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Pension Reform Success Stories

Most states and many municipalities have passed some kind of pension reform in recent years, but only a few did so in a way that addresses the immediate unfunded liability of their plans. Plus: Has pension reform gone too far?

AP/Seth Perlman
For Chris Bartley, the turning point in Lexington, Ky.’s pension deal came when the city finally budged. The longtime firefighter and union chief was slow to trust politicians. So he stood his ground and well into fall 2012, Bartley and other representatives returned again and again to the negotiating table. Tasked with fixing the city’s looming pension debt created by slow revenue growth and soaring entitlement costs, they had made no progress.

Then it happened, Bartley recalls. The city said it had come up with a way to increase its pension funding -- and could guarantee those payments. It was the first step in a compromise deal that city officials today believe will make the fund solvent.

Read the April issue of Governing magazine.

“Somebody had to step first,” Bartley remembers. “They moved, and it allowed us to make some movement.”

As in Lexington, many state and local pension plans are in crisis. Thanks to the recession’s toll on pension portfolio returns and its pressure on budgets, many public pension plans at both the state and local level have become woefully underfunded -- threatening future benefits. Meanwhile, the tight budget climate has strained relations between employee unions and employers, making it difficult to pass meaningful changes that would assure employees of their full retirement benefits and keep pension systems current with state and local revenue.

Most states and many municipalities have passed some kind of pension reform in recent years, but a smaller number have been able to do so in a way that addresses the immediate unfunded liability of their plans. Both sides have shirked responsibility, says Elizabeth Kellar, president and CEO of the Center for State and Local Government Excellence. “Neither the management side nor the labor side has owned up to reality.”

Now there will be new factors. The Governmental Accounting Standards Board rules set to kick in this summer will change the way public pension plans account for their portfolio gains and losses. That will likely have the effect of making a plan’s unfunded liability appear higher than it did in prior years. Coupled with announcements from credit ratings agencies that they will downgrade states with high unfunded liabilities, the pressure on public pension reform is mounting.

Some pension plans, however, have tackled those pressures successfully. While the processes vary, the themes for progress are consistent: education, reciprocity and trust. While it may seem essentially a public relations campaign to engage employees and inform the public, it is by no means a simple road to meaningful reform. It can, however, be worth the effort.

One person who took the education component seriously is San Jose, Calif., Councilman Pete Constant. A former cop, Constant was elected to the council in 2006 and by 2012, pension costs had grown to 27 percent of the city’s general fund budget. Constant made it his mission to understand exactly how pensions work or don’t work and took courses at the University of Pennsylvania, University of Chicago and Stanford Law School. (He’s now on his way to finishing his doctorate in public pension governance.) He’s used his expertise to launch a pension education crusade of sorts, making the case to voters and his colleagues that San Jose’s system was broken.

“What I took on as a personal challenge is, how can I learn these complex concepts and present them in ways simple enough to make people understand?” says Constant. In coordination with Mayor Chuck Reed and others, officials spent nearly three years discussing the city’s pension problem in public forums before proposing changes to the system that targeted retirement age and restructured employee contributions. “Once people start to connect the dots, you see the light go [on],” Constant says of the forums. Last June, voters overwhelmingly approved changes that included raising the retirement age to 65 for most employees; requiring current employees to contribute an additional 4 percent of their salaries or switch to a lower-cost plan; and allowing the city to suspend cost-of-living adjustments (COLA).

But San Jose’s method largely bypassed the unions, and now the city is embroiled in a costly -- albeit expected -- lawsuit.

Educating the voters and public employees on what’s wrong with the current system would seem to be key. It’s also extremely difficult.

“People’s eyes glaze over,” says Fitchburg, Mass., Mayor Lisa Wong. After redesigning health-care coverage for current and future employees and retirees, which reduced other post-employment benefits costs and addressed roughly 40 percent of the city’s unfunded liability, she has now made changing the pension plan itself a top priority this term. Accordingly, she has assembled a public employee committee with representatives from each of the city’s 16 unions. “One of the solutions [I’ve used] in terms of discussing it publicly is talking about this issue of trade-off,” she says. “People want to know why, if their taxes are going up and services going down, this is happening. And I had to say because we trade off current services to pay for past bills. That’s a very difficult conversation to have.”

It’s a conversation that Rhode Island Treasurer Gina Raimondo had dozens of times with taxpayers and state employees as she launched her tour around the state to advocate for pension reform in 2011. “Often these meetings would last for hours,” Raimondo says, adding, “Public employees did nothing wrong. They did what they were told -- it was the system that was poorly designed.”

At the meetings, Raimondo would talk to employees, telling them, “I’m sorry, I have a tough message. But I’m here to work with you.” Raimondo says attendees would often start off angry but by the end, thanked her. “They said I was the first person to lay it out like that for them.”

That year, she persuaded the Democrat-controlled legislature to pass pension changes that she projects will save up to $4 billion by delaying retirement, suspending COLAs and changing existing and new workers’ plans to a hybrid pension/401(k)-style plan. Still, Rhode Island’s legislation never won union support and now faces a legal battle.

Part of unions’ stiff opposition to pension changes can be traced to a lack of trust in the numbers pension sponsors’ report. Indeed, for every state chart that shows a less-than-expected rate of return on pension investments over the last decade, pro-union groups have their own or independent studies that show better rates of return over 20 or 30 years. “It’s disingenuous at best to say they’re on an education campaign,” says Jordan Marks, executive director of the National Public Pension Coalition. He rejects the picture that politicians present of reduced services versus pension cuts. “It’s a false choice,” he says. “Smaller class sizes or teacher pensions? It’s not one or the other -- budgets are made up of thousands of decisions.”

Marks says the lack of fairness has created distrust among workers. It runs deeper than disputes over rates of return on portfolios. Many states and localities have not paid in their required contributions in recent years as budgets have become strapped. (Rhode Island, Raimondo notes, has made its payments.) And employees -- who have also dealt with salary freezes -- have no control over how much they contribute to their pensions. The system has left a sour taste in the mouths of current public employees who now view pension reform as a bailout to states using their hard-earned money.

Melissa Turner, 34, is one such employee who feels she was given a “bait-and-switch” after 12 years at the University of California at Davis. Several years ago, her retirement benefits changed. That means she will have to work for the university 15 years longer -- until she is 65 years old -- to receive what was originally laid out for her. Meanwhile, budget cuts have allotted her just three raises in 12 years averaging less than 2 percent while her pension contribution percentage has more than doubled. The changes have disabused her of the notion that her job as a construction project coordinator will provide retirement security. “Let’s face it, the system our parents grew up on is not going to be the same system that’s there for us,” she says.

Overcoming that broken trust can mean that pension reform doesn’t have to be mandated from on high, but reciprocity is an absolute requirement. Lexington Mayor Jim Gray believes he’s done just that with reform the city passed in January and has since been approved by the state legislature. Put together by a pension task force made up of city officials, union representatives like Bartley and the aid of an outside financial consulting firm, the measure guarantees that Lexington will increase its annual contribution to the pension fund to $20 million from $11 million. At the same time, employees have agreed to an older retirement age and increased contributions.

Both sides say hiring a financial consultant with no ties to the city helped keep everyone in line and bring about compromise after months of standstill. “We just laid everything on the table -- nothing would be held against each other,” Bartley says, “and before long, we were making progress.”

Gray adds that the environment created a sense of common purpose and shared sacrifice. “That language can sort of sound artificial, cliché, sanitized and all sugar and spice,” he says. “But getting to that level of trust was hard work. Patience and persistence were required and a willingness to just stay at the table.”

Employees can be an asset and resource when it comes to redesigning pensions, says Ken Parker, former city manager of Port Orange, Fla. Including them in the redesign is likely to take longer than officials probably prefer. But after five years of efforts from city officials, Parker says Port Orange now has a sustainable pension plan. The city was able to reduce the benefits for current firefighters while the union got its wish for more money in the budget for new hires.

“Sometimes we assume that they don’t want … to be a part of the solution, which, in fact, I think they do,” Parker says. “By engaging the employees, you come up with better solutions than you do if you’re trying to mandate them.”

Launching a PR push on pension reform doesn’t guarantee success; only time will tell whether the changes enacted today will work for the years ahead. Nearly two years after Atlanta became the first city to pass major pension reform upping employee contributions and reducing COLAs, Mayor Kasim Reed says the city is saving at least $25 million a year.

The wave of reforms following Atlanta and Rhode Island’s changes signals a growing acceptance that, in many cases, the current system can’t last. In some places that has created a blame game that’s inhibiting compromise. In Illinois, employees point out that their state has been woefully derelict in paying into the plan, which is roughly 40 percent funded. Illinois’ inability to address its unfunded liability was a major factor in its recent downgrade by Standard and Poor’s. Last month the Securities and Exchange Commission charged Illinois with securities fraud for misleading investors about the health of its pension program.

But after all the finger-pointing is over, some places are finding their way to balanced solutions. Pensacola, Fla., for example, this year closed off its pension program and began enrolling all new hires in the state plan. Current employees remaining in the city plan must increase their contributions. In return, Mayor Ashton Hayward agreed to pay raises for city employees over the next few years. “There was melodrama in the city for about five months out of the nine that we were doing this -- it was ugly,” says Hayward. “But I had good support and they were telling me, ‘Ashton, you’re not going to please everybody. Get over it.’”

Brian Peteritas is a GOVERNING contributor.
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