The pension reform spotlight is shining on Arizona this week. When one considers that The Arizona Republic is in the midst of an eight-part series on public pensions, examining their effect on state and city budgets, and that the Goldwater Institute is welcoming pension reform champion New Jersey Gov. Chris Christie as its 2010 Goldwater Dinner keynote speaker, then something's definitely happening out there.
The Arizona Chamber Foundation in June sounded the alarm on public pensions' effect on the state budget in its paper, Pension Tension: Understanding Arizona's Public Employee Retirement Plans, which found that at the beginning of the decade, Arizona's pension funds enjoyed a cumulative $4.7 billion surplus. Since that time, however, asset growth has been unable to keep pace with the liability growth caused by a number of factors, including an expanding government workforce, rising salaries and legislative action that increased benefit levels. As a result, the $4.7 billion surplus has become a $10.4 billion deficit.
According to a Republic analysis, it's costing the state and local governments nearly $1.4 billion annually to run the public pension systems. To put that in perspective, that's more money than the budgets for higher education and the corrections system.
Arizona has a lot of work to do to get its public pension system under control, and we're not alone. Northwestern University professor Joshua Rauh has identified 20 states that will run out of pension money by 2025. Pension reform is emerging as the next great political battle that will hit state legislatures across the country.
It's Gov. Christie who might have the toughest challenge. New Jersey's pension fund is set to run out of money by 2018. That year it will owe $14 billion in pension payouts, which represents a third of the state's annual tax receipts. As described by MSNBC's Red Tape Chronicles, New Jersey "would have to eliminate spending on every elementary school, high school and college from its budget" in order to meet its required pension payouts.
New Jersey is rife with stories of pension abuse. Like most states, New Jersey's pension payouts are based on an employee's years of service and average salary. In one case, a state employee worked for 24 years in a job that paid less than $10,000 annually, but then took a job that paid $141,000. As a result, that employee's pension went from $3,000 to $70,000 annually.
Former Gov. John Corzine used the system to dole out favors. Before he left office, Gov. Corzine appointed political loyalists to obscure boards and commissions that were outside the appointee's area of expertise, but that would allow the individual to become vested in the state public pension. For example, the former commissioner of the Department of Education, who's a lawyer and a math teacher, got a seat on the Board of Pharmacy. Defending her appointment to the Bergen Record, the former education commissioner said that her background in schools could be useful in the area of New Jersey's new medical marijuana law.
Corzine also appointed the former commissioner of the Department of Labor to a seat on the Board of Marriage and Family Therapy Examiners and a state Treasury Department spokesman to the state Board of Examiners of Ophthalmic Dispensers. Remind me to steer clear of New Jersey if I need counseling or new glasses.
These defined benefit plans have come to symbolize how out of touch government is with the private sector.
In the public sector, 84 percent of state and local employees have access to a defined benefit plan, while only 21 percent of private sector employees have access to a traditional pension. Farrell Quinlan, the Arizona director of the National Federation of Independent Business, says none of his organization's 7,500 members offers a defined benefit plan. As Gov. Christie said in a February speech to New Jersey mayors, "At some point there has to be parity between what is happening in the real world and what is happening in the public-sector world."
Some states have seen the gathering storm and have instituted reforms. Public employee unions in Vermont, Iowa, Minnesota and Wyoming agreed to modest reductions in pension benefits, though the cuts aren't enough to bring those states' pension funds into balance. Michigan went further, passing a law that places new school employees into a system that's a hybrid between a defined benefit plan (a traditional pension) and defined contribution plan (more akin to a 401(k)).
Utah has been bolder, though. A new law there closed the Utah State Retirement System to new employees and instead created a new system that offers the choice of a defined contribution plan or a hybrid plan. Employees hired after July 1, 2011 will choose one of the two. Pushing reform even further, legislators and governors will only be allowed to join the defined contribution plan.
Pension reform is not some abstract issue best left to ivory tower academics to contemplate; it's an issue that affects every one of us. If government is spending more and more money servicing pensions, that's less money that can be directed to core government services like schools, infrastructure and public safety.