Public employees in the United States are striking back at what they see as attacks on their pensions. Recently, U.S. states have begun making changes both small and large to the benefits they pay retirees in the hopes of closing a shortfall totaling at least $600 billion.
Meanwhile, Republican members of Congress have ratcheted up scrutiny of the pension systems, releasing a series of reports they say show their current financial conditions are risky. Sen. Orrin Hatch is working on drafting legislation to address pension funding and "details will be forthcoming," said a spokeswoman for the highest ranking Republican on the Finance committee. Sen. Jim DeMint, a Republican member of the bicameral Joint Economic Committee, has also hinted a bill will be introduced soon.
Partly, public employee groups say policy-makers are overreacting. "Certainly, there have been some problems with state pension plans. Very often when you look at the history you find plans that have been underfunded in the good times. So when you come to this historic market loss we had in '08 and '09 you have ... a real difficult situation," New York State Comptroller Thomas DiNapoli told reporters in Washington, D.C., on Thursday. "That's not the story for most of the state plans."
Investments provide the bulk of pension funds' revenues. Employees also contribute and states determine how much they will have to pitch in by projecting the returns on investments. The recession and financial crisis hit pensions hard, with the investments' values plunging just as a revenue collapse made it harder for states to make contributions. In fiscal 2010, which for most states ended in June 2010, 30 shortchanged their pension funds, according to Loop Capital Markets.
But investment returns are bouncing back, and DiNapoli said for the most recent fiscal year the trust fund for New York public pensions had an annual return of more than 14 percent. Meanwhile, since the recession began, more than 30 states have reformed public employee compensation in the hopes of closing the gaps between revenues and retiree benefits. Many arguments over public pensions hinge on projections of annual investment returns. The systems prefer using historic averages, usually about 8 percent, while lawmakers say they should use a "riskless" rate closer to 4 percent.
STATES SAY CONGRESS OVERSTEPPING ITS BOUNDS
In a report he released last week, Hatch said "unfunded pension liabilities of state and local governments also affect the federal government's credit rating, and municipal insolvency or default threatens to place significant additional burdens on the federal government, which already spends trillions on anti-poverty programs."
When Standard & Poor's Investors Services downgraded the U.S. credit rating this summer "one of the key factors taken into account was underfunded government pensions at the federal, state and local level," he added.
But public employee groups say members of Congress are overstepping their constitutional bounds. "I think each locality is different and needs to work through in its own way how to resolve these issues," said Janet Cowell, North Carolina state treasurer, at the briefing. "There have been bills on Congress dictating accounting standards, or Congress pre-empting the rights of states and localities, and I certainly do not think that is the solution for this."
While almost all pensions have enough money to cover the benefits of current retirees, some are already struggling. The city of Central Falls in Rhode Island was recently felled by its pension obligations and filed for bankruptcy. The state is restructuring its pension systems.
Some states such as Illinois are cutting back the pension packages offered to new hires. Illinois' unfunded pension liability totals about $83 billion and its funding ratio is about 43.3 percent, according to the governor's office of management and budget. Some are also looking to reshape their retirement plans to resemble those in the private sector. Hank Kim, executive director and counsel for the National Conference on Public Employee Retirement Systems, said public employees "are interested in making the plans sustainable, because, obviously, this is their lifeline and we want to be part of the process and we want to work with the taxpayers and elected officials." But, he said, of late, "plans and the participants are unfairly attacked as the cause of fiscal woes," and that they are concerned that when they do agree to reforms the savings do not shore up the pensions but instead "the money is diverted."
(Additional reporting by Karen Pierog in Chicago)