Public-employee unions are being blamed for underfunded pension plans for state and local government workers. But two Washington research centers lay most of the blame on losses in the stock market and cuts in contributions by state and local governments.
The nonpartisan Pew Center on the States warned in February 2010 that states faced a cumulative $1 trillion gap in covering pensions and health benefits for state and local workers: $452 billion in unfunded liabilities for pensions and $587 billion for health benefits, as of December 2008. The Washington-based center warned that the gap would grow unless states brought down costs or “set aside enough money” to pay for benefits.
In a more recent report, the liberal-leaning Center for Economic Policy and Research (CEPR) concluded that most of what it calculated as $647 billion in unfunded pension liabilities stemmed from the two-year stock market plunge from 2007 to 2009. The Washington-based center listed a second major cause as reduced contributions by states during the downturn.
Unions play only a minor role in both reports. The Pew Center report notes that unions have resisted moves to increase contributions or reduce future benefits in some states, but it found “a greater willingness” to accept changes than in the past. The CEPR report, written by co-director Dean Baker, does not mention unions. In an interview, he says unions “haven't played much of a role.”
“The economy went off the cliff,” Baker says. “That wasn't the unions. That was bad management of the financial system, bad regulatory management. That wasn't school teachers and firefighters. It's a little perverse to be looking to unions as the main scapegoat.”
Conservative pension-reform advocate Jack Dean blames both unions and state and local governments for pension problems. (www.fullertonsfuture.org)
Jack Dean, a conservative pension-reform advocate who publishes the website pensiontsunami.com, does cite the unions' stance as a factor in causing pension funding problems, but he says state and local governments share the blame.
“The unions have gotten us into this situation, but that's what they're designed to do,” says Dean, a former journalist who began monitoring public pensions in 2004 and is now affiliated with the conservative California Public Policy Center in Santa Monica. “We can't fault them for doing what they were set up to do. We need to watch them more closely and prevent them from driving us into bankruptcy.”
Both the Pew and CEPR reports show wide variations among the states' pension funds. California, the nation's most populous state, has the biggest pension shortfall or “overhang” — $75 billion, according to the CEPR report. Illinois, with $65 billion, and New Jersey, with $43 billion, rank second and third.
Surprisingly, perhaps, the state where public unions are under severest attack — Wisconsin — gets high marks in both reports. Pew cites Wisconsin as one of four states — along with Florida, New York and Washington — with fully funded pension plans. The CEPR report shows Wisconsin with a minimal $193 million in unfunded pension liabilities. “Wisconsin looks pretty good in the scheme of things,” says Baker.
Public workers — federal, state and local — generally enjoy better pension benefits than private-sector workers as a whole, experts agree. Union leaders say the benefits often amount to deferred compensation in exchange for forgoing current wage or salary increases. Critics say government officials agree to boost pension benefits because they satisfy unions while pushing the fiscal impact of the increases into the future.
Contrary to the picture drawn by critics, however, a pension expert has found limited correlation between union strength and pension levels. In research to be published in the Journal of Pension Economics and Finance, economist Sylvester Schieber found, for example, that Colorado has the most generous pension benefits even though it has a relatively low 25 percent unionization rate among public workers.
Several states with high unionization rates do have relatively high pension benefits, including, in descending order, New York, Ohio, New Jersey, California and Wisconsin. But Georgia, with a low unionization rate of 15 percent, ranked third-highest in pension benefits. “I was surprised by the result,” Schieber told The New York Times.
Both Baker and Pew Center research director Kil Huh say states should be moving toward fully funded pensions through some combination of steps, beginning with keeping up their own contributions. Baker says that state and local payments to pension funds have averaged $6.9 billion less than withdrawals for the past three years.
Huh says states were already considering or adopting such reforms as reducing benefits, changing the retirement age and requiring employee contributions. Nineteen states adopted such changes in 2010, he says, in some instances with union support.
As one example, Ken Brynien, president of New York's Public Employees Federation, notes that public-sector unions worked with Democratic Gov. David Paterson on a package of changes in 2009. New employees are now required to contribute 3 percent of their paychecks to their pension throughout their period of service. In addition, the retirement age was increased from 55 to 62, the minimum years of service for pension vesting from five years to 10 and the use of overtime capped in calculating benefits.
Pension-reformer Dean gives the unions only grudging credit. “They've gone along with some of the changes, and that's because they've seen the handwriting on the wall. The problem is that the changes being made are in most cases tweaks.”
But Baker says the pension shortfalls are generally “manageable,” especially if the stock market avoids another reversal. “You do have states that have serious situations,” he says, “but those are the exceptions.”
— Kenneth Jost