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Fix it now or it gets ugly later

Public sector employees have to begin to think seriously about working with state and municipal governments to address the accelerating problem of under-funded pension obligations. Without drastic change, many governments will reach the point where they cannot afford to meet promised pension payments and other retiree benefit obligations. With taxpayers in revolt, they will default on their obligations and no court order can make the money magically appear.

The traditional adversarial negotiation model envisions negotiators for the employer, in this case state and local governments, trying to keep costs under control. The employees, conversely, fight for all they can and resist any attempt to modify any promised payments and benefits.

When it comes to governments and pensions, the model is broken on both sides of the equation. Governments have often been more partner than adversary when it comes to unions. Labor works to get its friends elected and those friends play nice in negotiations.

Making matter worse, elected officials, unlike those operating businesses, don't have to be terribly concerned with long-term fiscal outlooks. Politicians only need to keep people happy until the next election. So they have often delivered generous pensions, keeping workers happy, but failed to provide adequate funding to pay for those obligations, keeping taxpayers happy, at least in the short term.

As for the union employees, simply digging in won't do. Too much greed and too little willingness to adjust to fiscal reality will lead down that path to eventual default. It has already led to efforts in some states and cities to strip government employees of the ability to collectively bargain.

A report from the Pew Center on the states estimated the 50 states, collectively, face a $1 trillion gap between pension and benefit obligations and the money set aside to meet those obligations. Robert Novy-Marx of the University of Chicago and Joshua Rauh of Northwestern University, both finance professors, took a harder look and concluded the collective pension liabilities are really about $2.5 trillion.

Connecticut's pension system, serving 175,000 active and retired state employees, as well as teachers, reports an unfunded liability of nearly $16 billion, almost equal to the entire annual budget. But the Yankee Institute, an advocacy group for fiscal conservative policies, claims the real unfunded liability is $51 billion and $81 billion.

Whatever the numbers, they are big. Trying to place things in context, Novy-Marx and Rauh calculated that Ohio would need to devote nearly 9 years of tax revenue, all of it, to simply catch up on its pension problems.

Many municipalities are no better off, and some are worse off. It would be hard to find a more dire situation than that facing Providence, R.I., where annual retiree costs now amount to 50 percent of city tax collections.

The Providence-Journal, which has been digging hard into the pension crisis in that city and state, wrote recently about how for a time in the 1970s union representatives held majority positions on the Providence Retirement Board. Then in 1983, a charter change altered the board's role from implementing City Council decisions to setting its own pension policies.

Between 1985 and 1989, the board granted 105 disability pensions, six times more than the actuarial study had forecast. Then in 1989 the board granted annual cost-of-living adjustments of 5 percent and 6 percent for fire and police, 3 percent for non-uniformed workers, to 2,700 retirees and all future retirees. Retirees' pensions now double roughly every 12 years, the city estimates. And remember, police and firefighters can retire relatively young.

The city has since pushed back and cut pensions for new retirees (unions no longer control the board), but only after serious damage to the solvency of the pension system.

Close to home, taxpayers in Ledyard were startled to learn that their officers, with pension calculations pumped up by big overtime in their last few years, are sometimes retiring with lifetime pension paychecks larger than their base pay.

Government unions are not going to accept without an epic fight the solution undertaken in the private sector - moving employees from defined benefit pension plans to defined contribution plans (401(k)s). At the very least, however, labor unions must face reality and work with elected leaders to find a solution.

In New Jersey, Republican Gov. Chris Christie, with the backing of fellow Republicans and some Democrats in the legislature, passed a bill requiring employees to pay more towards pensions and benefits and reduced the size of those pensions. Automatic cost-of-living increases were eliminated, even for current retirees. Unions fought the changes and have filed lawsuits challenging them.

That seemingly major accomplishment, however, is not expected to completely repair a roughly $120 billion gap between what New Jersey owes workers and what it has saved. It should stop the gap from growing.

There and elsewhere the problem will, some day, have to be fixed. It's only a matter of how nasty or cooperatively it happens.

Paul Choiniere is editorial page editor.


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