COMMENTARY: Municipal, state pension reform message gaining momentum
Despite an organized campaign to stop public pension reform, reality is beginning to break through. One recent report outlines a possible path to long-term solutions and another details the necessity of states and municipalities finding their own way because federal bailout is impossible. And Chicago Mayor Rahm Emanuel released a plan that could have been based on both reports.
In "GASB Won't Let Me" - A False Objection to Public Pension Reform, by the Laura and John Arnold Foundation, Professor Robert M. Costrell refutes the claim that public pension plans are "too deep in debt to reform."
One argument against real reform is that shifting current defined benefit pensions to defined contribution would require -- under Government Accounting Standards Board guidelines -- governments to come up with billions of dollars now to pay off unfunded liabilities.
Current defined benefit plans, which guarantee pensions whether the money is there or not, put all risk for any shortfalls on taxpayers. Right now, the deficit ranges from about $800 billion to more than $4 trillion depending on accounting assumptions.
Taxpayers have to fund that debt - which is not on the books -- on top of all other taxes over decades. Many pension plans are so far in the hole that pension costs will eat more and more revenue and require tax increases forever.
If governments close defined benefit plans and switch to defined contribution plans in which taxpayers don't have to shoulder the risk, opponents claim taxpayers would have to come up with the cash now instead of spreading payments over decades, a process called amortization.
Costrell argues that is false. "The funding schedule for amortization is a red herring, irrelevant to the fundamental policy decision for pension reform. Amortization pays for past debts; pension reform lays a path toward a responsible future."
Shifting to defined contribution plans and scheduling payoff of official unfunded liabilities over decades would stop the pension hemorrhage and allow governments to budget retirement cost.
Otherwise, according to recent reports by the Mossavar-Rahmani Center for Business and Government at the Harvard Kennedy School, and the Cleveland Federal Reserve Bank, all public pension plans will run out of money to pay benefits - some sooner, some later, but all eventually, and the burden could be a threat to the economy.
Nobody knows what happens then. But the reports say public pensioners could risk losing benefits.
Could the federal government bailout public pension plans?
No, according to States of Bankruptcy Part II: Eurozone, USA?, a report released Tuesday by U.S. House Joint Economic Committee Republicans. It is a follow up to last year's States of Bankruptcy Part I: The coming state pension crisis.
The report, which cites data that has only gotten worse by now, states "with some state pension plans facing insolvency within five years ... Drastic, Greek-like austerity measures to support pension costs in many states could drive successful businesses and individuals away, further draining the tax base and exacerbating the fiscal crisis."
According to the report, any bailouts would only make the crisis worse by creating "an environment that encourages recklessness and discourages difficult but necessary reforms."
Any who think the growing clamor for public pension reform is just part of some Republican conspiracy should check with Emanuel, staunch Democrat, mayor of Chicago for exactly one year this week and former Chief of Staff for President Barack Obama.
In his Roadmap to Retirement Security released last week, Emanuel proposes drastic pension reforms that include a defined contribution plan.
He outlines the stark reality: "Doing nothing will force me to choose between either letting our pension funds go bankrupt, or raising the City's property taxes by 150 percent."
"The roadmap proposes reforms that address the major cost drivers for the pension funds including: retirement age, COLA (annual automatic increase for retirees), employee contribution levels and the level of choice our employees have in planning for their retirement."
Those "retirement security choices ... keep our plans in line with what the private sector offers, and provide more options to those with their entire career ahead of them. ... Our retirement system should reflect how the job market really works."
When a career Chicago Democratic Party Politician and House Joint Economic Committee Republicans start singing similar tunes, it's time for America to listen.