The Hard Choices on Public Pensions
Rhode Island's capital city is addressing the fiscally crippling problems with its retirement system. Can Illinois find the political will to do the same?
With the city's police and firefighters' unions agreeing to go along with significant pension reforms passed last year, Providence, R.I., has become a leader among the many state and local governments that have acted recently to make their retirement systems more sustainable. But halfway across the country, Illinois is emerging as the poster child for what happens when the public sector shirks its pension responsibilities.
Last spring, both Rhode Island and Providence, the state capital, enacted groundbreaking pension reforms. The state and its unions have gone to mediation in an effort to resolve their differences, but Providence, which was on the verge of bankruptcy when the ordinance was passed, is well on the way to getting its pension house in order.
At the heart of the city's reforms were significant reductions in cost-of-living adjustments (COLAs). The majority of city retirees receive a 3 percent annual COLA. But increases for police and firefighters who retired in the late 1980s and early 1990s--27 percent of all retired city workers--were 5 to 6 percent each year. A pension with a compounding 5 percent annual COLA doubles in 16 years; at 6 percent, the pension benefit doubles in 12 to 13 years.
The new legislation not only eliminates the 5-6 percent COLAs but suspends all COLAs for 10 years and caps annual increases at 3 percent after the suspension. Another provision requires retirees to enroll in Medicare once they become eligible. In all, the reforms will reduce the city's $903 million unfunded pension liability by $178 million.
Providence's public-safety unions have stepped up and done the right thing. Almost 90 percent of the city's police officers voted in December to accept the reforms rather than battle them in court. Last week, nearly three-quarters of the city's firefighters voted to adopt minor changes and clarifications to a package that nearly 70 percent of them approved in November.
Prior to these reforms, public employee pensions were consuming more than half of Providence's annual tax levy, but the pension fund was still only one-third funded. That sounds a lot like Illinois. Just 39 percent of the state's pension liability is funded--the lowest funding level of any state. Total unfunded liability is nearly $100 billion, and it is increasing by $17 million every day. Gov. Pat Quinn's office estimates that if nothing is done in three years the state will be spending more on pensions than on schools. Illinois also has the worst credit rating of any state.
Unlike other jurisdictions, Illinois hasn't even begun taking steps like Rhode Island, Providence and others have to address their problems. The pension mess has gotten so bad that fixing it will now almost surely require both greater substantive sacrifices from retirees and political decisions that not long ago would have been unimaginable. Democrats will have to antagonize their supporters in public-employee unions; Republicans will have little choice but to vote for something they--and their constituents--know is likely to lead to a tax increase.
In government, the temptation to put off hard decisions is great. They usually get made only when leaders conclude that the political damage from not acting outweighs the risk of pulling the trigger.
But one thing is certain: The longer they wait, the worse the problem gets. Earlier action certainly would have made things easier in Providence, but the city is now addressing its challenges. There's going to be a whole lot of pain ahead when Illinois finally comes to grips with its pension woes.