Overhaul of the State's Pension

t epo r R ivi c C No. 103 September 2015 No. THE LIMITS OF RETRENCHMENT The Politics of Pension Reform

Daniel DiSalvo Senior Fellow, Manhattan Institute

C S L L CENTER FOR STATE AND LOCAL LEADERSHIP AT THE MANHATTAN INSTITUTE Published by Manhattan Institute

Executive Summary

The Great Recession sparked a powerful movement to rein in public-employee pension systems across the Unit- ed States. Since the economic downturn that began in 2008, all 50 states and Puerto Rico have enacted some sort of pension change: 21 states did so in 2010, and 29 did so in 2011.1 A few more states did so in 2012 and 2013, while others modified legislation passed in 2010–11. The thrust of these changes was almost universally toward pension retrenchment.2

States sought to make their pension plans less generous in order to take pressure off their budgets. Most states increased employee contributions and lowered benefits for new hires. Other changes included raising retirement ages, lengthening vesting periods, reducing cost-of-living adjustments, and eliminating spiking options. Barring future changes, state pensions in the long run will be less generous, and public employees will receive less in overall compensation.

On the surface, it seems that state politicians did not, in Rahm Emmanuel’s now-famous dictum, “let a serious crisis go to waste.” However, many observers believe that few of the aforementioned reforms fully addressed states’ long- term fiscal problems.3 Most of the changes apply only to new hires, not to existing employees or those already in retirement. Therefore, the savings from these plans will take decades to materialize. That even passing mild pension reforms proved contentious reflects powerful political alignments that militate against retrenchment. The key play- ers in pension reform have strong incentives to push costs into the future and avoid tough choices in the present. Consequently, most states did just that.

But a handful of states took more dramatic action, genuinely trying to do something about their pension systems with a view to the long term. States where major reform did occur stand out: they include (but are not limited to) Rhode Island, Utah, Virginia, and New Jersey. These few states offer lessons about when and why pension reform can work. They point the way toward successful political strategies for serious pension reform that might be emulated elsewhere.

A number of factors conditioned which states were willing to enact far-reaching reform. Most states found themselves constrained by some combination of voter apathy, public-employee union pressure, existing legal provisions, and politicians’ desire to avoid blame. Yet some states managed to overcome those barriers. A few things helped them do so:

1. A leader (or leaders) emerged who understood public pensions and was willing to tackle the issue. Reform requires a person with the credibility to serve as the public face of change. These leaders were willing to en- gage in a serious campaign of civic education. The way they framed the issue was hugely important, as it reduced the appearance that reform was designed to punish public employees or those already in retirement.

2. Preexisting fiscal conditions often shaped which states determined to take action. Whether the states had long-standing problems or took a particularly hard hit during the 2008–09 recession often provided the impetus for putting pension reform on the agenda.

The Limits of Retrenchment Civic Report 103 September 2015 states tofollowsuit.Thisbodeswellforthenextround ofpensionreform. a dozenstatesoffer suchplans.Asmore statestakethisstep,itwillbecomelesscontroversial andeasierforother hold on pension costsare increasingly introducing defined-contributionoptionsorhybrid plans.Atpresent, at least Genuine reform, ratherthanjustkickingthecandownroad, canhappen.Statesthatare seriousaboutgettinga Research in Contemporary Politics.DiSalvoholdsaPh.D.inpoliticsfromResearch inContemporary theUniversityofVirginia. Los AngelesTimes, popular publications,including ment Against Itself: Public Union Power and Its Consequences policy. HeistheauthorofEnginesChange:PartyFactionsinAmericanPolitics,1868–2010(2012)andGovern- DiSalvo’s andpublic scholarshipfocusesonAmericanpoliticalparties,elections,laborunions,stategovernment, Colin PowellSchoolattheCityCollegeofNewYork–CUNY. DANIEL DISALVO isaseniorfellowattheManhattanInstituteandanassociateprofessor ofpoliticalscience inthe A bout 4. 3. new legislation. table, howhard foughtthepoliticswouldprove tobe,andtheextentoflitigationafterpassage The powerofinterest groups, especiallypublic-sectorunions,shapedwhatpolicyoptionswere onthe hurdles toreform. has severely limited what legislators could do to address the problem. Other states confront lower legal ibility insomestatesthanothers.Afew, suchasIllinois,are inbadfiscalshape,butthestateconstitution Legal barriers—from stateconstitutionstostatutescollectivelybargainedcontracts—allowedlessflex-

the A New York DailyNews,andNewYork Post.HeiscoeditorofTheForum:AJournalApplied uthor , TheWeeklyNational Affairs, CityJournalAmericanInterestCommentary Standard (2014). DiSalvo writes frequently for scholarly and

CONTENTS

1 Introduction 2 I. Obstacles to Pension Retrenchment 5 II. Postrecession Politics 8 III. Pension Reform and Reformers 14 Conclusion 15 Endnotes

The Limits of Retrenchment

The Limits of Retrenchment The Politics of Pension Reform Daniel DiSalvo INTRODUCTION

he Great Recession created a huge budget crunch in U.S. state and local government. But with private-sector activity picking up, many assume that state and local government’s budget picture will consequently improve. However, there Tare good reasons to believe that the fiscal health of state and local government will remain under stress for years to come.4 We may be enter- ing a new “fiscal ice age,” where tax revenues translate into far fewer government services.5 Such fiscal stress threatens these governments’ financial well-being and their ability to deliver high-quality services to citizens. One of the key drivers of this problem is the rising costs of public-employee retirement benefits, which includes pensions.6

The problem is very large. Government pension systems cover approximately 20 million public (nonfederal) employees and 7 million retirees.7 Using traditional government accounting standards, postrecession estimates found that state and local pensions were underfunded to the tune of $700 billion to $1 trillion.8 More sophisticated analysis by financial economists Robert Novy-Marx and Joshua Rauh has shown the underfunding problem to be much worse: a better measure of the underfunding gap at the end of 2011 was more than $4 trillion, or one-third of total U.S. GDP.9 This estimate suggests that the pension underfunding problem is right up there with the fiscal crisis of America’s federal entitlements.

The financial-market implosion that set off the Great Recession exacerbated the situation. Pension plans lost approximately $1 trillion in assets.10 In addition, public employees began retiring in record

The Limits of Retrenchment 1 2 Civic Report 103 September 2015 people thinkofitincomplex actuarialterms, The pension crisis has been poorly framed. Most political crisis. crisis issimplythemanifestationofanunderlying trol over public-employee pension plans. The fiscal governors andstatelegislatorsexercise ultimatecon- they doaboutpensions. Whatever thenumberssay, address why state politicians make the decisions that detail.However,gory thesefinancialanalysesdonot crisis thatpensionliabilitieshave created in allits nancial features oftheplans. They reveal thefiscal investment strategies,ratesofreturn, andother fi- ties, discount rates, annual required contributions, son. They cover theformulas,fundinglevels, liabili- tothelayper- These studiestendtobeinscrutable pensions have beenwrittenby financialeconomists. Most analysesof public for themlater? with thepromise topay so manypublicservices and citizens consuming, ernments beenproviding, liabilities? Why have gov- lems inducedby pension address thebudgetprob- comprehensive reform to has there notbeenmore proved challenging. Why by statelegislatures andsignedby governors has matic action.But even gettingmodestreforms passed and scope,stategovernments wouldbetakingdra- One might think that with a problem of this scale out ofassetswithinthenextfive years. Jersey, andConnecticut,whichare predicted torun masks severe instatessuchasIllinois, New shortages out ofmoneyin2029. to theplans,Munnell estimatesthattheywillrun return onpensionassetsandongoingcontributions based on different scenarios. Assuming an 8 percent Alicia Munnell has estimatedthe exhaustion date ofcashincomingdecades.Pensionshort expert revenue, a large number of plans are likely to run than expected.If statesandcitiesdonotraisemore numbers, drawing on theirpension assets sooner 11 This average forallstates with thefiscalcrisisoffederal than $4trillion—one-third of at theendof2011wasmore U.S. GDPandrightupthere pension underfundinggap America’s stateandlocal entitlements. the politicalincentives encouragepolicymakersto ates hugeobstaclestosignificant reform. In fact,all sion retrenchment. Yet thepoliticsofpensionscre- The Great Recession openedawindow forpen- RETRENCHMENT I. OBSTACLES TO PENSION plans, and they vote in every legislative district inplans, andtheyvote inevery ees have a knowledge of and an interest in pension ronment. However, the government’s own employ- Pension politicstookplaceinalow-visibility envi- probably cared even lessaboutpublicpensions. Prior totherecession, littleand mostpeopleknew them. Andtheiractuarialcomplexityisdaunting. of statepoliticians. the numbers,we needtofocusmore onthebehavior costs to future generations. In addition to running pension policygeneratespowerful incentives toshift immediately, thepoliticalcrisisisrooted intheway and fiscal responsibility canbecombined. More level, itraisesthequestionofwhetherdemocracy problem of democratic politics. At the deepest beginning withfundingratios;butitisreally a jor issues. majority ofvoters lackanunderstandingofthema- The firstfeature ofU.S.pensionpoliticsisthatthe Voters fiscal times(Figure 1). to pushtheproblem ontofuture generationsinbad good fiscaltimes,as well asthemethodstheyuse why politicianshave tendedtofavor expansionin that structure pension politics. These forces explain 13 Newspapers devote limitedcoverage to sion plans. the generosity of pen- slowly butsurely increase examine thebasicforces reform, itishelpfulto took genuinelong-term handful ofstatesunder- ter understandwhya be undertaken. To bet- that retrenchment could cal government finances crisisinstateandlo- rary because ofthetempo- 12 It wasonly the nation. In fact, they often turn out to vote at higher Figure 1. Barriers to Pension Reform rates than other citizens.14 The policy of providing public workers pension benefits has, Voters • The majority of voters are poorly informed as one might expect, created a • Public employees have more knowledge of and interest voting constituency willing to in pensions defend them. Politicians—of both parties—seeking election Interest Groups • Public-sector unions favor expanded benefits • Financial-management firms favor expanded benefits pay attention to such voters. • Conservative civic groups favor retrenchment What public employees want • Credit-rating agencies encourage creditworthiness is more generous pensions— or, at least, no diminishment Policy Structure Defined-benefit model encourages politicians to: of their current plan. If poli- • Short funds to free up revenue for other priorities ticians respond to the strong • Push costs into the future preferences of public employ- • Avoid transparency ees in their role as voters, they • Plead ignorance of systems should therefore favor benefit expansion.15 Legal Constraints Legal provisions can limit reform options: • State constitutions Interest Groups • State laws • Collectively bargained contracts The primary interest groups with a stake in public pensions Political Culture • Reduced skepticism about borrowing from future are public-employee unions generations to pay for present amenities and associations representing government workers. Public- sector unions today are among the most politi- What is notable is that there are no well-established cally active interest groups in U.S. state and local interest groups pushing politicians to rein in the politics.16 The unions use their political power to generosity of pension plans. Various taxpayer and encourage politicians to expand benefits—or, that good-government groups exist, but their attention failing, to at least maintain the status quo. Wheth- to pensions is episodic, at best. Other groups with er they should pressure policymakers to fully fund an interest in pension politics are rating agencies pensions is a secondary issue for most unions. (It (Standard & Poor’s, Moody’s, Fitch) and bondhold- should be noted that analysts have found no em- ers.20 The ratings agencies might put a slight brake pirical evidence that the strength of public-sector on expansive pension policies insofar as their esti- unions causes pension underfunding).17 mates of future interest payments make politicians think twice about their decisions. But that is a mar- The other major group with an interest in pen- ginal check. In sum, the interest-group environment sions is the financial-management firms that seek is weighted in favor of groups that favor expansion. to win business from pension funds.18 Like the unions, they have incentives to favor expanded Policy Structure benefits: the more generous the benefits, the larger Political scientists have long argued, in E. E. Schatt- the portfolios of assets they get to manage and the schneider’s famous dictum, that “a new government larger the fees they can charge. Many firms also policy creates new politics.”21 This insight is par- earn money from the sale of pension-obligation ticularly apposite for public pensions, whose basic bonds. Pennsylvania is currently considering issu- structure helps explain why the political scales are ing $3 billion of such bonds.19 tilted in favor of expansion.

The Limits of Retrenchment 3 4 Civic Report 103 September 2015 legislators lackafirmgrasp ofmanythetechnical Making mattersworse,thevast majorityofstate such ascuttaxes. in thebudgettodothingsthattheywantdo, thefund,they,And by shorting too,cancreate space fighters, andotherpublicworkers intheirdistricts. favor withpoliceofficers,fire- publicans cancurry grams. Conversely, by allowing greater benefits, Re- can free upprecious budgetdollarsforotherpro- districts. By thepensionfund,Democrats shorting unions andgovernment workers whovote intheir Democrats canwinplauditswithpublic-employee cians cangetmore ofwhattheywantinthepresent. Second, by pushingcostsintothefuture, politi- salaries, whichshow upincurrent budgets. this strategyisvastly preferable to,say, increasing rent incentive structure, on thehook.In the cur- and othertaxpayers are when otherpoliticians in thedistantfuture, whose costswillbeborne more generous pensions, rent publicemployees tivized topromise cur- instead, theyare incen- to fundfuture payouts; tributions are sufficient to makesure thatcon- politicians. First, politicians have little incentive This policystructure incentives creates for perverse fixed stream of retirement income. investmentsa willproduce returns sufficienttopay inbonds. a smallerportion The assumptionisthatthe mostly inequities(suchasmutualfundsorstocks)and employees thatgointopooledfundsare invested, then financed by contributionsfrom employers and several years leadinguptoretirement. These plansare number ofyears worked andtheaverage earningsin benefit isusuallybasedon aformulathatcalculatesthe tofigure outhowtry topayforit. Thedefinitionofthe come thataworker willreceive inretirement andthen el. Such plansstipulateinadvance anamountofin- Most publicpensionsfitintothedefined-benefit mod- one rooted inthewaypension its underlyingpoliticalcrisis— simply themanifestationof policy generatespowerful incentives toshiftcosts America’s pensioncrisisis future generations. shall notbediminishedorimpaired.” a “contractual relationship, thebenefitsofwhich preme invoked aconstitutionalprovision court of forms were overturned in2015,whenthestatesu- forcurrent retirees.ments (COLAs) But thesere- sions limitpolicymakers’ options. In some states, Existing statelawandconstitutionalprovi- Legal Constraints for transparency orretrenchment. In hasstrong incentives sum,neitherparty topush around smoothinggainsandlossesare, etcetera.” required contributionsare, whatthedifferent rules rates ofreturn are, forexample,orwhatactuarially and ittooksometimetounderstandwhatactuarial to educatemyselffirst.Andthisisacomplexissue, absolutelynothingaboutpensions,andIhadknew tough issue. When Iwent intothelegislature, I senator Dan Liljenquist,stated:“Pensions are a pension reform movement, formerUtah state features ofpensionsystems.Even aleaderofthe ernment workers inCalifornia. Such freezes are prohibited forstateandlocalgov - ent form—usuallyadefined-contribution model. to thatpoint,butfuture comeinadiffer- accruals employees keepthemoneythat theyhave earned often do)freeze pensionplans,whichmeansthat efits. In the private sector, corporations can (and cation ofcurrent publicemployees’ pensionben- constitutional doctrinethatprohibits themodifi- Consider, the“CaliforniaRule,” likewise, astate their constitutions. and otherstateshave nearlyidenticallanguagein cost-of-living adjust- employees andcapping ment ageforyounger law raisingtheretire- 2013, Illinois passeda table. retrenchment offthe provisions oftentake current employees. Such prospective benefits of already retired andthe guarantees protect those strong constitutional 23 For example,in 24 New York 22

Further, altering arrangements for current em- information. The partisan alignment in the states ployees who are covered by collectively bargained changed dramatically, as Republicans took over a contracts usually requires that new agreements be record number of statehouses and governors’ man- negotiated between unions and management; but sions. From 1978 to 2010, Republicans controlled public-sector unions often oppose any diminish- both chambers of state legislature in, on average, ment in deferred compensation for their members, only 13 states. From 2011 to 2015, they controlled making such negotiations contentious. Agency both chambers in, on average, 27 states. Today, they managers and elected officials thus have incentives control 30 states and have an all-time high of 4,111 to avoid negotiating. In sum, the legal environment state legislative seats—compared with 11 legisla- surrounding pensions tends to keep retrenchment tures for the Democrats and only 3,136 seats.27 off the table, preserve the status quo, and make increasing the generosity of existing systems the only Conservative civic groups, foundations, and think available change option. tanks also began to push Republicans to favor rein- ing in benefit schemes (Figure 2).28 Democrats Political Culture split, as governors and mayors became concerned A final feature of pension politics is a shift in Amer- with the number of dollars in their budgets devoted ican attitudes toward public finance. Before the to pension payments. Legislators of both parties 1960s, there was something of a moral bar against could also draw on the experience of the private borrowing from future generations to pay for pres- sector, which has moved away from defined-benefit ent amenities. This acted as a check on the rational plans and toward other 401(k)-style plans in recent incentive of every voter and politician to borrow decades. And the recession created a sense of crisis, money for things that they want but cannot per- as well as a huge budget problem for many states, suade other citizens to pay for with higher taxes. which increased pressure for action. However, as James Q. Wilson observed, the public and policymakers have become more accepting Pension politics—as political scientists Sarah Anzia of a government that saddles one’s grandchildren and Terry Moe have shown in a detailed empirical with the costs of efforts to address problems in the analysis—which had hitherto been largely consen- here and now.25 sual and bipartisan, became increasingly partisan, as

All told, the basics of pension politics point in the direction of expanding benefits. Neither voters nor Figure 2. Ways to Modify Pension Plans interest groups nor politicians are likely to muster the wherewithal to push consistently for retrench- • Reduce cost-of-living-adjustments (COLAs) ment. This explains why the general thrust of pen- • Increase employee contributions sion politics prior to the recession was in favor of expanding and enhancing workers’ benefits. For in- • Hybrid plans (defined contribution and defined benefit) stance, during the late 1990s, public pension funds • Reduce the multiplier across the U.S. accrued large actuarial surpluses. • Increase early retirement age Momentarily flush conditions spurred legislators in many states to substantially expand retirement ben- • Introduce defined–contribution plans for new hires 26 efits for public workers. • Let current workers choose to switch from defined benefit to defined contribution

II. POSTRECESSION POLITICS • Increase maximum pension service years

The Great Recession scrambled past political align- • Lengthen the vesting period ments. The media woke up to the pension prob- • Eliminate spiking options lem and started covering it. Some voters gained new

The Limits of Retrenchment 5 6 Civic Report 103 September 2015 Source: NationalConference ofStateLegislatures certain categoriesofemployees. *Many stateshavemultiplepension planscoveringdifferent typesofemployees.Manytheabovechanges onlyapplytocertainplansand New Hampshire Nevada Nebraska Montana Missouri Mississippi Minnesota Michigan Massachusetts Maryland Maine Louisiana Kentucky Kansas Iowa Indiana Illinois Idaho Hawaii Georgia Florida Delaware Connecticut Colorado California Arkansas Arizona Alaska Alabama States Wyoming Wisconsin West Virginia Washington Virginia Vermont Utah Texas Tennessee South Dakota South Carolina Rhode Island Pennsylvania Oregon Oklahoma Ohio North Dakota North Carolina New York New Mexico New Jersey

                       Increase Employee Contribution Rates Figure 3.StatePension PlanChanges, 2010-2013*               Decrease COLAs

Reduce Benefit        Multiplier                    Increase Age

Limit Deferred     Retirement Options

Higher Benefit    Reduction Factor

Increase Vesting           Requirement

Increase FAC /                 Prohibit Spiking         Increase Service        Defined-Contri- bution Option Republicans began to introduce more bills seeking what, by and large, has happened. Much of the onus to prune pensions.29 Anzia and Moe found that of of policy change fell upon what public-employee the 63 pension bills passed by state legislatures in unions call “the unborn,” meaning those not yet 2010 and 2011, 59 were retrenchments. This put hired. For politicians and union officials, the politi- Democrats and their union allies on the defensive. cal logic of doing this is evident. Future workers do Whether a new style of pension politics will emerge not belong to unions now and will not be voting in and endure, or prove fleeting, remains to be seen. the next union leadership election. Nor will they be protesting on the steps of the state capitol. Current Overall, during 2010–13, every state undertook workers, on the other hand, have a voice in their some modification of its public-employee pension union, and their union is likely to make that voice plan (Figure 3). In 2009–12 alone, 28 states re- heard in the political sphere. duced COLAs. Seven such states reduced COLAs for current employees as well as new hires, while Maryland provides an example of how a state can 16 states reduced COLAs only for current employ- spread the political pain of pension adjustment, leave ees and five states only for new hires. In this same the basic system intact, and generally push the prob- period, 35 states, as well as Puerto Rico, increased lem into the future. When Maryland entered its 90- employee contributions.30 A handful of states intro- day legislative session in 2011, it was one of the few duced hybrid plans—which offered a defined-con- remaining states with unified Democratic control of tribution plan—for the first time. its electoral institutions. Governor Martin O’Malley had won reelection in a strongly Republican year. Despite the significant change in U.S. pension poli- Maryland is also a strong public-employee-union tics since the recession, the basic elements of pen- state, where the local AFSCME and NEA-affiliated sion politics have not disappeared. Other features teachers’ unions are particularly powerful. of American state government have also conspired to limit the extent of reform. First, Democrats, even The state’s pension system, however, was in bad if they cannot push for expansion under current shape and getting worse: a $19 billion unfunded li- conditions, are still under pressure to maintain the ability. In 2003, state lawmakers, in league with the status quo. Second, Republicans still have public state’s public-employee unions, defied pension-fund employees in their districts who vote, and they need managers and reduced the government’s annual re- to be sensitive to them. quired contribution. In addition, under Republican governor Robert Urlich, the state had expanded Third, it is not clear how long the new conserva- benefits by increasing its multiplier to 1.8 percent— tive groups can sustain the pressure for reform or the percentage used to calculate the final pension whether their attention will be diverted. Fourth, amount. Consequently, the plan’s funding ratio be- serious reform would address a long-term problem gan to fall; by 2010, it was only 63 percent funded but impose much short-term pain. Fifth, state poli- and was on course to fall to 59 percent funded by ticians can sometimes take pressure off their bud- 2012. (A funding ratio below 70 percent begins to gets by pushing problems down to the local level worry bond buyers and investors.) And costs had of government. These factors conspire to encourage tripled to more than $1.5 billion over the previ- politicians to want to do something to respond to ous decade. With the worst funding ratio among current pressures but not necessarily to undertake states with a triple-A credit rating, the credit-rating major reform. agencies were threatening a downgrade. Governor O’Malley noted that pensions presented a “credit From the self-interest of many state politicians, the challenge for the state.” best solution was to trim a little, which offered the symbolism, if not the substance, of reform, and then Governor O’Malley initially proposed a bold set of push as much of the costs into the future. This is proposals.31 He called for a new defined-contribution

The Limits of Retrenchment 7 8 Civic Report 103 September 2015 ter 25 years of service insteadof16. ter 25years ofservice hiresmum pensionfornew couldbesecured af- five themaxi- toten years, while,henceforth, percent. The vesting periodwasextendedfrom ees, themultiplierwasreduced from 1.8to1.5 hires,new benefits were cut;forcurrent employ- for retirees.the legislation capped COLAs For contributions from 5to7percent ofsalary, and fit model. Public employees hadtoincrease their Ultimately, itsdefined-bene- preserved Maryland on thecapitolstepsinAnnapolis. opposed. AFSCMElaunchedamajorprotest rally one. The state’s public-employee unionswere also of Delegates), thedebatewaslargelyanintra-party ies (35–12 in thesenate and 98–43in the House the Democratic Party’s largemajoritiesinbothbod- ate argued that they did not go far enough. Given while more membersofthestatesen- conservative assembly objectedthattheseproposals went toofar, age from 55to60.LiberalDemocrats inthestate er to1.5percent, andincrease theearlyretirement tions from 5 to 7 percent of pay, reduce the multipli- workers. He soughttoincrease employee contribu- tribution anddefined-benefitplansamongexisting hiresplan fornew andachoiceamongdefined-con- causing thegovernment to owe even more money. in themarkets tocover theinterest onthebonds, when the bond revenues failto earn enoughmoney to itspensionsystem.Often, theproblem emerges nancial riskinhopesofreducing themoneyitowes The government, however, assumesmuchgreater fi- fund uses the extra earnings to pay its pension costs. er than the interest on the bonds;and,finally, the invests the proceeds andearnsarateofreturn great- the government sellsbonds;itspensionfundthen places. inmany bonds, despitetheirpoorperformance islators’ persistentattractiontopension-obligation The alignment of political forces also explains leg- are manyyears awayfrom retirement. of thereductions hires—who, hitnew ofcourse, tired, current employees, hires. andnew But most evenly across allrelevant groups: thosealready re- adoptedtospreadMaryland thepainmore orless rather thanembark onaninnovative approach, 33 These schemesseektooperate asfollows: 32 Alltold, III. PENSIONREFORMANDREFORMERS confronted withmuchmore difficultchoices. next downturn intheeconomystrikes,stateswillbe will begreatly constrictedinthefuture. When the theiroptions contributions andeliminatedCOLAs, picked thelow-hanging ofincreased fruit employee that limitedactionraisesisnow thatstateshave when economic conditions are flush. The problem states have historiesofsweetening pensionplans occur farinthefuture—if theyoccuratall.Many The real financialsavingsof recent reforms willthus annual pensioncontributions. the markets encouragespoliticianstoreduce orskip ofthebondmoneyin from thegoodperformance Further, revenue thenew from thebondsalesor Retirement Committee,a committeethatother in finance,Liljenquistsought apostonthe Senate 2010. Asafreshman legislatorwithabackground one ofGoverning Dan Liljenquist. His earnedhimplaudits as efforts ate Bill 63andSenate Bill 43,wasstatesenator architect of Utah’s reforms, asincarnatedin Sen- innovative pension reforms in recent years. The as thestatesthatenactedmostfar-reaching or Utah, RhodeIsland, and New Jersey are oftencited tion, anddefinedthetermsofdebate. each leaderframedtheissue,changedconversa - capital—a keyelementofsuchleadershipwashow confront oppositionandspendsignificantpolitical the publicfaceofreform. That leaderwaswilling to acted major changes, a dynamic leader emerged as nificant pension reform possible. Where statesen- Strong leadershipproved essentialtomakingsig- Leadership rounds ofreform? ence thatwouldprove usefultopoliticiansinfuture them? What lessonscanbedrawnfrom theirexperi- lect politicianssurmounttheforces arrayed against normal incentives ofpensionpolitics?How didse- sions. But how states(Figure didafew 4)defythe cession politicsofAmerica’s public-employee pen- Such are theforces atwork inthepre- andpostre- magazine’s toppublicofficialsof 34 legislators deemed a backwa- ter. He then used that post as Figure 4. Reform Choices of Model States a platform to launch a major overhaul of the state’s pension systems. Liljenquist’s first step New Jersey  Increase contribution rates was to request comprehensive,  Eliminate COLA, for now long-term actuarial models. He  Increase retirement age then used the data to create a  Decrease final compensation percentage  New pension committees presentation that he gave to legislators and civic and business Rhode Island  Create a hybrid plan—members and employees contribute groups across Utah.  Suspend COLA  Increase age and service requirements In Rhode Island, Gina Raimon-  Increase FAC years do became a lone crusader for  Decrease vesting pension reform. Elected state treasurer in 2010, Raimon- Utah  Hybrid plan do—a Yale-trained lawyer and  Increase vesting a former Rhodes Scholar and venture capitalist—had no pre- Virginia  Increase employee contribution vious political experience. She  Felons forfeit benefits was inspired to run for office by seeing the effects of rising pension costs crowd out local library and bus services in with no corresponding commitment of new rev- Providence. Raimondo’s experience in finance and enue, creating a system that was increasingly out status as a political outsider gave her particular cred- of whack. Raimondo used this report as the basis ibility in tackling pension reform. of a presentation, “Truth in Numbers,” that she delivered at more than 50 civic forums throughout She began by persuading the Rhode Island Re- the state. She stressed that the need for reform was tirement Board to adopt more realistic actuarial driven by “math, not politics.” The data in the re- assumptions, which lowered the expected rate port were also posted online and picked up by the of return on pension-fund investments by three- national press corps. quarters of a point and extended life expectancies. Raimondo did this by bringing a lawyer to her Raimondo convinced Governor Lincoln Chafee initial meeting with the board to remind them of that the pension problem was more serious than their legal fiduciary responsibilities. This produced he had previously thought. Together, they created a far less favorable funding ratio, thereby dramati- a 12-member pension-advisory group to gather cally increasing the state’s unfunded liability from more information and make proposals to the state $4.7 billion to $7 billion (a jump that explains why legislature. The group comprised representatives six of the board’s seven union representatives voted from organized labor, the business community, against changing the actuarial assumptions). The academia, and the political establishment. The larger figure added impetus to Raimondo’s claim group held numerous public hearings to open lines that the system needed serious reform. of communication about the state’s pension problems and build public support. Raimondo then produced an in-depth report in May 2011, which described Rhode Island’s large In New Jersey, leadership came from the top of the and growing pension problems. It detailed how political system. State senate majority leader Stephen the generosity of benefits had grown over time, Sweeney put pension reform on the agenda. Sweeney,

The Limits of Retrenchment 9 10 Civic Report 103 September 2015 change, in other places it was part oftheequationchange, inotherplacesit was part nois andCalifornia,itwas insufficienttodrive many states. While insomeplaces,suchasIlli- help pushpensionreform ontotheagendain Budget pressure andthesenseof crisiscertainly Crisis Mentality that average citizens shouldcare about. case thatpublic-employee pensions were something alsohelpedmakethe ofotherkeystateservices ery examples ofhow pensioncoststhreatened thedeliv- groups would be privileged or punished. Pungent was irrefutable, whilepoliticsimpliedthatvarious versation asaquestionofmath,notpolitics.Math Advocates of reform managed to frame the con- public-employee unions. to be willing to endure criticism, especially from ing fresh perspective. Nonetheless, all leaders had them credibility inclaimingthattheywere offer- the politicalsceneintheirstates. This status gave to theirfirstgovernment to positions,andnew Christie were politicaloutsiders,recently elected public. In addition, Liljenquist,Raimondo,and to explaintheissuestheircolleaguesand the actuariallanguageandwere betterpositioned rience infinanceandpensions. Theyunderstood Liljenquist, Raimondo,and Sweeney all had expe- As theseexamplesattest,strong leadershipmatters. legislature. the pressure onSweeney andDemocrats inthestate take muchofthecriticismfrom opponentsreduced groups topromote reform. Christie’s willingnessto the state,givingspeechesandmeetingwithcivic spending. Once in office,the governor canvassed ofhisprogram ofreducingpart taxes andpublic backed pensionreform duringhiscampaignas Republican governor, ChrisChristie.Christiehad lightning rodelected forcriticismbecamethenewly powerbroker. Yet thepublicfaceofreform and the moved through thelegislature, hebecamethekey attacks by public-employee unions. As thebill immunized himfromstatus asaunionmanpartly the actuariallanguageandnumbers.Sweeney’s chaired his union’s pension fund. He understood a former president of an ironworkers’ union, had jeopardy. While the governor said that he had heard ensure that thestate’s triple-Abondratingwasnotin York Citytomeet with S&P, Fitch, andMoody’s to 2010 cametoaclose,thegovernor traveled to New The situationwassufficientlyworrisomethat,as long-term financesappeared tobeinseriousdoubt. Therefore, in the teeth of the recession, Virginia’s lieu ofapayraise. an eliminationoftheirpensioncontributionin and itsemployees in1983,when workers accepted curious systemdatedfrom adealbetween thestate not contributeanythingtotheirpensions. This was oneofonlyfourstateswhere employees did thereby thefund.In shorting addition, Virginia ommendations of VRS actuariesby lowering rates, there was apowerful temptationto defy the rec- annually by the General Assembly. In flush years, as the government’s contributionrateswere set Virginia withpensionfunding, hadlongstruggled the state’s budgetin2010. $620 millionfrom thepensionsystemtobalance “borrowed”with a$3billionbudgetshortfall, acerbated when Governor Bob McDonnell, faced 70 percent fundedin2011. The situationwasex- funded ontheeve oftherecession, butfelltoonly ginia Retirement Systemwas80percent (VRS) $19.9 billionin2011.Stated differently, the Vir- ability increased from $11.8billionin2009to ing therecession, thestate’s unfundedpensionli- Similar dynamics were atwork in Virginia. Dur - term future ofthestate’s finances. the instabilityofsystembodedillforlong- provided theimpetusforLiljenquisttodeclare that its assetswiththestock-market crashof2008. This shape, butitspensionfundlostsome22percent of sense ofcrisis.Utah entered therecession ingood For moststates,itwastherecession thatdrove the ing thepensionissue. bankruptcy. This renewed theurgencyofaddress- the legislature, thetown ofCentralFalls declared Island: justwhendebatewasbreaking down in role inpassingpensionreformcrucial inRhode that madeinnovation possible. Timing played a nothing bad about Virginia’s finances, he claimed Policy Design merely to want to shore things up in person. Central to the degree of difficulty of pension reform are the specific changes proposed and how Almost simultaneously, Governor McDonnell such changes affect different stakeholders. The po- proposed a significant reform of the VRS,35 which tentially affected are public-worker constituencies, covers approximately 600,000 current and retired including retirees, current workers at various stages workers.36 The subsequent passage of Senate Bill in their careers, and future workers. 497 was hailed as one of the “biggest achieve- ments” of the 2011–12 legislative session.37 The Policy changes that affect existing retirees are usu- centerpiece of the new legislation was the cre- ally the most difficult to enact. There are high legal ation of a hybrid plan that combines elements of a barriers to diminishing pensions for those already 401(k)-style plan for new hires. in retirement. And there is moral concern about diminishing payouts to those already on a fixed A final example: when the recession hit, New Jer- income. Among current workers, it is difficult to sey had already estab- tinker with those who lished its reputation for During 2010–13, every have already vested in fiscal irresponsibility in the current system and meeting pension obli- state modified its public- slightly easier to change gations. Pension expert aspects of plans for those Alicia Munnell listed the employee pension plan. From who have not yet vested. state as a “bad actor.” the self-interest of most The easiest thing for New Jersey had stopped policymakers to do is to making its full annual politicians, the best solution change plans for those required contribution in was to trim a little, which yet to be hired. There is the 1990s and for some no legal or moral obliga- years had contributed offered the symbolism of tion to offer a particular nothing to its pension reform, and then push as much pension plan to them. fund. If that were not bad enough, the state of the costs into the future. For states such as Virginia passed a major pen- This is largely what happened. and Utah, which were in sion expansion in 2001. sufficiently good shape to Flush from the stock- confine reforms to new market highs of the dot-com boom, Republican hires, the politics of reform were easier. Lawmak- governor Donald DiFrancesco and the Republi- ers could promise current retirees that their ben- can-controlled state legislature increased pension efits would not be touched, emphasizing that those benefits by 9 percent. The expansion relied on benefits would, in fact, be safeguarded by changes rosy projections that stock-market returns would to benefits not yet accrued—changes that would remain high forever. When they did not, a sense of make the pension system as a whole better funded. crisis took hold. Drawing such distinctions helped lawmakers drive a wedge between active and retired government work- Consequently, for the first time in decades, the Gar- ers, thereby fracturing the antireform coalition. den State enacted significant pension reforms in 2011. It eliminated COLAs, raised current employ- Creating new defined-contribution plans for new ee contributions, increased the retirement age for hires is easier because there are advantages to these new hires, and adopted a funding schedule meant systems for workers. In general, there is usually no to prevent the state government from skipping its vesting period, and the benefits accrued are portable annual required contributions. (i.e., should a worker change jobs, he can take his

The Limits of Retrenchment 11 12 Civic Report 103 September 2015 states wassointense. explain whyoppositionto pensionreform inthose constituency.posed somepainonevery This helps reduced hires. benefitsfornew they im- In short, increased contributions for current workers, and forthosealreadyThey reduced retired, COLAs and New Jersey hadthetoughestpathstoreform. RhodeIslandAt theother endofthespectrum, hires.to new hybridsystem.Allsuchchangesappliedonly a new formula.Inand revising theCOLA 2012,itcreated Plan 2in 2010, increasing theretirement ageto65 come forfuture retirees. Similarly, Virginia enacted butnot necessarily a smaller streamdelivery of in- plan. This wouldmean a different mode ofpension defined-contribution-style ated anew retirement new hiresdefined-benefit pensionplanfor and cre- inated thestate’s existing Instead, thereforms elim- reducing future COLAs). tributions) orbenefits(by increasing workers’ con- cut intoworkers’ pay(by was neededthatwould good shape,noaction plan was inreasonably hires.new Because Utah’s defined-benefit planfor was anendtothestate’s that Liljenquistproposed tirees. The bigchange not changebenefitsforcurrent employees or re- hirescause itsplanappliedonlytonew anddid Utah hadtheeasiestpathtopensionreform be- treat publicemployees. in theway, thatthey dependingonyears ofservice, defined-benefit systems are actuallyhighlyunequal McGee andMarcus Winters have argued,current in thesystemtoend.In thatrespect, asJosh receive farsmallerpensionsthanthosewhoremain getting closetotheretirement age,theyare likelyto have vested. Even iftheyvest andthenleave before sentially nothingiftheychangejobsbefore they to defined-benefitplans,where workers receive es- pension savingswithhim). This standsincontrast 38

politicians surmounttheforces How didafewstatesdefythe address pensioncosts,we risk normal incentivesofpension hollowing out government. hollowing outgovernment. Absent successfulefforts to politics? Howdidselect stacked againstthem? Senate, with one independent). In the fallof2011, Democratic (65–10intheHouse and29–8inthe elections, thestatelegislature remained strongly victories in state legislative seats in the 2010 In contrasttothe Tea Party wave ofRepublican endorsement ofthestate’s public-employee unions. his campaign,whichhelpedhimsecure the opposedpensionreformswitched parties, during Lincoln Chafee,aformerRepublican whohad pension reform in2011. governor,The new Rhode Island was an unlikely candidate for major into lawby thegovernor inlateMarch. way through thelegislative process andwassigned introduced in early February, it quickly made its unions are politicallyweak inUtah. Once abillwas launched protests onthestepsofstatecapitol, public-employee associations opposed the bill and Rhode Island andNew Jersey. far weaker thaninstrong unionstates,suchas is forbidden,public-employee associationsare ia, where collective bargainingingovernment during thereform period.In Utah and Virgin- Virginia were bothunderdividedgovernment strongly Democratic, while New Jersey and is a strongly Republican state, Rhode Island is groups, especiallypublic-employee unions. Utah sition of the legislature andthe power of interest form. compo- That balanceincludesthepartisan major reform ofpensionre shapesthestruggle - The balance of power in each state that enacted Political Alignments alition easier. Although sembling areform co- legislation, thismadeas- swing voters onpension legislature andare the licans control thestate ernor. Given thatRepub - with aRepublican gov- a 59–16majorityalong and intheHouse, ithad held a22–8majority, In theSenate, theGOP path topensionreform. Utah hadthesmoothest 39 the leadership of Rhode Island’s legislature had to call Lawsuits for a special session to consider a pension bill. All of In states where the political battle over reform is es- the state’s public-sector unions adamantly opposed pecially intense, one can expect opponents who lose the final legislation. Yet with Raimondo’s energy, in the legislature to take the matter to court. This the governor’s support, the creation of the pension- is exactly what happened in Rhode Island and New advisory board, a special session of the legislature, Jersey. In both states, a number of public-employee and new outside groups supporting reform, the final unions sued to have the pension reform overturned. bill passed by overwhelming margins (57–15 in the The lesson for future reformers is to prepare for liti- House and 35–2 in the Senate). gation, as things aren’t over with a governor’s signa- ture on a new law. New Jersey undertook pension reform with Democrats in control of the legislature and a Re- A year after the passage of the Rhode Island Re- publican in the governor’s mansion. New Jersey’s tirement Security Act in 2011, government unions public-employee unions, led by the New Jer- filed multiple lawsuits against it. The judge in the sey Education Association and representing the case ordered the parties into talks overseen by a state’s 400,000 workers, led the opposition to the federal mediator. In 2014, Governor Chafee and bill. The NJEA spent $6 million on ads oppos- Treasurer Raimondo reached an agreement with ing the governor and pension reform over a two- the unions that preserved most of the key elements month period. In the end, the reform coalition of the original legislation. The deal, which pre- that formed in the state legislature comprised served 90 percent of the savings, was finalized in Republicans and more conservative Democrats, court in June 2015. many with ties to private-sector unions that were skeptical about the generosity of public-sector New Jersey’s experience has been even more fraught. benefits. The final votes (25–14 in the Senate and To close budget gaps, Governor Christie abandoned 46–32 in the Assembly) reflected the close, hard- the state’s new commitment to fund its pensions, fought nature of the policymaking process.40 paying less into the fund than the new legislation appeared to require. A coalition of public-sector Virginia, too, enacted pension changes under unions sued.42 The judge in the case sided with the conditions of divided government. In 2010 and unions and ordered Christie and the legislature to 2011, Democrats controlled the state senate and come up with another $1.6 billion to make a full Republicans controlled the House of Delegates $2.25 billion state contribution, as called for in the and governorship. Yet Virginia has weak public- reform legislation. employee unions and is among the few states that completely prohibit collective bargaining in The governor responded that the state simply does government.41 Nonetheless, pension reform faced not have the money and appealed the decision.43 He some opposition. Public-employee associations— has also called for another round of pension reform, most notably, of teachers and firefighters—pro- which would freeze the old defined-benefit system tested the changes. and move all employees into a hybrid plan.44 In addition, the governor’s commission has floated the As the aforementioned examples attest, the greater idea that if state workers accepted more cuts, they the number of Democrats in the state legislature would seek to secure a state constitutional amend- and the more powerful the state’s public-employee ment ensuring full payments into the system. In unions, the bigger the battle to enact serious pen- June, the New Jersey State Supreme Court ruled in sion reform. Rhode Island thus stands out as a truly favor of the Christie administration.45 The court de- remarkable pension-reform story—Raimondo had clared that the new law was not a contractual obliga- the highest hill to climb from what was, in many tion that obliged the state to make the entire contri- respects, the weakest institutional position. bution to its pension system.46

The Limits of Retrenchment 13 14 Civic Report 103 September 2015 budget decisionsthatvoters understandorthat are precommitted topensions,there are fewer As ever largerslicesofstateandlocalbudgets ingovernment.which underminestrust less abletodothethingsthatcitizens expectittodo, ing. For this means that government both parties, is sibly call for taxcuts in a periodofausterity budget- programs;launch new Republicans cannotrespon- or Republicans. Democrats cannotresponsibly Austerity isnotawelcome outcomeforDemocrats orincreasingraising taxes, debt. slashing services, must impose some version of austerity budgeting by As pensioncostsrise,stateandlocalgovernment that we have already consumed. continue topayoffthecostsofpublicservices public priorities will be constrainedwhile we ing more. The present path is one where current government does not end up doing less but cost- a waytoeasebudgetpressures andensure that government. Addressing thepensionproblem is to address pension costs,we riskhollowing out states across the country. Absent successfulefforts Serious pensionreform remains pressing for CONCLUSION of thestatusquo. But thiscanbeovercome. The bigenemyoftheseimprovements isthepower andenhanceequityamongworkers. performance, processes, relieve fiscal stress, improve government Serious pensionreform willimprove state-budgeting defined-contribution plansmakefarmore sense. to spend their entire lives in government, portable butdonotwant many whoaspire topublicservice are the bestway to attract talented people.) For is, moreover, farfrom clearthatgenerous pensions who spendtheirentire careers ingovernment. (It riod, end up subsidizing the retirement of workers those whowork forgovernment foronlyabriefpe- matters currently stand,younger workers, aswell as duce greater equityamongpublicemployees. As Reconfiguring pensionsystemswouldalsointro- induce greater fiscalmodesty. incentivesthe current forpoliticiansand perverse defined-contribution planswilleliminatesomeof sibility. Indeed, moving more in the direction of der buttorestore adegree ofdemocraticrespon- states andlocalitiestogettheirfiscalhousesinor- retrenchment istherefore essentialnotonlyfor between budgetingandself-government. Pension politicians can make, loosening the connection Endnotes

1. Ronald K. Snell, “Pensions and Retirement Plan Enactments in 2011 State Legislatures,” National Conference of State Legislatures, July 31, 2012, http://www.ncsl.org/research/fiscal-policy/2011-pension-and-retirement- enacted-legislation.aspx. 2. Legislative summaries by the National Conference of State Legislatures. 3. Josh Barro, “Dodging the Pension Disaster,” National Affairs, 2011; Josh McGee, “Creating a New Public Pension System,” Laura and John Arnold Foundation, http://www.arnoldfoundation.org/resources; Raegen Miller, “Redefining Teacher Pensions,” Center for American Progress, 2011, http://www.americanprogress.org/ issues/2011/09/pdf/teacher_pension_reform.pdf; and Richard C. Dreyfuss, “Fixing the Public-Sector Pension Problem: The True Path to Long-Term Reform,” Civic Report no. 74, Manhattan Institute for Policy Research (February 2013). 4. Stephen D. Eide, “Quantifying Crowding Out,” Civic Report 81, Manhattan Institute for Policy Research (Octo- ber 2013); idem, “California Crowd-Out: How Rising Retirement Benefit Costs Threaten Municipal Services,” Civic Report 98, Manhattan Institute for Policy Research (April 2015); and Tyler Cowen, “Don’t Be So Sure the Economy Will Return to Normal,” New York Times, May 15, 2015. 5. D. Roderick Kiewiet and Matthew D. McCubbins, “State and Local Government Finance: The New Fiscal Ice Age,” Annual Reviews of Political Science 17 (May 2014): 105–22. 6. Daniel DiSalvo, “Government Crowded Out: How Employee Compensation Costs Are Reshaping State and Lo- cal Government,” Manhattan Institute for Policy Research, Civic Report 77 (April 2013). 7. Jennifer Staman, State and Local Pension Plans and Fiscal Distress: A Legal Overview, report R41736. (Washing- ton, D.C.: Congressional Research Service, 2011). 8. “The Widening Gap,” Pew Center on the States, Issue Brief (2012). 9. Robert Novy-Marx and Joshua Rauh, “The Liabilities and Risks of State-Sponsored Pension Plans,” Journal of Economic Perspectives 23, no. 4 (2009); and idem, “The Revenue Demands of Public Employee Pension Prom- ises,” no. w18489 (Washington, D.C.: National Bureau of Economic Research). 10. Alicia Munnell, Jean-Pierre Aubry, and Laura Quinby, “Public Pension Funding in Practice,” Journal of Pension Economics and Finance 10, no. 2 (2011): 247–68. 11. Alicia Munnell et al., “Can State and Local Pensions Muddle Through?,” Center for Retirement Research, Brief 15 (March 2011). 12. In this respect, the politics of state and local public-employee pensions are similar to those for Social Security at the federal level. See Martha Derthick, Policymaking for Social Security (Washington, D.C.: Brookings Institution Press, 1979); R. Douglas Arnold, “Politics at the Precipice: Fixing Social Security in 2033,” The Forum: A Journal of Applied Research in Contemporary Politics 13, no. 1 (spring 2015): 3–18; Daniel Béland, Social Security: History and Politics from the New Deal to the Privatization Debate (Lawrence: University of Kansas Press, 2005); and Paul Pierson and R. Kent Weaver, “Imposing Losses in Pension Policy,” in Do Institutions Matter? Govern- ment Capabilities in the United States and Abroad, ed. R. Kent Weaver and Bert Rockman (Washington, D.C.: Brookings Institution, 1993), 110–50. 13. Tito Boeri and Guido Tabellini, “Does Information Increase Political Support for Pension Reform?,” Public Choice 15 (2012): 327–62. 14. Jake Rosenfeld, What Unions No Longer Do (Cambridge, Mass.: Harvard University Press, 2014). 15. Edward L. Glaeser and Giacomo A. M. Ponzetto, “Shrouded Costs of Government: The Political Economy of State and Local Public Pensions,” Journal of Public Economics 116 (August 2014): 89–105. 16. Daniel DiSalvo, Government Against Itself: Public Union Power and Its Consequences (Oxford University Press, 2015); Terry M. Moe, Special Interest: Teachers Unions and America’s Public Schools (Washington, D.C.: Brook- ings Institution Press, 2013); Thomas J. Healey et al., “Underfunded Public Pensions in the United States: The Size of the Problem, the Obstacles to Reform and the Path Forward,” M-RCBG Faculty Working Paper no. 2012-08, Mossavar-Rhaman Center for Business and Government (April 2012): 34–35; and Daniel Béland, “Does Labor Matter? Institutions, Labor Unions, and Pension Reform in France and the United States,” Journal of Public Policy 21, no. 2: 153–72.

The Limits of Retrenchment 15 16 Civic Report 103 September 2015 38. 37. 36. 35. 34. 33. 32. 31. 30. 29. 28. 27. 26. 25. 24. 23. 22. 21. 20. 19. 18. 17. Josh McGee and Marcus A. Winters, “Modernizing Teacher “Modernizing Josh McGeeandMarcus A.Winters, Pensions,” NationalAffairsno.22(winter2015). See http://leg1.state.va.us/cgi-bin/legp504.exe?ses=111&typ=bil&val=hb2410. Ric Brown, “PensionReform Improves StateFinances,”RichmondTimes-Dispatch, June24,2012. finances. contributiontothesystemever($2.2billion)overnexttwoyears,inordergovernment toshore upits nor’s planwould have affected current workersandnewhires. alsopromised Thegovernor tomakethelargest which meantthatthere would beonlya2percent reduction intake-homepay. These changesinthegover tions toitspensionfundof5percent oftheirsalaries,whilethestatewouldoffer payincreases of3percent, McDonnell proposed that Virginia’s 87,000publicemployees,alongwith130,000teachers,makecontribu - Institution, Brown Centeron EducationPolicy(February2014). Patrick McGuinn,“PensionPolitics:PublicEmployeeRetirement SystemReforminFourStates,”Brookings Walsh, “Borrowing toReplenishDepletedPensions.” formCharts.pdf. Reform ChangesEffective July1,2011,”http://www.dbm.maryland.gov/employees/Documents/PensionRe- “Md. LawmakersAgree onPensionReform,”CBSBaltimore, April4,2011;andStateofMaryland,“Pension get andManagement,January31,2011,http://www.courts.state.md.us/hr/pdfs/prop_pension_reform.pdf. T. EloiseFoster, “Memo:AdministrationProposal forPensionReform,”StateofMaryland,DepartmentBud- es%20handout%202014%20(final).pdf; andhttp://www.ncsl.org/research/fiscal-policy/pensions.aspx. nificant ReformsinStateRetirement Systems,”http://www.nasra.org/files/Compiled%20Resources/Resourc- National Conference ofStateLegislatures andNational AssociationofStateRetirement Administrators,“Sig- sociation annualconference,” August29–September1,2013. Sarah AnziaandTerry Moe,“ThePoliticsofPensions,”apaperprepared fortheAmerican PoliticalScienceAs- Corporations SponsorPensionReformSeminarforJudges,”HuffingtonPost,April25,2014. “Looting thePensionFunds,”RollingStone,September16,2013;andChrisYoung, “KochBrothers, Major rity—and LeaveTaxpayers withtheBill”(Washington, D.C.:InstituteforAmerica’s Future, 2013);MattTaibbi, David Sirota, Campaignto UndermineAmerica’s “ThePlotAgainstPensions: ThePewArnold Retirement Secu- house-declines/ft_15-03-02_legislators. See http://www.pewresearch.org/fact-tank/2015/03/02/ahead-of-redistricting-democrats-seek-to-reverse-state- Finance, andPolicy9(spring2014):165–92. Corey Koedel,ShawnNi,andMichaelPodgursky, “WhoBenefitsfrom PensionEnhancements?,”Education, 1985). andPublicPolicy,” “TheRediscoveryofCharacter:PrivateVirtue James Q.Wilson, ThePublicInterest81(fall http://files.sj-r.com/media/news/FullPensionRuling.pdf?_ga=1.224981468.755801105.1434464622. lees, v. PatQuinn),DocketNo.118585,May8,2015, The Supreme CourtoftheStateIllinois,InrePENSIONREFORMLITIGATION- (DorisHeatonetal.,Appel (2012): 617–46. Amy B.Monahan,“PublicPensionPlanReform:TheLegalFramework,”EducationFinanceandPolicy5,no.4 Foundation, September17,2013,http://reason.org/news/show/utah-pension-reform. Quoted inLeonard Gilroy, “ClosingtheGap:DesigningandImplementingPensionReforminUtah,”Reason E. Schattschneider, Politics,Pressures,andtheTariff (Hamden,Conn.:Archon, 1963). thiness (Ithaca,N.Y.: UniversityPress, Cornell 2008),93–118. J.Sinclair,Timothy TheNewMastersofCapital:AmericanBondRatingAgenciesandthePoliticsCreditwor Walsh,Mary Williams “Borrowing toReplenishDepletedPensions,” NewYork Times, May27,2015. 8, 2015. withManyFundManagerstoSaveonFees,”NewYorkAlexandra Stevenson,“CalperstoCutTies Times, June Politics ofPublicEmployeeBenefits,”CaliforniaJournalPolicy2,no.3(2010). ington, D.C.:Brookings InstitutionPress, 2012).SeealsoD.RoderickKiewiet,“TheDayAfterTomorrow: The sion fundingandthepowerofpublic-sectorunions.Munnell,StatesLocalPensions:WhatNow?(Wash- Alicia Munnell,oneofAmerica’s leadingretirement experts,foundnostatisticallysignificantlinkbetweenpen- - - 39. See http://le.utah.gov/~2010/bills/static/SB0063.html. 40. See http://www.njleg.state.nj.us/bills/BillView.asp. 41. Virginia’s opposition to public-workers’ unions dates to the 1940s, when then-governor Bill Tuck (D) declared in his State of the Commonwealth Address that it was “utterly incompatible with sound and orderly government.” 42. Reuters, “New Jersey Union Sues over Pension Fund Payments,” June 22, 2011. 43. John Reitmeyer, “NJ Public Employees Ready to Hit Gov. Christie with New Pension Funding Suit,” New Jersey Spotlight, March 4, 2015. 44. “A Roadmap to Resolution,” Report of the New Jersey Pension and Health Benefit Commission, February 24, 2015, http://www.state.nj.us/treasury/pdf/FinalFebruaryCommissionReport.pdf. 45. Burgos v. State of New Jersey (A-55-14) (075736), June 9, 2015, http://www.judiciary.state.nj.us/opinions/ supreme/A-55-14BurgosvState).pdf. 46. Heather Haddon, “New Jersey Court Backs Chris Christie Administration on Pension Payments,” Wall Street Journal, June 9, 2015.

The Limits of Retrenchment 17 Center for State and Local Leadership Isaac Gorodetski Director Charles Sahm Education Policy Director Dean Ball Policy Manager

Fellows Rick Baker Daniel DiSalvo Richard C. Dreyfuss The Manhattan Institute’s Center for State and Local Leadership (CSLL) promotes Stephen D. Eide promising new approaches to reform of state and local government. CSLL works on a broad Nicole Gelinas range of issues, including public sector reform (specifically of pensions and health benefits), Edward Glaeser education, prisoner reentry, policing, public housing, infrastructure, immigration, and George Kelling public-service delivery. By spotlighting new ideas and providing the research and proposals Steven Malanga to inform creative new policies, CSLL hopes to lay the groundwork for an environment in Josh B. McGee which commerce, employment, and a rich civic life can flourish. Edmund J. McMahon CSLL operates across the country, working in states such as California, Illinois, and Rhode Aaron M. Renn Island, and cities such as Newark, New Jersey, and Detroit, Michigan. CSLL’s tools include Fred Siegel regular writing and research reports by affiliated Manhattan Institute scholars and senior Jacob Vigdor fellows, along with public events and media appearances. CSLL also annually hosts both Marcus A. Winters the James Q. Wilson Lecture on Urban Affairs—a forum for distinguished policymakers and scholars to explore the challenges and opportunities facing American cities—and the Manhattan Institute’s Social Entrepreneurship Awards, which recognize those who identify social needs and take it upon themselves to address them privately.

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