Changes on the State and Municipal Pension Front

by Veronique de Rugy

State and local pensions always seemed to be a sacred cow, but in recent days I have been reading more and more stories about how states and local governments are slowly but surely making changes to their pension plans.

In Rhode Island, the city of Warwick just passed two ordinances to reduce the benefits of future state employees:

The City Council gave first passage Monday night to two pension-reform ordinances that would trim retirement benefits for future police and municipal employees. The ordinances, both approved by 6-to-2 votes, are companion proposals to an ordinance approved earlier this month by the council that similarly affects future Fire Department employees.

And last week the Arizona State Senate joined the state house in passing legislation that would force some public employees to increase their pension contributions and prevent “double dipping,” the common practice of going back to work soon after retiring. Steve Moore at the Wall Street Journal explains what triggered the change:

The catalyst for the reform, which GOP Gov. Jan Brewer has said she will sign, came from reports in the Arizona Republic that pension expenses now cost the state nearly $1.4 billion a year and that retirement trust fund reserves fall far below private industry standards for soundness. Lawmakers also discovered that some of the retirement trust funds were near depletion because of heavy losses during the stock market meltdown in 2008. For the past two years Arizona has had the largest fiscal deficit as a share of its budget of any state.

It also looks like pension reform will be the hottest issue on the ballot in San Francisco.

Sure enough, all the serious candidates for mayor say they support pension reform, though some know a lot more about the various proposals than others.

Just about all of them back the components that are palatable to labor because they apply only to new hires. Those include capping pensions, probably at the IRS limit of $195,000 a year, and raising the retirement age by a couple of years. There is also a general consensus about the need to curtail “spiking,” in which employees are promoted at the end of their careers to ensure a higher pension.

The most controversial element is raising employees’ contribution rates. Currently, most pay 7.5 percent of their paychecks to their pension fund. All three proposals would increase that somewhat, though Adachi’s would go the furthest.

It’s good to see that some cities and states are trying to tackle this problem, which is bound to become gigantic in the near future. But I’ve always wondered why this issue is so controversial. Advocates for public employees should be the ones pushing for reform, because the truth is that no matter how binding the promises made by state and local governments to their employees are, when a pension plan runs into a cash-flow deficit, if the city doesn’t have the money, then retirees won’t be getting their checks anymore. This, I hope we can agree, is the worst possible outcome — see the case of Prichard, Alabama, where some public employees stopped receiving their checks last year.

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