The Pension Tide Turns

Illinois and New Jersey legislators try a new tack on reform.
April 8, 2010 AT 3:00 AM
Girard Miller
By Girard Miller  |  Finance Columnist
The finance columnist for Governing.

State legislators in Illinois and New Jersey have stood up to union members and lobbyists to approve noteworthy pension reforms. In two states where organized public employees hold powerful sway over legislators, that's a big deal.

The Illinois legislation is a landmark law in its requirement that new employees must wait until they attain the age of 67 to receive full retirement benefits, just like their Social Security checks. Previously the eligibility age was 62. That provision is coupled with a ceiling on pensions equal to the current Social Security earnings cap of $106,800, to curb abuses from pension spiking and pay-pyramiding. It won't change budgetary costs for several years, but it sets a new standard for public pension plans that other state lawmakers should consider seriously.

Earlier, New Jersey legislators took a different approach: Benefits levels were rolled back 9 percent for new hires, and pensions can only be collected from one job in their statewide system. That should help curb outlandish pensions by stopping a practice called pay-pyramiding. That is where managerial personnel draw earnings credits for former employment when they change jobs, yet still collect the former job's pension as well as the retirement from the new job, which gives them credit for the other one. New Jersey also put a cap on pension spiking by public safety and public works personnel who rack up overtime. They did this by limiting to $15,000 the amount an employee can claim as pensionable income at retirement. Employees will also be required to contribute 1.5 percent of salary toward health benefits, a new concept in the traditionally labor-friendly Garden State.

As they face huge budgetary shortfalls and the bad news that their pension costs are skyrocketing from the 2008 stock market meltdown, legislators have begun to smell the coffee and push back at those who demand ever-higher benefits and lax qualifying rules. Pension reform is catching on, and I would expect to see other states take up similar proposals in coming months and years.

So far, the new laws are primarily targeted at new employees, but I wouldn't be surprised to see other legislators pick up the pace and begin to require increased contributions from current employees. That is the most practical way most states and localities can begin to balance the benefits budget in any meaningful way for 2011. Incumbent employee benefits are much harder to change than those of new hires, so their contribution levels are the path of least resistance and greatest opportunity.

In Missouri, the state teachers' retirement system has increased the employees' contribution from 13 to 13.5 percent of pay, and similar actions are expected in other state and local systems in the coming year. The National Conference of State Legislatures keeps track of pension laws. For those seeking to follow the latest developments, Ron Snell tracks pension legislation among a myriad of other tasks he competently and humbly performs for NCSL. To follow the latest developments, click here to see what other states have done with employee contribution rates and other provisions.

So far, the unions representing public employees have stonewalled the legislatures -- and are getting terrible press on this issue. They now find themselves in an obstructionist political role similar to Congressional Republicans as the "Party of No." Politically, the unions may have no choice as they want to show their members that they are fighting for their interests in the state capitols. But obstructing necessary reforms may not be as good a tack as working collaboratively to fix the mess we're in. In a conference call with a state official last week, I was told the unions in that state would prefer to endure layoffs than to negotiate pension reductions -- the lost workers will no longer be part of the membership and won't be around to second-guess the leadership. So there is a new cynicism emerging in the pension politics that will only become more interesting as the fiscal squeeze tightens even further around the $2 trillion unfunded liabilities of state and local government pension and retiree medical plans.

Eventually, state lawmakers will come to realize that pension reform is not about the rich versus the poor. Retirement plan deficits don't affect the rich. But the budget cuts necessary to offset rising public employee retirement benefits costs will affect the poor and elderly the most -- it's social services and safety net programs that are likely to be cut as pensions eat up more of a state's budget.

Next month, I will outline a bipartisan plan for pension and retirement reforms I'm developing for the state of California. It will provide a context for genuine long-term solutions.

Girard Miller
Girard Miller | Finance Columnist |