Local and state governments across the country face potentially ruinous pension and benefit costs. Too bad so many political leaders have decided that the best way to solve the problem is by making public-sector employees Public Enemy No. 1.
Outgoing Gov. Tim Pawlenty calls them "over-benefited and over-paid." Indiana Gov. Mitch Daniels says they are the "new privileged class." New Jersey Gov. Chris Christie describes two classes of state residents: "Public employees who receive rich benefits, and those who pay for them."
Union leaders are quick to take the bait, trotting out their own mix of dubious statistics and tired clichés about "corporate greed."
Whoever developed the script for taking on public employees must be pleased that so many have their heads buried in it, even as things get worse. One estimate puts the combined total of unfunded state and municipal pension obligations at almost $3.1 trillion. It's an estimate over 30 years and highly dependent on what happens to the stock market in coming decades, but we're not talking about a theoretical problem.
Just ask officials in Illinois, who've resorted to borrowing billions to prop up the state's pension funds. New Jersey skipped a $3.1 billion payment owed to its plans. Prichard, Ala., stopped sending pension checks to 150 former city employees and has filed a Chapter 9 bankruptcy petition. In San Diego, some think bankruptcy may be the only way for California's second-largest city to shed some or most of its $3.5 billion in pension and benefit liabilities.
Pension costs are not threatening to bankrupt any Minnesota cities because most public employees are enrolled in one of three state-run plans. But that's a far cry from saying all is well. The three major state plans are an estimated $12.3 billion short of the cost of benefits that will have to be paid out over the next 30 years. Add another $3 billion to account for unfunded liabilities of independent plans, including the St. Paul Teacher's Retirement Fund. Tack on another $2.5 billion to $3 billion for other benefits that some Minnesota cities and many school districts offer retirees, such as health care.
Pretty soon you're talking about a shortfall of almost $20 billion, and it could get worse if the stock market does as badly in the next 10 years as it has in the most recent decade.
The issue plaguing pensions is the same one facing Social Security: Fewer people are paying into the fund even as the benefit, and number of people relying on it, grows. In 1985 there were four workers for every person drawing a pension from one of Minnesota's three big plans and the average benefit was $5,053. By 2009 there were fewer than two workers for every beneficiary collecting an average of $18,472.
Estimates of these multi-billion dollar shortfalls extend over 30 years, but the cost is hitting taxpayers now. In 2008 and 2009, 75 Minnesota school districts borrowed almost $500 million to pay for post-retirement obligations, according to the Bond Buyer. The city of Minneapolis now devotes 8 percent of a shrinking budget to pension obligations, up from 2 percent in 2002. Minnesota lawmakers approved a measure last May that will reduce benefits in statewide plans by $2.1 billion and require workers to contribute an additional $313 million over the next five years, but also will increase pension funding costs for school districts and state and local governments.
With budgets already squeezed, it's hardly surprising that elected officials are turning their attention to public sector wages and benefits. Telling voters you want to chop the pay or shrink the pension of government workers is a lot easier than telling them you will have to raise taxes, close recreation centers or reduce the number of police officers to fulfill promises made decades ago.
Two things to keep in mind about how we got to where we are.
First, elected officials from both parties often chose to hide the cost of these agreements from voters, often for decades. That's how a $32 million liability in Duluth in 1998 became more than $300 million by 2009, raising the spectre of a potential bankruptcy filing.
Second, wages, pensions and benefits are the result of collective bargaining. Ultimately, elected officials approved the contracts. Blame should be shared equally, and any change will have to be negotiated mutually. Vilification is a standard negotiating tool, but not an effective opening gambit.
In Duluth, the city negotiated with the unions to end free retirement health care for anyone hired after 2007. It also negotiated the right to move all employees to a single health plan, and then did the same with retirees. Those changes have reduced the city's projected shortfall from $350 million to $208 million.
"It's the difference between bankruptcy and solvency," said Mayor Don Ness.
Ness is perhaps more optimistic than he should be. The accountants say the city needs to put aside about $17 million a year to meet current and future obligations, but the city can only afford about $10 million. The outlook worsens if health care costs rise faster than current projections, or if the Minnesota Supreme Court overturns lower-court rulings that allowed the city to shift retirees into one plan.
Most private sector workers will have to rely on 401(k) savings and Social Security when they retire. It's easy to envy the comparative security that a public sector pension offers, and cynical rhetoric can transform envy into resentment.
Union leaders, meanwhile, owe it to their members to help craft a solution that is sustainable and responsible. But don't fault them for being alarmed and resistant. Imagine how charitable the rest of us would feel if the topic wasn't pensions but Social Security and Medicare, benefits we're counting on and helping pay for.
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