States face an estimated $1 trillion in unfunded retirement and health care bills for teachers and other public employees, according to one recent estimate. Now a California congressman has proposed legislation meant to shed light on how big the tabs are for state and local retirement plans, using the power of the federal purse to compel that transparency.
The measure would require the sponsors of those plans to publicly disclose information on the liabilities of those systems and their future costs. It would also prevent certain federal tax benefits on bonds from going to state and local governments that don’t comply.
The lack of openness about pension obligations “poses a direct and serious threat to the financial stability of such plans and their sponsoring governments, impairs the ability of state and local government taxpayers and officials to understand the financial obligations of their government, and reduces the likelihood that state and local government processes will be effective in assuring the prudent management of their plans,” the legislation asserts.
Nunes says he is protecting taxpayers—at the federal level—from having to pay the bill for pensions that he suggests are quite generous.
“As we speak, lucrative pension promises are being made to public employees that taxpayers simply cannot afford,” Nunes said in a statement. “The plans themselves admit to more than a $1 trillion in unfunded liabilities. Unfortunately, the true level of unfunded liabilities associated with these plans—perhaps more than $3 trillion—is being hidden thanks to unrealistic accounting standards.”
The $3 trillion estimate is apparently from a study by researchers at the University of Rochester and Northwestern University’s Kellogg School of Management, which use different methods than other, smaller calculations of those costs. Local governments carry an additional $574 billion in unfunded pension burdens, those researchers have said.
Elected officials across the country, particularly conservatives, have voiced concerns about the costs of state and local pension systems. To date, most of the attention has come from state-level politicians, like New Jersey Gov. Chris Christie, who argue that public workers’ retirement packages are far too expensive and out of line with what the private-sector provides. (The fact that unions have fought hard to obtain and protect those benefits probably makes them an especially appealing target for conservatives, given that organized labor traditionally aligns with Democrats.) The newfound interest among Congressional Republicans in the public pension issue suggests the issue has a political life beyond state capitals.
One of the suggested strategies for reducing the costs of state-run pension systems is switching them from a defined-benefit model, in which employers guarantee a specified benefit, to a defined-contribution, or 401(k)-style approach, which are more common in the private sector and give workers a return based on the gains or losses in the market. The defined-benefit model, at least as it exists today, is a boon to public employees but a heavy weight on taxpayers, argue conservatives like columnist George Will, who recently penned an opinion piece praising Nunes’ legislation.
Current pension enrollees’ benefits generally have a lot of legal protections, so as an alternative, state officials have sought to cut the benefits of future public workers. But others say there are cost-saving strategies that don’t involving moving workers to a 401(k). One suggested model is a cash-balance plan, often defined as a hybrid between defined benefits and defined contribution systems. Another option is simply adjusting defined-benefits plans to reduce state costs through steps such as lowering benefits or requiring workers to pay a bit more. That was the strategy used successfully by the state of Vermont in cutting the costs of its teacher retirement system, which saw both sides (the state and the union) give up something. I’m taking a more in-depth look at state retirement costs in our next issue of Quality Counts, an annual report which comes out next month.
Another factor to consider: Not every state is facing a huge crush of unfunded liability. States make regular contributions to fund their retirement systems, and some of them have done a lot better than others in keeping up with their obligations, as a recent report by the Pew Center on the States noted. Simply put, some states appear to be in a very tough spot, while other states appear to have paid the bills necessary to keep up with their financial commitments.
What’s the best strategy for states—or the federal government—to deal with the current and future costs of teachers’ and other workers’ retirement plans?
A version of this news article first appeared in the State EdWatch blog.