Public Employee Pensions Under Attack

by James Parks, May 30, 2006

While private employers are dismantling the traditional guaranteed pension system to save money, some of the largest defined-benefit plans, those designated for public employees, are under attack as well. And workers from Alaska to New Jersey are fighting back.

During the stock market boom in the 1990s, many cities and states increased pension benefits as part of collective bargaining agreements with firefighters, police, teachers and other public employees. When the stock market sank in 2001, many public plans became underfunded. Pensions & Investments magazine estimates that in 2004 the average major public plan was only 88 percent funded. Now some Republican governors are using public pension plan underfunding as a reason to attack public employee pensions.

In a recent report, Notre Dame economics professor Teresa Ghilarducci says defined-benefit plans, which guarantee a monthly payment amount to each retiree, provide a safer retirement than defined-contribution plans such as 401(k)s, which shift the risk of retirement savings to workers.

In Alaska, state employees vowed to challenge a new pension system that not only reduces benefits but forces workers to pay taxes on both their contributions to the plan and the state’s. The situation arose after the state legislature adjourned its regular session earlier this month without approving a bill that would clean up technical problems with a controversial switch from a defined-benefit pension plan to a defined-contribution plan, which lawmakers approved in 2005. The proposed changes were largely designed to ensure that the new plan complied with Internal Revenue Service codes and regulations. The House tacked onto the fix-it bill a one-year delay in implementing the new retirement plan. The Senate stripped the delay provision from the bill.

Jim Duncan, business manager for the Alaska State Employees Association/AFSCME Local 52, said putting the plan in place as-is would be irresponsible. “We don’t like a defined-contribution plan, we think it’s a real step backward in this state as far as retirement systems go,” he says. Duncan says the unions are exploring whether to seek an injunction to halt the July 1 implementation.

National Education Association–Alaska President Bill Bjork says employees could be forced to pay taxes on their own and the employer’s contributions if the plan does not gain tax-exempt status. “This diminishes an already miserable retirement system,” he says.

The battle over retirement security is not unique to Alaska. States across the country are trying to dump defined-benefit pension plans for teachers, firefighters and nurses, forcing new employees into a 401(k)-style defined-contribution plans run by private, for-profit investment companies. Although public employee pension plans have combined assets estimated at $2.6 trillion, the National Association of State Retirement Administrators says they carry more than $322 billion in unfunded liabilities.

But workers are winning some pension battles. Under steady pressure from working families, California Gov. Arnold Schwarzenegger (R) last year pulled back from one of his anti-union initiatives, suspending his pension privatization initiative. Thousands of union members had protested the initiative, turning out at the governor’s events throughout California. A strong effort by unions and civil rights and community groups overwhelmingly defeated other Schwarzenegger initiatives, as well, including one that would have eliminated public employees’ right to free speech.

In Colorado, the right-wing group Americans for Prosperity was forced to withdraw its pension privatization ballot initiative after legislators, public-employee unions and the state pension system struck a compromise in April to reform the state’s largest pension plan. Under the compromise legislation, the state would address the $11.3 billion unfunded liability of its defined-benefit pension plans by raising the minimum retirement age from 50 to 55 for new hires and giving the pension fund more than 30 years to reach full funding.

Maryland teachers and state employees will get better pensions thanks to $120 million in improvements signed into law last week. Maryland’s pension bill allows people hired after 1998 to retire with 54 percent of their pre-retirement income, up from about 42 percent.  Under the new law, workers’ contributions will increase from 2 percent to 5 percent over three years.

Despite these wins, serious battles are under way as workers try to protect their retirements:

• In Montana, a new bill requiring a defined-contribution plan for new employees is being prepared for the 2007 legislative session. The state’s unions have vowed to fight the bill.
• New Jersey’s Public Employee Retirement System and other public worker pension plans are facing a $12.1 billion shortfall that began in 1994 when Republican Gov. Christine Todd Whitman raided pensions to pay for a $1.2 billion tax cut for the wealthy. Whitman increased employees’ contribution to the plan to 5 percent, and through a series of legal maneuvers, she and subsequent governors allowed the state to ride the stock market to cover its pension obligations, deferring payments into the plan. The state pensions director testified last fall that the state had shortchanged the pension funds by $5.5 billion. Union members turned out for three public hearings and testified for proper funding of the pension plan and against any two-tier schemes that would replace the current defined-benefit plan for younger workers and leave them with only a 401(k) savings plan.
• In February, a Kentucky Republican state representative introduced a bill to establish a Kentucky Retirement Systems (KERS) task force to analyze the current defined-benefit plan, study the feasibility of offering a defined-contribution plan for new hires and make recommendations. (The state’s teachers have a separate plan, which this bill does not address.) In his 2006 budget address, Gov. Ernie Fletcher (R) proposed a significant increase in the employer contribution rate for KERS—a 24 percent increase in the first year and a 10.9 percent boost in the second year.

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