Public Pensions, Once Off Limits, Face Budget Cuts
When an arbitrator ruled this month that Detroit could reduce the pensions being earned by its police sergeants and lieutenants, it put the struggling city at the forefront of a growing national debate over whether the pensions of current public workers can or should be reduced.
Conventional wisdom and the laws and constitutions of many states have long held that the pensions being earned by current government workers are untouchable.
But as the fiscal crisis has lingered, officials in strapped states from California to Illinois have begun to take a second look, to see whether there might be loopholes allowing them to cut the pension benefits of current employees.
Now the move in Detroit — made possible, lawyers said, because Michigan’s constitutional protections are weaker — could spur other places to try to follow suit.
“These things do tend to be herd-oriented,” said Sylvester J.Schieber, an economist and consultant who studies pensions.
The mayors of some hard-hit cities have said that the high costs of pensions have forced them to lay off workers: Oakland, Calif., laid off one-tenth of its police force last year after failing to win concessions on pension costs.
Elsewhere there is pension envy: some private sector workers, who have learned the hard way that their companies can freeze or reduce their pensions, resent that the pensions of public workers enjoy stronger legal protections.
But government workers, many of whom were recruited with the promise of good benefits and pensions, say that it would be unfair — and in many cases, very likely illegal — to change the rules in the middle of the game.
It has been far more common for cities and states to adopt more modest retirement plans for future workers.
But the savings from new plans are initially small, growing only over time.
Other states have gone further, requiring workers to work more years before retiring, or to contribute a higher portion of their salaries toward their pensions.
A few states have rolled back cost-of-living increases for retirees, prompting lawsuits.
Reducing the rate at which government workers earn pension benefits — even modestly, as Detroit did — has been rare.
Pension funds can run out of money. In Prichard, Ala., a small city outside of Mobile, the fund ran out in 2009. The city stopped sending pension checks to its 150 retired workers, defying a state law that requires it to pay what it has promised. In the 19 months since the checks stopped, 18 retirees have died while waiting for their money.
When Gov.Scott Walker of Wisconsin, a Republican, moved to curtail the collective bargaining rights of public worker unions in the state, he exempted police and fire unions.
But they often have among the most expensive pension benefits. That is, in part, because they must be paid for more years.
Because police work and firefighting are dangerous, physically demanding jobs, it is not uncommon for cities to promise workers full pensions after as little as 20 years of service, even if that means paying retirees from their 40s until they die. Such pensions are powerful recruiting tools.
When the mayor of Jacksonville, Fla., addressed a recent conference there for the trustees of police and fire pension funds, he said that he would not attend the “Guns ’n’ Hoses” boxing tournament on the last night.
The mayor, John Peyton, had spent the past year in rancorous, fruitless negotiations trying to get his local unions to agree that future police officers and firefighters should have to work 25 years before getting full pensions, instead of 20, among other things.
“I fear that if I showed up, I’d be put in the ring and I’d come out unrecognizable,” he said, joking.
In Omaha, the police union recently agreed to reduce the benefits being earned by current officers after the city agreed to put more money into the teetering pension fund.
The struggles of Detroit, of course, are extreme.
The report by the arbitrator, Thomas W.Brookover, noted that although the city’s unemployment rate was officially 28 percent, there was evidence that less than 37 percent of the city’s residents were actually working. The population had crashed. Property tax revenues were dwindling.
Detroit had drained its rainy day fund, reduced overtime, offered property-tax amnesty, sold public assets, borrowed money, allowed casinos to set up shop — and still its deficits kept growing.
The average pension for retired police officers in Detroit is not especially rich: it is $28,501 a year. But with more than twice as many retirees as active workers, Mr.Brookover wrote, the costs of paying for the pensions “threaten both the city’s fiscal viability, as well as its wherewithal to provide public safety for its citizens.” Detroit’s efforts to cover those costs through aggressive investing have not helped.
In a 2010 report, an auditor warned that $103 million of alternative investments were unaccounted for. The city’s bets have included Tradewinds Airlines, which went bankrupt for the third time in 2008, and a luxury hotel in Detroit. The Securities and Exchange Commission is investigating. The city initially sought to freeze its pension fund immediately, which is almost unheard of in the public sector. The arbitrator rejected that proposal, but agreed that the city could reduce the rate at which lieutenants and sergeants earn pension benefits from 2.5 percent of their salary per year to 2.1 percent.
Although rare, the reduction is not particularly large, given the magnitude of Detroit’s problems. The arbitrator did not try to find a solution to the fund’s imbalance.
Michigan’s new Republican governor, Rick Snyder, has taken a carrot-and-stick approach to the state’s troubled cities. The carrot: He scrapped the old way of distributing state aid, and wants to make aid contingent on having cities adopt “best practices,” which he says should include reducing the rate at which workers earn pension benefits. The stick: A new law allowing the state to appoint fiscal managers with broad powers over distressed local governments.
Mayor Dave Bing of Detroit referred to both carrot and stick in his budget address this month, when he spoke of the need to reduce pensions for current workers, and to move away from traditional pension plans to those more like 401(k)’s for “at a minimum all new hires.” “If we are unable or unwilling to make these changes, an emergency financial manager will be appointed by the state to make them for us,” he said. “It’s that simple.”