After years of bad news, the environment for state and local government employees began to improve in 2013. Far fewer governments reported layoffs (18 percent compared to 28 percent last year); fewer pay freezes were in effect (33 percent compared to 51 percent); and hiring freezes fell from 42 percent to 27 percent, according to the Center for State and Local Government Excellence.
These improvements raised employee morale and allowed governments to begin shifting their focus from keeping their heads above water to staff development and workload management. Many governments hope that improvements in those areas will help retain their current employees and make working in the public sector more attractive to future ones.
Positive or negative, there were four major issues facing state and local employees in 2013—public pensions, Obamacare, retiree health benefits and hiring. We outline how employees fared in these arenas.
Probably the biggest public workforce story of 2013 was pensions, as states and municipalities continued to struggle to determine the best method for shoring up their unfunded pension liabilities. More than 1,000 bills were filed to fix the array of problems facing pensions. Most states focused on trying to share the risk between employers and employees by raising the retirement age, ending cost-of-living adjustments (COLA), moving employees from defined-benefit to defined-contribution or hybrid plans, offering supplemental 401(k)-style plans, and asking employees to contribute more to their pension funds.
In states with a union presence, any change was met with resistance. This was most evident in Illinois, where the state's leaders passed a law to attempt to fix what is the nation's least-funded pension plan. The plan calls for employees to pay 1 percent less per paycheck toward their pension, while increasing the retirement age for younger workers, giving certain groups of employees a 401(k)-style option, skipping some annual retiree increases, and reducing COLA—all in the hopes of saving $160 billion over the next 30 years. Even before Gov. Pat Quinn signed the bill, unions promised to file a lawsuit, arguing that the changes were unconstitutional.
California's largest unions also pushed back against pension reforms passed in 2012 that went into effect this year. The new law raised the retirement age, requires employees to pay at least half of their pension costs, and caps benefits. Meanwhile, a group of California mayors is working on a reform package that they hope to put on the state ballot in 2014 that would let local governments change retirement benefits for current workers—not just future employees. Public-employee unions in the state are already promising to prevent that from happening.
In Kentucky, a 2013 pension reform package, which was hailed as a model for the nation and came about from bipartisan negotiation, included a limit on future COLA payments unless they can be paid in full, new cash-balance retirement plans for employees hired after 2014, and a plan to immediately end partial payments to the pension plan. Few significant challenges have been proposed thus far.
One of the biggest local government pension stories of 2013 came out of Detroit, where a federal judge ruled in December that a city could cut pensions to help ease the strain of bankruptcy. Unions are already planning an appeal, well aware that about half of the city's $18 billion in debt is linked to pensions and retiree health care. The decision is likely to send ripple effects through other financially strapped governments.
Despite the federal government shutdown starting on the same day, the health exchanges created by the Affordable Care Act (ACA) opened in every state Oct. 1. In a bid to save money on health-care costs, some states, like Washington, announced that they would explore moving part-time or education workers onto the online insurance marketplace. Lawmakers in Washington believe such a plan has the potential to save $120 million over the next two years. Detroit and Chicago also explored sending their retired employees to the marketplace for coverage instead—a plan that’s likely to face lawsuits.
In Virginia, part-time employees are now required to work 30 hours or less per week to avoid Obamacare’s new mandate that requires an organization to provide health insurance for any employee working more than that. Municipalities across the country are cutting part-time workers' hours. Some say it's because of Obamacare, but others say doing so will actually cost governments more money in the long run.
Obamacare’s transitional reinsurance fee and so-called “Cadillac tax” were also on employers’ minds this year and will continue to be in 2014. The former requires state and local governments to pay $63 for each individual they cover for the purpose of helping to stabilize premiums on the individual market. Employers will be responsible for paying this fee from 2014 through 2017. The Cadillac tax, on the other hand, is permanent, and starting in 2018, imposes a 40 percent excise tax on health insurance issuers and self-funded plans with a premium that exceeds a certain threshold.
In the meantime, many state and local governments have been fervently working to ensure that their plans remain below the threshold. Without bringing plans under the threshold, both the employer and the employee stand to suffer financially. Wisconsin is hoping to avoid the tax by moving employees from a high-cost HMO plan to a self-funded one. Today, 20 states are fully self-insured, while 26 other states are partly self-insured.
Retiree Health Benefits
In 2013, states and localities continued cutting back on retiree health benefits or eliminating them altogether. Some of the changes being made in 2013 included increasing the age of eligibility, increasing out-of-pocket costs, and forcing spouses to move to Medicare. According to Cobalt Community Research, from 2011 to 2012 (the most recent year for which complete data is available), the number of local governments with more than 250 employees that did not offer retiree health insurance increased from 17 percent to 23 percent. Smaller governments with 51 to 100 employees were even less likely to offer such benefits, and only 39 percent did so in 2012.
There are multiple reasons behind the cuts—health care’s rising costs, tax revenues that aren’t keeping pace with pre-recession levels, and the savings that governments stand to get from cutting the benefits. The per-employee cost of health care is expected to reach upwards of $11,000 this year. But perhaps most importantly is that retiree health benefits are not legally protected like pensions, so changes are easier to make. Because the benefits are not guaranteed, states can generally avoid labor union lawsuits like those filed in response to pension reform.
But the story is a bit different in California, where a Superior Court judge ruled in September that Los Angeles' decision to freeze contributions to some retiree health benefits was unconstitutional. The city had expected to save $100 million, but the judge said these benefits should be protected in the same manner as pensions. The ruling was narrow, only affecting a limited number of unions, and is likely to be appealed.
While the federal government was working to end the shutdown in October and get employees back to work, state and local hiring was picking up, albeit slowly. Although states and municipalities faced a few months in which the number of new hires decreased, overall, government payrolls grew (just barely) as tax revenue rose. For the year, state and local governments increased their payrolls by .2 and .4 percent, respectively. Many of the new hires are police, fire and education employees, with the latter seeing the largest gains.