Progress on Perks, But More to Be Done

September 2, 2010

“How does a state of only 1.3 million people end up $4.4 billion behind in its payments for just one state program?”

Good question.

It was posed by a reporter for the Maine Center for Public Interest Reporting, in a series on unfunded-pension liabilities for state employees and government-school teachers.

Quick answer: Greedy politicians and rapacious unions.

According to a February report by the Pew Center on the States, a cavernous gap exists “between the $3.35 trillion in pension, health care and other retirement benefits states have promised their current and retired workers as of fiscal year 2008 and the $2.35 trillion they have on hand to pay for them.”

Pew noted that “many states fell behind on their payments to cover the cost of promised benefits even before the Great Recession. Our analysis found that many states shortchanged their pension plans in both good times and bad, and only a handful have set aside any meaningful funding for retiree health care and other non-pension benefits.”

Other analysts believe the problem may be worse than Pew’s estimate. Joshua Rauh, a professor of finance at Northwestern University, speculates that the pension funds of Illinois, Louisiana, New Jersey, Connecticut, Indiana, Oklahoma and Hawaii could be depleted by 2020.

Is anything being done to hold off insolvency? Surprisingly, recent months have seen several states make progress.

Illinois raised its retirement age and lengthened its vesting period. Utah closed its defined-benefit system altogether, and required all new hires to accept a defined-contribution or “hybrid” plan. Wyoming and Missouri made employees start funding part of their retirement income. New Hampshire launched an experiment in pre-funding retiree healthcare costs with tax-free employee contributions. According to Pew researcher John Gramlich, “What is most noteworthy about New Hampshire’s plan -- besides its broad bipartisan appeal -- is that it has the potential to take taxpayer money completely out of the retiree health care equation. Instead, contributions come from government employees themselves. The model differs sharply from the generous, taxpayer-funded health care subsidies that New Hampshire has been paying to its retired state and local workforce for years, and which it is trying to phase out.”

A new law designed to suppress double-dipping in Florida took effect July 1. That day also saw the demise of gratis post-retirement healthcare for new West Virginia employees.

New Jersey’s governor denounces a “sector of our society that is sheltered from the recession,” and promises bolder reforms to come. Bill Brady, running ahead in the Illinois gubernatorial race, is pushing for 401(k) plans for state employees. The Los Angeles Times reports that Jerry Brown, trailing Meg Whitman, wants to “end pension ‘spiking’ by basing employees’ pension benefits on their base salary and stop enlarging workers’ payouts with bonuses, promotions, overtime and unused vacation in the final year of service. Under his plan, benefits would be based on the average of an employee’s last three years instead of the final year. Payouts would be capped at a ‘reasonable’ level.”

So the news is encouraging. But the permanent solution to unfunded-liability hell still eludes the political class. In an editorial earlier this year, the Chicago Tribune offered a concise explanation why: “Many politicians of both parties enlist [state] workers as their allies in a cozy paradigm: If you help us win re-election, we will reward you with adequate salaries today -- and fabulous retirement benefits tomorrow.”

The re-election portion of the grift is funded by forced union dues. Campaign cash doesn’t decide elections -- never has, never will. But it undergirds skilled propagandists, a large mailing list of “members,” and sophisticated get-out-the-vote operations. State pols either benefit from unions’ power, or are cowed by it.

Unfortunately, many voters believe that public-employee unionism is something to bear with aplomb, the way one endures a blizzard or heat wave. They’re wrong.

Every local- and state-government union is the creation of legislators and governors. Washington doesn’t play any role. The federal government’s Wagner Act, which established compulsory unionism in the private sector, applies to only the private sector.

New measures aimed at wrangling public-employee costs indicate a willingness to tinker at the edges of the problem -- mild gumption that is long overdue. But the way out of the dual curse of runaway compensation and unaffordable retirement burdens in the public sector is the repeal of government unions. No more featherbedding. No more protection of laggards. No more pay and benefits disconnected from performance.

Fiscal reality makes the death of government unions inevitable. It’s time to elect candidates who’ll get it done.

D. Dowd Muska (www.dowdmuska.com) writes about government, economics, and technology. He lives in Broad Brook, Connecticut.

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