Today, the Brown Center on Education Policy at Brookings released two papers that examine pension reform efforts across the nation and provide actionable policy solutions aimed at those states still struggling with underfunded pension systems. A presentation of the papers’ findings by authors Patrick McGuinn and Patten Priestley Mahler was followed by a keynote presentation by San Jose Mayor Chuck Reed, and a panel discussion with leaders who have helped to develop noteworthy reforms to public pension systems at the state and local level.
“The central problem in the entire equation is the fact that the benefits are too expensive.” – Mayor Chuck Reed, San Jose, Calif.
Mayor Reed described the underfunded pension situation in his city, the third-largest in California and the tenth-largest in the United States, as 20 percent of general fund spending. He acknowledged that he and the majority of his city council are Democrats and yet remain motivated to take on pension reform because, as he said, “the alternatives were worse … When the pain gets so much, you’re facing service delivery insolvency, or bankruptcy, that’s a big motivation to do something.”
Mayor Reed said the following of his city’s experience and the objectives behind its pension reform efforts:
The first is, we want to make sure that our retirees and our employees get paid what they’ve earned. Bankruptcy is not something we want to do, and go in and cut payments. That’s what we’re trying to avoid. We want to make sure our employees get paid what they’ve earned. But at the same time we want to make sure our residents and taxpayers get the reasonable services they deserve. Now either one of those problems alone is not that hard to fix. But trying to do both at the same time is what makes it extremely difficult.
And the central problem in the entire equation is the fact that the benefits are too expensive. The costs are too expensive. And that’s not something you can fix with actuarial assumptions. Benefits cost what the benefits cost and they’re too expensive. The government cannot afford to pay for them and the employees cannot afford to pay for them. So shifting the costs of employees, while that is a helpful step, it is only an interim step because it doesn’t solve the cost problem.
And for significant reduction in costs you have to deal with the current employees. You can’t just say, OK for new employees we’re going to do something. Well that’s good. It’s important, but it doesn’t solve the problem, it doesn’t deal with the trillions of dollars of unfunded liabilities that we see at state and local governments because those are all related to current retirees and current employees. So you have to deal with the current employees, which is one of the things we did in San Jose.
The other thing I learned is that the sooner you start the better off you are. But the sooner you start, the harder it is to convince people you need to do something. But if you want too long bankruptcy is your only choice.
“In the absence of new revenue sources, ballooning pension obligations are likely to crowd out other vital services, such as education.” – Matt Chingos, Fellow, Brown Center
To open the event, Matt Chingos observed that:
Last [year] my colleagues and I released a report calling attention to the nearly $3 trillion hole in public employee pension systems nationwide. … Since then the situation has worsened in several places. Most notable in the news these days is Detroit where in December a federal judge ruled that the promises made to public employees for their retirement benefits were not sacrosanct, as basically they had previously been held to be pretty much everywhere, because that city is entering bankruptcy.
And earlier this month the major ratings agencies downgraded Puerto Rico’s debt to junk status in large part due to ballooning pension deficits and in spite of attempts to reform those systems and rein in rising costs.
And those are obviously extreme examples. But even more typical cases are unsettling. In the absence of new revenue sources, ballooning pension obligations are likely to crowd out other vital services, such as education. One recent analysis found that in the Milwaukee public schools, the rising pension costs there will mean that without new revenues between now and 2020 they will have to either fire 24% of their teachers or reduce the salaries and benefits of their teachers by 24 percent. So these are hard problems that present policymakers and voters with tough choices.
The report, “Are Public Pensions Keeping Up with the Times?” was co-authored with Russ Whitehurst, director of the Brown Center, and Richard Johnson of the Urban Institute.
“It’s ultimately in the best interest of both taxpayers and the public sector workforce to make changes to many of these underfunded pension systems before they go broke.” – Patten Priestly Mahler, paper author
In her presentation, Patten Priestley Mahler of the University of Virginia, co-author with Chingos and Whitehurst of “Improving Public Pensions: Balancing Competing Priorities,” stated that “public pensions are at a crossroads.”
Taxpayers urgently push to cut costs and reform the nature of public pension systems, while public sector workers value the current system that affords them the retirement security that they’ve always been promised. It’s ultimately in the best interest of both taxpayers and the public sector workforce to make changes to many of these underfunded pension systems before they go broke. But it’s difficult to agree on what those changes should be as it seems that these two groups have fundamentally competing interests.
We have two objectives in this report. First, we lay out a framework that can be sued to evaluate proposed reforms. This includes three goals for a well-functioning pension system. Second, we propose a pension plan that meets these goals better than the current public sector plan or the popular alternative of a 401K style private-sector plan.
The point here is not to promote our proposed plan as a silver bullet reform but rather to show that these seemingly competing interests of taxpayers and workers can be met simultaneously with an innovative hybrid type plan.
“A serious conversation about the nature of the pension challenge in American states is long overdue.” – Patrick McGuinn, paper author
In the second presentation, Drew University’s Patrick McGuinn presented findings from his paper, “Pension Politics: Public Employee Retirement System Reform in Four States.” McGuinn stated that a serious conversation about the pension challenge in America “is long overdue.”
There are legitimate concerns that recent changes and reductions in benefits will harm the quality of life for retired public workers. However, this paper starts from the premise that the pension systems in many states have simply become unsustainable, and that significant changes are necessary to protect the retirement benefits promised to workers and to relieve the growing pressure on state budgets due to large unfunded liabilities and increasing annual pension payments.
If changes are not made, states will increasingly face the prospect of pension systems becoming insolvent or having to significantly reduce spending on other state priorities such as education and health care. And this is why, by the way, in states very pro-labor, strongly Democratic states like Rhode Island, and New Jersey and Illinois, it’s actually been Democrats that have taken the lead in initiating pension reform.
While it’s of course possible to raise taxes to pay off pension obligations, this appears politically impossible in many states. And as the case of Illinois demonstrates, tax increases alone do not address the longer term fiscal issues around pensions. There’s also growing evidence that the structure of traditional public sector pension systems is ill-suited to attracting and retaining the high quality workforce or to permitting the kind of worker mobility necessary to better match worker skills and preferences with workplace demands.
A serious conversation about the nature of the pension challenge in American states is long overdue.
“It comes down to a choice at the local level of doing nothing about the pension plan and having to close the parks, or lay off police or have fewer teachers, or trying to address that problem.” – Russ Whitehurst, Director, Brown Center
Grover “Russ” Whitehurst, director of the Brown Center, introduced Mayor Reed with the observation that “while most of the actions that can actually improve the pension prospects occur at the state level, the pinch occurs first at the local level.”
It’s the school district, the city, the municipality that is having to make contributions to the pension plans to support their employees and they find that the cost of doing that has risen to the point where it has the strong likelihood of crowding out other essential public services.
So it comes down to a choice at the local level of doing nothing about the pension plan and having to close the parks, or lay off police or have fewer teachers, or trying to address that problem.
So it’s the reality of the problem occurring first at the local level that makes it very important to have people who have struggled with it at that level help us think through what the appropriate response should be. And that’s one reason we’re very excited today to have with us Mayor Chuck Reed of San Jose, California. San Jose is the third largest city in California, the tenth largest city in the United States. It has a lot of public employees and it found its pension costs more than tripling over a ten year period approaching 20 percent of the annual revenue of the city simply to pay pension benefits.
Commentary
San Jose Mayor Chuck Reed – Public Pension Benefits Are Too Expensive
February 26, 2014