical of many Rhode Island municipalities in the 1980s. While failing to set aside much of what it needed to cover its obligations, the city had also scrimped on pension benefits. That left some firefighter retirees, who like many government workers don’t get Social Security, surviving on less than $300 a month, Doughty said.

That changed in 1989 after municipal unions gained control of the city’s retirement board. Backed by court rulings and over objections from former Mayor Joseph Paolino, a Democrat, the panel voted to give public-safety workers a top cost-of-living adjustment of 6 percent annually, as well as to triple the base benefit payment and reduce the minimum years of service needed to qualify for retirement.

Then there’s California, which hasn’t done nearly enough to address the problem.

In California, the euphoria of the 1990s technology stock bubble supported promises backed by the California Public Employees’ Retirement System, which was fully funded at the time and now has about 75 percent of needed assets. Gray Davis, elected governor in 1998 with support from government unions, the next year signed SB400. The retroactive pension enhancement let prison guards, firefighters and highway patrol officers retire at 50 and collect as much as 90 percent of their pay.

Real pension reform in California requires repeal of SB400, something California government will pull out all the stops to prevent. But as in many other states burdened with huge budget deficits, it’s not as if the cause of the problem is hard to identify.

For more on pensions, see here. (Subscription needed for Wall Street Journal link.)