Some of the worst public-sector pension problems in America are playing out in states and cities where legislation or local court rulings have granted extraordinary protections to workers’ retirement benefits—far beyond those enjoyed by private-sector employees. Illinois officials, for instance, are awaiting a ruling from the state’s Supreme Court on a suit by workers seeking to overturn the legislature’s 2013 pension reforms. If the court, which has previously refused to allow any changes to retirement plans for retirees or current workers, throws out the reforms, Illinois will face $145 billion in higher taxes over the next three decades just to pay off the debt, according to a report by the Civic Committee of Chicago.
One can see a glimpse of Illinois’s possible future in Arizona. Last year, the state’s Supreme Court overturned 2011 pension reforms that, among other things, sought to curb expensive annual cost-of-living increases for judges, legislators, and municipal public-safety workers. Though courts in other places have ruled that retirees have no right to annual cost-of-living increases, the Arizona high court ordered the state to reinstate the 4 percent increases and pay retirees back for payments that the pension system had missed. In restoring the payments, the court ignored the distress of the pension system, which is only 67 percent funded. Indeed, the system is so hard-pressed that the head of one of the state’s largest public unions has asked the legislature to push for a constitutional amendment allowing the kind of money-saving changes that the court nixed. Without such changes, according to the Arizona Republic, some retirees will wind up earning more within a few years of retirement than they earned while working full-time for government.
The bill for the court’s ruling is now coming due in Arizona, and municipalities whose workers participate in the state system are straining under the pressure. The city of Phoenix, for instance, has a $2 billion unfunded liability for police and fire pensions. Now the city must grapple with a $37 million increase in pension costs over the next three years. This year alone, Phoenix must contribute $143 million to public-safety pensions, up from just $16 million a decade ago. The city also must pay a $133 million tab for civilian worker pensions. Rising costs have helped create persistent deficits in Phoenix, whose general fund budget is only $1.15 billion this year.
Phoenix is far from alone. Cities around the Grand Canyon state are experiencing pension “sticker shock,” in the words of the Arizona Republic. Six other cities—including Mesa, Scottsdale, and Glendale—face $23 million in extra pension payments next year. Thanks to poor stock market performance and an inability to reduce its pension benefits, the city of Tempe has seen its public-safety pension costs rise nearly ten-fold in a decade, from $1.9 million annually to $18.3 million, while Mesa’s will reach $41 million this year, up from $6 million a decade ago.
The predicament faced by Illinois and Arizona should be a warning, especially to other states where government pensions enjoy extraordinary legal protections. Raising benefits or shortchanging annual pension-system payments is especially dangerous in states lacking the ability to tame costs once debt grows too large. Yet, New York State, where government workers enjoy some of the strongest protections against changes to their retirement benefits, is doing exactly that—continuing a program that allows the state and its hard-pressed municipalities to shortchange the pension system by billions of dollars.
New York has one of the better-funded government pension systems. This is largely due to a 1993 Court of Appeals ruling that stopped the state from toying with accounting standards. The ruling also required the state and local governments to make their annual required pension payments. Even so, the stock market’s uneven performance since 2008 has pushed government pension costs skyward. Expenditures have more than doubled since 2010, crimping budgets, especially in upstate communities where tax revenues have rebounded only slowly from the sharp decline in 2009 and 2010. In response, the state initiated a program that let itself and municipalities defer pension contributions, if they promise to repay them with interest in the future. Last year alone, 139 municipalities deferred $472 million in pension payments, while the state put off nearly $1 billion. Since 2010, the state and municipalities have skipped $3.3 billion in pension payments.
Worse still, though it had previously said it was ending such “borrowings,” New York is now set to defer another $1 billion in state payments over the next three years. The state is going ahead with the plan even though it has a budget surplus this year, thanks to a $5.4 billion settlement with major financial institutions over their role in writing defective mortgages in the state.
New York officials defend the borrowing program by arguing that sharply rising pension costs are too disruptive to government budgets. Allowing governments to “amortize,” or pay off, the costs over a decade makes more sense. But that assumes the pension system will keep recovering, even as it’s been deprived of money crucial to its revitalization. The state’s Court of Appeals warned against this very kind of thinking when it said that by denying the pension system money “available for immediate investment, the return on investment of moneys in the existing fund will be significantly decreased.” The judges understood the threat better than New York’s elected leaders, who must be hoping that they simply won’t be around when things go terribly wrong, as they have in Arizona and are about to in Illinois.