National Edition

Dwindling pensions still swindling funds from vital city and state services

Published: Wednesday, March 5 2014 9:25 a.m. MST

San Jose Mayor Chuck Reed and his wife, Paula, arrive at a campaign party to discuss pension reform before the polls closed in San Jose, Calif., Tuesday, June 5, 2012. Mayor Reed was a member of the Brookings Institution panel to discuss pension crises across the country. He cited his own experiences with pension reform in his city, the third largest city in California and the 10th largest city in the country. San Jose found its pension costs eating up more than 20 percent of its annual budget, and pension costs had tripled over a 10-year period, crowding out vital city services.

Paul Sakuma, Associated Press

When a series of major cities went bankrupt in the height of the Great Recession, fears festered that scores of state and local governments faced immediate jeopardy. But after Stockton and San Bernardino in California, and then, most notably, Detroit all declared bankruptcy, the tide of insolvency slowed, leading many to think the crisis had passed.

Not so, agreed a panel of pension reform experts assembled at the Brookings Institution last week. Severely underfunded pensions are still forcing cities to crowd out vital services such as police, fire and schools, the panelists agreed, citing examples ranging from San Jose to Rhode Island.

By 2020, said Brookings Institution fellow Matthew Chingos, Milwaukie schools will have to fire 24 percent of their teachers or reduce salaries and benefits by 24 percent. The pressure comes amidst a series of major municipal bankruptcies that jarred the nation in the immediate aftermath of the Great Recession, reaching from major cities in California to the iconic manufacturing giant of Detroit.

Public pensions nationwide still sit in a $3 trillion “unfunded liability” gap, the difference between promised benefits and the money saved to pay them, Chingos said. And while public employees have long assumed that their pensions are legally protected, he noted that a federal judge recently ruled in Detroit that pension obligations could be put on the chopping block there.

In addition to a handful of scholars, the Brookings panel included Mayor Chuck Reed of San Jose and Rhode Island Deputy Treasurer Mark Dingley — both Democrats and both fresh from the trenches of the pension reform wars.

None of the panelists disagreed on the essential thesis, namely that cities were being forced to choose between paying for essential services and servicing ongoing commitments to poorly handled and ill-considered pension plans.

San Jose, the third largest city in California and the 10th largest city in the country, found its pension costs eating up more than 20 percent of its annual budget, said Mayor Chuck Reed. Pension costs had tripled over a 10-year period, and the city had at first responded by decimating services.

Over a decade, the city cut its payroll by 28 percent. “No department escaped the cuts,” Reed said, “and that included police, fire and librarians.” City pension costs had jumped from $73 million a year to more than $245 million.

The city finally responded with pension reform pushed over the objections of its 11 employee bargaining units. The proposed reform was supported by 70 percent of the voters. “The alternatives were worse,” Reed said. “When the pain gets so much, service delivery, insolvency or bankruptcy, you get motivated.”

San Jose is not an outlier, Reed said. The state public employee and teacher retirement systems remain vastly underfunded even under optimistic scenarios, he said.

“We want to make sure our employees and retirees get paid what they’ve earned,” Reed said, “and we want to make sure residents get reasonable services they deserve. Trying to do both is extremely difficult.”

One problem, Reed said, is that it’s hard to get people to take the problem seriously until it’s nearly too late. “The sooner you start, the better off you are,” he said. “But the sooner you start, the harder it is to convince people they have to do something.”

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