When a series of major cities went bankrupt in the height of the Great Recession, fears festered that scores of state and local governments faced immediate jeopardy. But after Stockton and San Bernardino in California, and then, most notably, Detroit all declared bankruptcy, the tide of insolvency slowed, leading many to think the crisis had passed.
Not so, agreed a panel of pension reform experts assembled at the Brookings Institution last week. Severely underfunded pensions are still forcing cities to crowd out vital services such as police, fire and schools, the panelists agreed, citing examples ranging from San Jose to Rhode Island.
By 2020, said Brookings Institution fellow Matthew Chingos, Milwaukie schools will have to fire 24 percent of their teachers or reduce salaries and benefits by 24 percent. The pressure comes amidst a series of major municipal bankruptcies that jarred the nation in the immediate aftermath of the Great Recession, reaching from major cities in California to the iconic manufacturing giant of Detroit.
Public pensions nationwide still sit in a $3 trillion “unfunded liability” gap, the difference between promised benefits and the money saved to pay them, Chingos said. And while public employees have long assumed that their pensions are legally protected, he noted that a federal judge recently ruled in Detroit that pension obligations could be put on the chopping block there.
In addition to a handful of scholars, the Brookings panel included Mayor Chuck Reed of San Jose and Rhode Island Deputy Treasurer Mark Dingley — both Democrats and both fresh from the trenches of the pension reform wars.
None of the panelists disagreed on the essential thesis, namely that cities were being forced to choose between paying for essential services and servicing ongoing commitments to poorly handled and ill-considered pension plans.
San Jose, the third largest city in California and the 10th largest city in the country, found its pension costs eating up more than 20 percent of its annual budget, said Mayor Chuck Reed. Pension costs had tripled over a 10-year period, and the city had at first responded by decimating services.
Over a decade, the city cut its payroll by 28 percent. “No department escaped the cuts,” Reed said, “and that included police, fire and librarians.” City pension costs had jumped from $73 million a year to more than $245 million.
The city finally responded with pension reform pushed over the objections of its 11 employee bargaining units. The proposed reform was supported by 70 percent of the voters. “The alternatives were worse,” Reed said. “When the pain gets so much, service delivery, insolvency or bankruptcy, you get motivated.”
San Jose is not an outlier, Reed said. The state public employee and teacher retirement systems remain vastly underfunded even under optimistic scenarios, he said.
“We want to make sure our employees and retirees get paid what they’ve earned,” Reed said, “and we want to make sure residents get reasonable services they deserve. Trying to do both is extremely difficult.”
One problem, Reed said, is that it’s hard to get people to take the problem seriously until it’s nearly too late. “The sooner you start, the better off you are,” he said. “But the sooner you start, the harder it is to convince people they have to do something.”
Sometimes it takes a disaster, said Mark Dingley, deputy treasurer of policy and financial empowerment for Rhode Island. When Central Falls in Rhode Island filed for bankruptcy in 2011, it was forced to slash pension benefits by 55 percent. “So a pension of $25,000 a year was reduced to $11,000 or $12,000,” Dingley said. “That harsh reality was felt by all public employees in Rhode Island. Younger employees look at it and said, ‘I want that money to be mine so the city can never touch it.’ ”
The state of Rhode Island itself is also behind the eight ball, Dingley said, despite having made its “actuarially required contributions” every year from 1992 to 2011. Over that period, the state’s unfunded liability went from 55 percent to 48 percent. The state managed that feat by manipulating a multitude of variables that allowed it to mask the reality without formally breaking its commitments, he said.
San Jose’s working solution, Reed said, involved existing employees being given a choice between paying more of their salaries to support their promised future benefits or accepting new arrangements. State law that prevents public employee benefits from being renegotiated downward, he noted, has hampered policy change in California. Reed is working with other mayors to get an initiative on the 2016 ballot to create more flexibility.
Patten Priestley Mahler, a Ph.D. candidate and co-author of one of the reports presented at the event, sketched out three objectives that any pension reform must meet. Viable plans, she said, must provide adequate savings for the retiree, be sustainable over time, and be capable of maintaining or improving workforce productivity.
Most reforms, the panelists said, aim to mix or substitute wholesale “defined contribution” programs in place of “defined benefits.” The DC plans put the risk on the employee, if the market takes a sharp downturn shortly before they retire. The traditional DB plans put all of that risk on the taxpayers.
Mahler suggested a middle ground that many states are considering called a “collective defined contribution,” a concept pioneered in the Netherlands that spreads the risk over time by putting employees into a retirement pool that they collectively own. Those who retire at a high point distribute the gains, while those who retire in a trough are buffered against losses. If the fund needs to raise contributions or scale back benefits, it does so through a self-governing board, but all the burden of these adjustments falls on the employees collectively.
These plans could also be made more mobile, allowing workers to move amongst employers and even into the private sector without having to worry about vesting requirements and longevity in their current job. This mobility is highly valued by many in the younger generation, panelists agreed, making pension reform actually a positive for them.
The center-left Brookings Institution hosted the panel, and Dingley and Reed are Democrats. While there was broad consensus on the panel that reform was urgent, there was less than complete comity in the room. At least two hostile questions from the audience accused researchers of sidelining critics and painting a needlessly dire picture.
Dingley responded to these challenges by saying that, while he agrees that there is too much wealth at the very top of the pyramid, public sector employees have actually gained enormously over the past decades.
“In Rhode Island, the average public employee earns $54,000 and the average private sector employee makes $38,000,” Dingley said. “How do you tax the private sector to pay more given that disparity on salary, let alone in benefits? Other than the top 1 percent, Main Street has not done that well in recent years.”