The subject of pension liabilities is always an issue of concern for governments, but two recent events brought it to the forefront once again.
Central States Fund, a prominent Teamster pension fund and one of the nation’s largest, has filed for reorganization under a new federal law and informed its more than 400,000 members that their benefits must be cut.
Cutting retirees’ benefits has generally been thought undoable, but the director of the Teamster fund believes that reducing the payouts is the only realistic way to make any of the money last. Currently, the Central States Fund pays out $3.46 in benefits to its retirees for every $1 it receives in employer contributions, resulting in a pension capital fund reserve that will run out in 10 to 15 years. Conversely, restructuring could make the fund last 50 more years. The fund chairman, unlike many government leaders, realized that the responsible thing, not the politically expedient thing, was to confront the problem now.
The governor of Rhode Island, Gina Raimondo, took the same principled approach. After a four-year overhaul and intense union negotiations, a new pension plan was enacted that neither raised taxes nor forced the purchase of risky pension obligation bonds. To reach this result, retirees had to trade in part of their defined benefit pension plan for a 401(k)-style plan where they must bear some of the investment risk.
Mired in Illinois’ $110 billion shortfall, Mayor Rahm Emmanuel of Chicago is also attempting to get a handle on pension costs, but the outcome has been very different due to a very important variance in state law.
Most states, including Illinois and New York, took steps long ago to make pensions creatures of contract law versus that of a statutory right á la Rhode Island, and the distinction is critical.
Statutes are relatively easy to change by simple amendment, but pension “contract” states have to confront a clause in the United States Constitution that bans them from enacting any law that retroactively impairs contract rights.
The clause dates all the way back to post-Revolutionary America and was created as a way for the Founding Fathers to stop the states from giving themselves debt relief.
In essence, Gov. Raimondo had bargaining leverage that Mayor Emmanuel does not.
Mayor Emmanuel successfully negotiated compromises with 30 of his 33 unions. The deal collapsed when some holdouts filed an injunction to stay the new plan until the Supreme Court of Illinois decided the constitutionality of a concurrent case concerning an Illinois state pension revision.
The court found the state’s restructuring unconstitutional, and soon after, a Cook County judge ruled the decision binding on Chicago as well.
The effect on Albany did not go unnoticed as Illinois’ constitutional provision nearly verbatim mirrors that of New York’s, which defines membership in a governmental pension system as a “contractual relationship, the benefits of which shall not be diminished or repaired.”
The Illinois court went even further and disallowed any attempt to reduce the future benefits not yet earned by people still working in government.
New York officials have always presumed that our constitutional language would be interpreted in a like manner, i.e. entitling public employees to earn all the benefits offered by the pension system at the time of their hire.
That is why the few reforms of late have only focused on changing the rules for new “tiers” of employees not yet hired.
As a result of the court’s interpretation, the current reality for Chicago is a record-breaking property tax increase. Mayor Emmanuel stated his only other option to bridge the gaping financial hole was to layoff thousands of police and firefighters and forestall street repairs and rodent control programs, making in his words the city of Chicago “unlivable.”
At the Illinois state level, the governor is scrambling to avert the same draconian choice of deep spending cuts or exorbitant tax hikes by proposing a constitutional amendment that limits current employees from being entitled to pension benefits they have yet to earn.
Likewise, but with a zero chance of passing in New York, Republican Rep. Mike Fitzpatrick of Suffolk County has proposed a similar constitutional amendment.
Faced with what appears to be an almost insurmountable legal firewall, some financial analysts are urging Congress to enact a law enabling states to declare bankruptcy the way municipalities such as Detroit and San Bernardino, Calif., did under Chapter 9 of the Federal Bankruptcy Code. California and Illinois are in such extremis that the possibility is not so far-fetched. As a nation, it is estimated that we now have unfunded public pension liabilities of as much as $3 trillion. The logic flows that even the threat of bankruptcy and the attenuating change in financial obligations would give governors and legislatures a powerful new weapon to achieve concessions.
I don’t know where the answers or solutions lie, but I know it is not by not confronting the issue head on. Inaction is a clear and dangerous action and as the fund manager of the Central States plan stated, it is also “irresponsible.”
The state of New York must do something soon and significant. A union leader in Rhode Island put it best when he said, “A settlement can be fair and heartbreaking at the same time.”