On the heels of a politically charged debate and angry street protests in Wisconsin over stripping public employees of their collective-bargaining rights, producers who serve the public sector are now seeing similar efforts take shape across the nation.
One such place is South Carolina, whose Republican Gov. Nikki Haley wants to pare $14 billion in unfunded benefit obligations for state workers. In Florida, Republican Gov. Rick Scott is pushing for state employee contributions to help fund their retirement. And in Connecticut, labor negotiations are underway to address former Republican Gov. M. Jodi Rell's proposal to seek higher pension and health care contributions from state workers.
Meanwhile, the dust is still settling in Wisconsin, where a court order now stands in the way of Republican Governor Scott Walker’s controversial plan severely restricts the right of public employees, except for police and firefighters, to collectively bargain for wage increases beyond the rate of inflation. Proposed pension and health care contributions that, in effect, were seen as an 8% pay cut would be used to help rein in the state’s deficit, which is expected to hit $3.6 billion over two years.
A re-leveled playing field
Governors and legislators in 24 states have sought changes in rules pertaining to pension benefits for public employees that the Pew Center on the States suggests "could significantly remake many of the nation’s public retirement systems." Ten of those states with the highest liabilities are Washington, Massachusetts, Virginia, Wisconsin, North Carolina, Illinois, New Jersey, Florida, Ohio and California.
State and local governments offer health insurance coverage for roughly 10% of the nation’s workforce — a number that swells to about seven million when including covered dependents – and hold more than 20% of total pension assets, according to national surveys by the Center for Retirement Research at Boston College, Segal Co. and Kaiser Family Foundation that were cited in a recent the National Conference of State Legislatures report.
Other notable findings show that 46 states self-insure at least one of their employee health plans and at least 20 states self-fund all of their health plan offerings. In addition, the U.S. Bureau of Labor Statistics notes that 91% of full-time state and local government employees have access to a traditional pension.
"States are under the greatest fiscal pressure they have experienced in the modern era," explains Alan Weil, executive director of the National Academy for State Health Policy. "The need to generate budget savings is intense and exists without regard to political party." Weil says it’s reasonable to expect that public employees will face cost-sharing increases for the same reasons seen in the private sector, noting how public employee and retiree benefits "are very much in the mix of areas being examined for possible budget savings."
A fraction of all budgets
Keith Brainard, research director at the National Association of State Retirement Administrators in Baton Rouge, La., says it’s understandable that “the fiscal downturn affecting states, cities and school districts is forcing evaluation of all spending” — an effort that largely transcends political party lines in the quest to balance budgets. Indeed, half of all states already have furloughed some of their workers in the past few years, according to the NCSL.
But the fact is that “a relatively small portion of all state and local government spending goes to public pensions,” he wrote in a recent issue brief, citing an estimate of less than 3%. Brainard also says an estimated 30% of state and local government employees do not participate in Social Security, reducing taxpayer expenses by about $15.6 billion a year.
David John, a senior fellow with the Heritage Foundation in Washington, D.C., who’s also affiliated with the Brooking Institution’s Retirement Security Project, says the more relevant statistic is to measure what contribution levels need to be in the aggregate to pay pension promises.
“States are suddenly waking up and recognizing that they have promised far more than they’re going to be able to comfortably pay,” he observes, adding that there’s nothing wrong with a traditional pension as long as it’s affordable and handled responsibly.
One problem is that many state and municipal governments have failed to accurately analyze their health care and retirement promises to employees, which John says, has fueled voter outrage and given rise to the Tea Party movement. Another issue is how retirement plan solvency is determined. While the California Public Employees’ Retirement System recently agreed that a 7.5% real rate of return is an appropriate estimation, John cautions that most fund managers believe it will be "exceedingly hard to reach without a substantial level of risk."
Still, many policymakers realize how difficult it is for state employees to save money if they switch to a DC plan from a DB plan and appreciate the role of a traditional pension as both “a retention tool and source of economic stimulus,” according to Brainard.
Joe Benton, executive director of the South Carolina State Employees Association, recently challenged Gov. Haley’s claim about $14 billion in unfunded retirement benefit obligations — noting that the system is amassing $4 billion a year and has $22 billion on hand while paying out $2 billion. State workers, who reportedly haven’t had a raise in four years, pay 27% of their health insurance and are responsible for contributing half of their retirement benefits.
John says, “What’s important is not the size of the pension fund or income level today as opposed to what it’s paying out in the future. What’s important is the ratio between available assets and pension promises.” Long-term pension promises must be “structured in a sustainable manner” with sufficient contributions from state governments and workers to meet those obligations, says John.
He adds that retirement plan performance will be more of a key measure in the future for advisers serving public-sector employers in light of the current movement toward austerity. “If advisers can show a proper level of performance for a reasonable level of fees, they should do fairly well,” he believes.
— Bruce Shutan is a freelance writer based in Los Angeles.
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