Election Adds Pressure to Change Public Pensions

By: - November 4, 2010 12:00 am

Six newly elected  governors are looking favorably at some form of 401(k)-style retirement plan for public sector employees, adding to the momentum building nationally for a shift away from traditional guaranteed pensions.

Tuesday’s election was in some ways the first national referendum on the future of public pensions, the cost of which has been rising in many states, counties and cities and is crowding out education and other popular programs. In addition to the gubernatorial elections, voters in eight of nine California cities and counties approved ballot measures slashing public pension benefits, and residents of more than 40 suburban Chicago communities approved a ballot question demanding that the Illinois Legislature lower benefits for future state workers, targeting public safety officers and firefighters.

“There is widespread concern about the cost of public-employee pensions,” says John Pitney, Jr., a professor of American politics at Claremont McKenna College in California. “Passage of the ballot measures is another sign that voters are serious about the issue.”


Loss for labor

The election of Republican governors in Alabama, Nevada, Pennsylvania, Tennessee and Wisconsin and an independent in Rhode Island who have all embraced 401(k)-style plans was a defeat for organized labor. Public employee unions have sought to largely preserve the current system, although they have supported some benefit reductions for newly hired employees. Several other candidates for statewide offices elected Tuesday also have said they believe state employee pension plans eventually will run out of money unless new hires receive retirement benefits more in line with those of the private sector.

Pension reform already was going to be a key issue in many state legislatures in 2011; the Tuesday vote could presage tense fights between the newly elected Republicans and Democrats who received campaign cash and workers from public employee unions.

Republican governors-elect  Brian Sandoval of Nevada ( profile ), Robert Bentley of Alabama ( profile ), Bill Haslam of Tennessee ( profile ) and  Scott Walker of Wisconsin ( profile ) all say they generally back the 401(k)-style system, also called “defined contribution” plans. In that model, employees contribute to their pension fund and assume the investment risk, but are given no specified guarantee of funds upon retirement.

A fifth Republican winner, Tom Corbett of Pennsylvania ( profile ), has said he would consider a hybrid that combines features of the 401(k)-like plan and fixed benefits. Independent candidate Lincoln Chafee ( profile ), who was elected Rhode Island’s next governor, says he would support a hybrid plan for new hires. Michigan already has a 401(k)-type defined contribution plan for state workers but newly elected Governor Rick Snyder, a Republican ( profile ), has vowed to tighten public pension eligibility and increase retiree health care co-pays.

Democrats also are under pressure to trim retirement fund costs. Seven Democrats who won gubernatorial seats refrained from supporting 401(k)-style plans but said they would continue overhauling the existing public pension system to bring down costs. All had been challenged by 401(k)-supporting Republican opponents. These Democrats pledged to modify the system despite receiving campaign contributions from public employee unions. 

So far, only two states — Alaska and Michigan — have adopted 401(k)-style public pension systems as their primary plan. Six states offer defined contribution benefits as an option and eight states have instituted hybrid or combined 401(k)-style and fixed benefit plans, according to the National Conference of State Legislatures. Nearly every state has discussed changing to a defined contribution plan but many have backed off because of political differences and pushback from organized labor.

Public pension plans took a severe hit from the Wall Street financial collapse in 2008; the median investment loss was 25 percent. Even before the recession, however, states were underfunding their employee pension plans. A study by the Pew Center on the States released earlier this year and based on data from before the 2008 Wall Street crisis found that there was a gap of trillion between assets and liabilities of state pension funds. 

Local liabilities

A similarly staggering gap exists in local government pension plans.  In California this Tuesday, voters in Menlo Park, Carlsbad, San Jose, Redding, Riverside, Bakersfield and Pacific Grove approved ballot measures reducing public pension benefits for new hires. In San Diego, voters rejected a half-cent hike in the sales tax that would have prevented budget cuts in police and fire services. The city pension fund, in which public safety employees are included, faces a .1 billion deficit that is driving San Diego’s budget crisis. The lone exception in the state was labor-friendly San Francisco, where voters rejected a ballot measure to boost pension contributions from city workers.

In the California governor’s race, Meg Whitman, a Republican, sought to paint Democrat Jerry Brown as a tool of labor unions who would refuse to slash public pension costs. Brown, who won ( profile ), said he would work with union leaders to keep the current defined-benefit plan but offer it to new employees with diminished benefits and increase contributions of current workers.

Public pensions also were a huge issue in Illinois, the state with the nation’s most underfunded retirement system. By one unofficial count, 47 communities in six Chicago-area counties approved a ballot question asking the Illinois Legislature to enact additional public pension reform. Governor Pat Quinn, who held a narrow lead over Republican Bill Brady following the vote on Tuesday, had pushed   through a series of reforms  earlier this year, including one raising the retirement age from 60 to 67 for new hires, establishing the highest retirement age in the country. Still, Quinn supported the existing defined-benefit plan while Brady favored defined contribution.

Analysts say the public pension funding crisis guarantees years of election debates and ballot measures similar to the ones this year. 2010 was just the start. “It’s not ideology, it’s arithmetic,” says political scientist Pitney of Claremont College.  “Money is short, and the savings have to come from somewhere.”

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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.