States Tackling Public Employee Retirement Benefits in 2010

By: - February 19, 2010 12:00 am

He has been on the job for only a month, but already Governor Chris Christie of New Jersey has done all states a favor by elevating the crisis facing public pension systems across the country.

While other governors were declaring snow emergencies last week, Christie proclaimed New Jersey a financial disaster area-with good reason. He blamed a shortfall of billions of dollars to pay for state employee pension benefits as a big reason why he needs immediate executive powers to cut spending.

“Make no mistake about it, pensions and benefits are the major driver of our spending increases at all levels of government-state, county, municipal and school board,” Christie said . “We cannot in good conscience fund a system that is out of control, bankrupting our state and its people, and making promises it cannot meet in the long term.”

With Christie raising the stakes, New Jersey appears headed towards changing its state employee retirement system this year to bring down costs. At least 16 other states besides New Jersey are considering similar changes that could mean lower benefits, higher retirement ages, freezes in cost-of-living adjustments and increased employee contributions. Most of the changes would affect newly hired state workers, but some states are weighing higher contributions from current employees. The proposals are already getting major pushback from state employees and retirees and their unions.

“A growing number of policy makers recognize that their states’ fiscal health depends on how well they manage the bill coming due for public sector retirement benefits,” said Susan Urahn, managing director of the Pew Center on the States. “We are seeing more and more states explore policy reforms aimed at putting their systems on stronger fiscal footing.”

The Pew Center on the States released a report Thursday (Feb. 18) saying that there is a $1 trillion gap between what states have promised to pay retirees and the money they have set aside to cover those costs. New Jersey, the report said, was one of the worst states in keeping up with its required annual pension payments, amassing a $34 billion shortfall in 2008 after finishing with a surplus in its retirement fund in 2000. [ is a unit of the Pew Center on the States.]

Christie, invoking emergency powers similar to those when a natural disaster takes place, is trying to plug an $11 billion budget gap with deep spending cuts. He has challenged lawmakers to enact tough, cost-cutting changes to the state employee retirement system, including reducing benefits for newly hired employees and requiring current and future employees to contribute to their retiree health care costs.

New Jersey is not alone in connecting future fiscal stability to the public retirement system. Delaware Governor Jack Markell called for reduced pension benefits for new hires in his state of the state address . West Virginia budget director Mike McKown told the Associated Press, “The major driver of the fiscal year 2011 budget will be shoring up the retirement systems.”

The other GOP governor elected in November besides Christie, Virginia’s Robert McDonnell, also is taking aim at worker pensions, proposing a benefit cut for new hires.

States usually are barred by law from trimming future benefits for current employees. But one of the striking things this year is the willingness of some states to look at ways to boost pension contributions from current employees. In Wyoming, for example, some lawmakers are proposing that current and future state employees pay a larger share of their retirement costs. Governor Dave Freudenthal, also questions the rationale for cost-of-living increases. “We have had a habit of taking a fixed benefit plan and inserting cost of living increases,” the Democrat said in his state of the state address . “We need to assess whether that makes sense.”

Other states are cleaning up abuses that allow some employees to collect overly generous benefits when they retire. New Mexico lawmakers, for instance, say they will approve a bill preventing government workers from retiring with a monthly pension check and going right back on the state payroll in another job. A bill approved by the state Senate would require state employees to wait for a year after retiring to return to a government job. The pension checks would cease as long as they keep working.

Although such abuses are inherently unfair and do not help the image of state retirees among private sector workers, they are not the main reason why states are falling behind in their pension payments. Still, the numbers can add up. Utah’s auditor found in November that double dippers would cost the state $897 million over the next decade if the Legislature did not change the law.

California voters may get to decide the fate of state employee pensions in an election. Signatures are being collected for at least three initiatives for the November ballot aimed at tightening retirement eligibility and offering reduced benefits to new hires.

Retiree health care costs are a target, too. Michigan Governor Jennifer Granholm, a Democrat, wants newly hired workers to chip in 20 percent of the cost of their health insurance plan, comparable to the private sector. The Pew Center on the States report found that states have done a poor job funding their $587 billion retiree health care liability.

The spurt of pension activity in 2010 follows three busy years in states. Last year, 15 states approved legislation to change their state-run retirement systems, compared to 12 in 2008 and 11 in 2007. Most of the reforms centered on reducing benefits, increasing the retirement age, hiking employee contributions and keeping up with funding requirements. The Pew report discusses many of these reforms in greater detail.

Ronald Snell, who tracks pension developments in the states for the National Conference of State Legislatures , predicts that many state lawmakers will discuss shifting employees from a defined benefit plan, with a guaranteed pension benefit, to a defined contribution plan similar to a 401(k) in which the employee assumes most of the risk because they choose where to invest their money.

“The record suggests few states will adopt them,” Snell said.

The record is that only Alaska and Michigan have defined contribution plans-for now. Alaska lawmakers considered changing back to a defined benefit plan last year after state employees’ defined contribution plans suffered substantial investment losses. Replacing existing pension systems with defined contributions is emotionally and politically charged. The truth is there has not been enough objective, nonpartisan examination of the costs and benefits of both plans to offer states much help in deciding between the two options.

Making changes to pension plans will not be easy. In Vermont, union representatives have threatened legal action if the state adopts a panel’s recommendations to require larger contributions from newly hired employees and adopt a higher retirement age. Earlier this month, hundreds of state employees and retirees rallied at the Utah State Capitol against plans to place newly hired employees in a cheaper pension plan with reduced benefits. Union officials in New Jersey vow to fight Christie’s plans to shrink benefits.

Former California Assembly Speaker Willie Brown, who was revered by Democrats and unions during his 15 years as speaker, offers a reality check on the need for states to responsibly manage their pension bills. He recently wrote a column that said lawmakers created a too-generous pension system for state workers in exchange for their political support.

“The deal used to be that civil servants were paid less than private sector workers in exchange for an understanding that they had job security for life,” wrote Brown. “But we politicians, pushed by our friends in labor, gradually expanded pay and benefits to private-sector levels while keeping the job protections and layering on incredibly generous retirement packages that pay ex-workers almost as much as current workers. Talking about this is politically unpopular and potentially even career suicide for most officeholders. But at some point, someone is going to have to get honest about the fact that [a portion] of the state, county and city budget deficits are due to employee costs.”

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Stephen Fehr

Stephen Fehr is a senior officer with Pew’s government performance portfolio. He is a lead writer on many of the products generated by the portfolio, specializing in state and local fiscal health.