Hot topic

Governors rev up rhetoric on pension reform

Speeches to legislators are opening salvo in fight to reduce costs

Governors across the country are developing pension reform proposals to deal with mounting fiscal problems.

Among the latest to have publicly endorsed pension reforms, including in their State of the State addresses to legislators this month, are the governors of New Jersey, California, Washington, Virginia and Massachusetts.

It's also become a big issue in New York City, where Mayor Michael Bloomberg is promoting his own plan to cut pension costs.

And Keith Brainard, research director of the National Association of State Retirement Administrators, Georgetown, Texas, said potential public pension plan reforms are in the works in Arizona, Alabama and Florida, though details haven't been announced.

New Jersey Gov. Chris Christie targeted pension costs in his address to the state General Assembly Jan. 11, proposing to require increased employee pension contributions while reinstating state contributions that have been withheld. Mr. Christie has killed a $3.1 billion pension contribution for the current fiscal year, saying he wouldn't put money into a “broken” system.

He said the unfunded liability of the $71 billion New Jersey Division of Investment, Trenton, which oversees the state's seven pension plans, would grow to a “staggering” $183 billion from the current $54 billion within 30 years.

“If we cannot make the promises of your pension system more realistic, there will be no pensions for those who have earned them,” Mr. Christie said in his address.

In her own Jan. 11 State of the State speech, Washington Gov. Christine Gregoire proposed repealing a 1995 law that gave automatic benefit increases to some retirees covered by the Washington Public Employees' Retirement System and Teachers' Retirement System, both overseen by the $76.7 billion Washington State Investment Board, Olympia.

Both plans were closed to new members in 1977 and are the only two of the state's 15 public pension plans that are underfunded, according to Dawn Gothro, spokeswoman for the Washington State Department of Retirement Systems. The plans have a combined unfunded liability approaching $7 billion, Ms. Gothro said in an e-mailed response to questions.

“The (1995) pension law was well intended but it carries a staggering price tag and we simply cannot afford to continue it,” Ms. Gregoire said in her speech. “Pension reform will save $2 billion over the next four years and more than $11 billion during the next 25 years.”

Also on Jan. 11 in his state of the Commonwealth address, Virginia Gov. Robert McDonnell proposed that state employees contribute 5% of pay to the $51.9 billion Virginia Retirement System, Richmond. As part of his proposal, state employees would get a one-time 3% salary increase and the state would increase its contribution rate to the system to 6.08% for state workers from 2.08%, and to 7.16% for teachers from 5.16%, said Jeanne Chenault, a spokeswoman for the $52.3 billion pension fund. The increase would start July 1.

Virginia state employees have made no pension contribution since 1983, when the state agreed to cover employee costs in lieu of pay hikes. “With a net 2% contribution from Virginia employees, and an additional 2% from the state ... we will provide $311 million a year, or $4.2 billion over 10 years, in new funding for the system,” Mr. McDonnell said to the Virginia General Assembly.

Massachusetts proposal

In Massachusetts, Gov. Deval Patrick said he wants to reduce by 0.5 percentage points each the 9% contribution rate for new state employees and 11% contribution rate for new teachers in a pension reform package he announced Jan. 18. Also, the retirement age for many new state employees would be raised to 60 to 67 from 55 to 65.

Other governors have indicated that reforms are in the offing. California Gov. Edmund Brown Jr. told the League of California Cities conference in Sacramento on Jan. 19 that he would propose public pension plan reforms soon.

“It's going to be a continuous process as we understand exactly what the stock market provides and what the stock market doesn't provide,” Mr. Brown said.

The $140.1 billion California State Teachers' Retirement System, Sacramento, has a funding deficit of $40.5 billion, said Ricardo Duran, a spokesman. The $226.6 billion California Public Employees' Retirement System, Sacramento, had an unfunded liability of $48.6 billion as of June 30, 2009, the latest figure available, said Wayne Davis, a CalPERS spokesman.

Republican Gov. Robert Bentley wants to create a defined contribution plan to replace that state's existing defined benefit system, NASRA's Mr. Brainard said.

Leah Garner, a spokeswoman for Mr. Bentley, declined to comment on the governor's reform plans, saying he would detail his legislative agenda in a State of the State speech sometime before Alabama's legislative session begins March 1.

On the municipal front, meanwhile, New York City Mayor Michael Bloomberg announced that he wants to reduce the cost of the city's pension system by consolidating some of its administration and raising the retirement age for new employees.

Both recommendations, made in his State of the City address Jan. 19, would require new state laws, Marc LaVorgna, a spokesman for Mr. Bloomberg, wrote in an e-mailed response to questions.

Mr. Bloomberg said the city could save $8 million a year “right off the bat by consolidating pension systems, an administrative reform that will not affect benefits at all.” Mr. LaVorgna couldn't provide the current total administrative cost of the city's pension system.

The proposed consolidation would affect only one of the city's five pension plans — the $1.8 billion New York City Board of Education Retirement System, Mr. LaVorgna wrote. It would be consolidated with either the $35.4 billion New York City Employees' Retirement System or the $26.3 billion New York City Teachers' Retirement System. All told, the five New York City pension plans had $109.6 billion in assets as of Oct. 31, according to the website of New York City Comptroller John C. Liu, trustee to the five funds.

“The mayor did include an important discussion of containing pension costs,” Mr. Liu said in a news release. ”I wholeheartedly agree with the mayor's sentiments that government must live within its means.” Michael Loughran, spokesman for the city comptroller, said Mr. Liu would have no other comment.

Speaking on raising the retirement age, Mr. Bloomberg said: “We'll seek a new tier for employees hired in the future that would raise the retirement age to 65 (from 55 to 62) for non-uniformed workers. That would produce billions in long-term savings, and bring our retirement age in line with the private sector, even as we offer far more generous benefits.”

Staying mum

While government workers are the ones that would be most affected by the reforms being proposed, union officials were keeping their cards close to the vest.

Mark McCullough, a spokesman for the Service Employees International Union, Washington, declined comment. Tiffany Ricce, a spokeswoman for the American Federation of State, County and Municipal Employees, Washington, had not returned calls seeking comment by press time.

NASRA's Mr. Brainard said he hopes state lawmakers generally limit reforms to tweaking existing DB plans, such as modest increases of employee and employer contributions, and in raising the retirement age.

“Relatively minor changes can have major long-term impacts,” Mr. Brainard said. “You don't have to kill the system to fix it.”

Amid the heightened calls for pension reform, a report issued Jan. 20 by the Center on Budget and Policy Priorities, Washington, said that predictions of an “imminent fiscal meltdown” among U.S. states and municipalities are exaggerated and create “unnecessary alarm” for policymakers. The operating deficits most states are forecasting for fiscal 2012 are the result of the post-recessionary weak economy and have been erroneously tied to longer-term issues such as pension obligations, Iris J. Lav, senior adviser at the Washington research group, and Elizabeth McNichol, a senior fellow, said in the report.

“Overheated claims about state and local budget problems not only are inaccurate, but also could lead policymakers to take unwise steps, such as allowing states to declare bankruptcy or forcing them to change the way they report their pension liabilities as a condition for issuing tax-exempt bonds,” Ms. Lav said in a news release accompanying the report.

Robert Steyer and Bloomberg News contributed to this report.