You see a lot in the news these days about public employee pension costs pushing cities and states to the brink of bankruptcy.
Private sector employers confronted the same crisis years ago and are still struggling with it today. Eager to avoid costly strikes, companies agreed to long-term pension benefits they couldn’t afford, hoping to find a way to fund them later.
The focus on employee benefits intensified in the 1970s when President Nixon implemented wage and price controls. Employers couldn’t increase wages, so union leaders’ focus turned to employee benefits. By the time the controls were lifted, employee benefits had become a staple of labor contracts and collective bargaining.
Eventually, companies could no longer ignore the consequences. U.S. automakers are the prime example. One of the reasons General Motors couldn’t compete with foreign automakers such as Toyota was its “legacy costs” —payments for employee pension benefits granted through the years. In 2005, those legacy costs added $1,600 to the cost of a GM car, making it difficult to compete with foreign automakers that had no such obligations. When the recession threatened to put them into bankruptcy, the U.S. automakers got a federal bailout.
Municipal and state governments are now facing the same crisis, only there isn’t enough money in the federal Treasury to bail everyone out.
For example, the San Francisco Weekly reports that public pension costs in that city have increased 66,733 percent in the last 10 years. Financial analyst Meredith Whitney set off a firestorm recently when she predicted on CBS’ “60 Minutes” that 50 to 100 American cities could go broke within the year.
States are reeling as well.
Despite implementing reforms, experts say Illinois’ pension system could go broke within seven years. If that happens, pension costs would have to be paid from the state’s general fund, but that would consume half the entire state budget every year.
Analysts say that public-sector accounting methods actually understate pension liabilities and that state pension funds nationwide are underfunded by as much as $3 trillion. The situation has become so desperate that congressional leaders are considering legislation to allow states to declare bankruptcy.
So, what is the situation here in Washington? Not bad by comparison.
Unlike many states, Washington acted back in 1977, closing access to the most generous public-employee retirement plans, raising the retirement age and requiring more cost sharing.
Even so, our state faces a $6 billion unfunded pension liability, and two of the state’s pension funds are considered to be at risk. To make matters worse, in 1995, lawmakers approved automatic annual benefit increases for members of those closed pension funds. While they were billed as a hedge against inflation, the increases weren’t linked to inflation, which has been low for the past decade.
Based on the work of a panel of leaders in business, nonprofits and government, Gov. Gregoire has proposed a plan to address our state’s pension problems.
The governor wants to stop automatic benefit increases for the closed pension plans except for people receiving minimum benefits. Gregoire also wants to discontinue incentives for public employees to retire early, and she’s proposing to end the practice of retired employees returning to a new state job, receiving full salary and full retirement benefits.
Currently, retirement plans for employees in higher education are similar to the old closed state pension programs. Gregoire wants to bring those pensions in line with state plans and cap the state’s contributions at six percent.
The State Actuary estimates that the governor’s pension reforms could save as much as $11.3 billion over the next 25 years.
Despite a looming $5 billion budget deficit, some state legislators may balk at cutting back public-employee pensions. But the governor is doing the right thing, and lawmakers who try to block her reforms will be putting the state at risk.
About the Author: Don Brunell is the president of the Association of Washington Business. Formed in 1904, the Association of Washington Business is Washington’s oldest and largest statewide business association, and includes more than 7,200 members representing 650,000 employees. AWB serves as both the state’s chamber of commerce and the manufacturing and technology association. While its membership includes major employers like Boeing, Microsoft and Weyerhaeuser, 90 percent of AWB members employ fewer than 100 people. More than half of AWB’s members employ fewer than 10. For more about AWB, visit www.awb.org.