Those seeking to downsize government have their sights set on trimming the retirement security of public employees, too

By: Virginia Myers Kelly

Faculty at public institutions are not known for their wealth. Many characterize their careers as a calling, and choose to pursue the rewards of teaching and learning despite relatively low pay. In the past, their benefits—including reasonable and sometimes even generous pensions—made that a choice worth making.

Now the security of those benefits is so seriously threatened by politicized assaults that even inspired academics are beginning to reconsider.

Across the country, public pension funds—including those that serve faculty and staff at public universities and colleges—are being pummeled by tight budgets, poor management and a bearish stock market.This comes on the heels of eroding benefits and increasing demands on college staff like Velma Butler, president of the LA Staff Guild/AFT at the Los Angeles Community College District. “Working in [an education] system that is underfunded, working in a system where our health benefits are at a crisis level ... It’s [adding] insult to injury to have our pension plan attacked,” she says.

In California, Gov. Arnold Schwarzenegger has declared war on defined benefit plans, which guarantee state retirees income based on their years of service. Spurred on by conservative tax “reform” groups that want to shrink, if not eliminate, government, Schwarzenegger claims the plans are decimating the state budget. He has jumped on the Republican private account bandwagon and he wants to put all state employees into inadequate and risky defined contribution plans. But Schwarzenegger’s cry about emptying state coffers rings false, says John Abraham, AFT deputy director of research. “This is a phony crisis,” he says. While fiscal challenges certainly require attention, pension funds have ridden the ups and downs of the market for 100 years. “They’ve never missed a payment and they won’t miss one now.”

As it turns out, uproarious opposition to Schwarzenegger’s proposal forced a retreat. Californians, including many labor leaders, were outraged that Schwarzenegger would, among other things, jeopardize existing disability and survivor benefits in the defined benefit plans of police and firefighters, teachers and professors. The California Federation of Teachers produced a 15-minute video overview of the governor’s plan and how it would affect the state’s faculty and teachers. Called “Insult to Injury,” the CD went out to every local in the state. (To get a copy, contact Fred Glass at cftoakland@igc.org. Specify VHS or CD-ROM.)

In Alaska, a similar move toward private accounts succeeded. There, the state knowingly underfunded the public pension system for 10 years, meeting just 75 percent of its obligation. This was typical during the 1990s, when pension fund investments did so well that the funds were overflowing, and states took holidays on feeding them regular payments. Then the stock market dipped, healthcare costs for retirees rose and Alaska wound up with a $5.6 billion shortfall. In May, the governor and the state Legislature approved a defined contribution plan for all employees, theorizing that it would save the state money—although AFT research disputes the idea. The plan parallels President Bush’s push to change Social Security. “The proposals in Alaska are part of the movement to privatize Social Security and as many retirement accounts as you can,” says Bruce Senkow, president of the AFT’s Alaska Public Employees Association. Unions there plan to continue the fight to review pension changes in the Legislature.

A happier outcome resulted in Illinois, where union members lobbied hard to protect pensions in five different state retirement plans: for current and former state employees, teachers, university faculty and staff, politicians and judges. The Illinois Federation of Teachers/AFT successfully defeated Gov. Rod Blagojevich’s proposals to institute a privatized state pension system, raise the retirement age and lower cost of living adjustments (COLAs). But the fight isn’t over: A pension holiday exempts the state from paying $2.2 billion in 2006 and 2007, and threatens to increase the $43 billion unfunded pension liability yet again. The increase will not be due to the drain of educators’ pensions, but to a failure of government to pay its share of costs in a timely manner.

From Plenty to Plunging
Years ago, pensions were a sure thing. New York is a good example: In the early 1970s, New York had the “finest [public] pension plan of any pension plan in the country,” says Mel Aronson, secretary for the United Federation of Teachers/AFT. Pensions were calculated, after 20 years of service, based on 50 percent of salary in the final working year. Individuals could retire at age 55. In 1973 and again in 1976, benefits were decreased, then slightly improved in 1983. Now, public pensioners in New York get 40 percent of the average of their final three years’ salary; they are required to have 30 years of service if they retire at age 55, and otherwise must be 62 years old to receive full benefits.

Aronson says workers have been able to maintain this much—so far—through vigorous political action. “We’re very, very active politically, and we work hard to elect public officials who are supportive of public education and those of us who work in public education,” says Aronson, who sits on the New York City Teachers’ Retirement Board. But while no politicians have suggested privatization for New York, the union remains vigilant as the press touts defined contribution plans and lawmakers begin to listen.

Across the nation, about 14 million active employees and 6 million retirees are covered by the public pension system, including public college faculty and staff, police officers, firefighters, legislators and judges. Many of these pensions are underfunded, creating the current inclination toward defined contributions or private accounts. In one report, from the State Net Capitol Journal, analysts cite a collective $366 billion shortage in 123 of the largest state and city retirement funds for fiscal 2003, a $611 million debt increase since 2000.

Yet, Abraham notes that the solvency of a pension fund cannot be measured at just one point in time. A better approach is to look at a 10-year trend formula of assets divided by liabilities and watch that the trend line goes up. Most public pension funds are 70 percent to 80 percent funded. Because not everyone retires at once, this level of funding should not be alarming—but it should be monitored.

Why are pension accounts not fully funded? One reason is that some states blithely skipped pension fund payments, as in the aforementioned boom of the 1990s, sometimes in order to cover other budget shortfalls. Combining this practice with subsequent poor stock market performance and a failure of some systems to account for the longer lifespan of retirees has put a strain on pension funding.

“There were a lot of decisions made to skimp on putting in the public’s share of the money,” explains Ed Muir, assistant director of research at the AFT. In New Jersey, for example, local governments are crying about skyrocketing pension costs, says Fred Nesbitt, executive director of the National Conference of Public Employee Retirement Systems, “but they forgot to mention that for six years, the employers made zero contributions to the pension plans.” Similarly, Illinois hasn’t made a full pension contribution since 1970. As a result, the state’s five retirement plans carry a cumulative $43 billion in unfunded pension liability. The diminishing returns on diminishing contributions are particularly disastrous in an already weak stock market.

To complicate matters further, practices such as spiking—allowing the pension benefit to be based on the last 12 months of service, when artificial salary raises can increase payouts—have come back to haunt funds that may not have been cash-strapped before but certainly are now. Given the resources of states, however, these challenges are nothing the funds can’t survive. That’s because of the beauty of pooled risk in defined benefit plans, points out Abraham.

“State governments exist into perpetuity, so they can weather the ups and downs of the market. Individuals’ work lives only span 20, 30 or 40 years. If their moment of retirement coincides with a drop in the market, their individual account won’t sustain them through retirement.”

Guarantee Benefits, Not a Gamble
Still, some states are considering these privatized plans, reasoning that the cost of pensions is too high and state budgets simply can’t meet them. With defined contributions, or private accounts, employees would have the option of putting their own money aside for retirement, and theoretically the employer would bear less of the burden for a defined benefit like a pension. These plans are portable—employees can change jobs, even outside the state system, and keep their retirement accounts—while defined benefit plans reward employee longevity.

But AFT research shows distinct disadvantages to the newer, poorly designed defined contribution systems (which are not the same as the TIAA-CREF defined contribution plan in which many public and private university educators participate). “The only way a person can guarantee that they will have income for the rest of their lives is through a defined benefit pension plan,” says Aronson, at New York’s UFT. “In a defined contribution plan, the employee is taking a great risk,” having to manage his or her own money and then, at retirement, deciding how much to withdraw, and when.

In addition, switching to defined contributions will cost states more in the short term, and long-term savings are not guaranteed. Transition costs, which involve designing a new system, selecting vendors and monitoring operations, as well as consulting fees and education for workers who must now learn to manage their own investments, drive initial costs up. In California, the pricetag on such a transition was estimated at $7.6 billion. In Florida, the state spent $89 billion to shift to defined contributions, but only a handful of employees chose the option. Nebraska switched back to defined benefits because returns were 5 percent higher than private accounts. More recently, West Virginia voted to save up to $1.8 billion over the next 30 years by switching to defined benefits, because the state’s share—4.3 percent of payroll—is less than under contributions, when it kicked in 7.5 percent. North Dakota dropped an existing 401(k) plan and shifted back to defined benefits in order to attract quality employees.

A contribution plan is also ill-favored because it does not cover disability and survivor benefits, especially important to police and firefighters; those benefits would have to be purchased separately, likely at higher cost.

Among other disadvantages of defined contribution systems are:

• The inability of a less secure system to attract and retain quality employees in key service areas.

• Loss of incentive for employees to stay in their jobs.

• Loss of the opportunity to pool employer and employee contributions as a way of reducing individual risk.

• Lower investment returns on defined contribution plans. States that experimented with private accounts experienced a drop of 50 percent in investment returns, a huge hit when the average retirement pension is already only $18,500 per year.

• Contribution plans carry higher investment management fees. States’ administrative costs can be four times those of defined benefit plans.

• More expense for taxpayers—most of the money in pension plans comes from investment earnings (less than 26 cents per dollar paid out in pensions come from taxpayers). With defined contribution plans, more would have to come from state coffers.

By the Board
To preserve what pension funds should be—a guarantee that public servants will be secure in their retirement, “a lifetime benefit for a lifetime of service,” as Abraham puts it—union members have not only lobbied state legislators as they arrange for funding, but they have wielded influence on the pension boards themselves (see sidebar, page 11). Many states require some current employee and retiree representation on these boards. Who better than union members, well-versed in benefits and fairness, to take up these positions of influence?

Labor advocates and other progressive thinkers also have used the pension boards as a platform to fight corporate excess and destructive labor and environmental policies common among some of the corporations in which the funds were invested. Most notably, California’s funds—the two largest in the country—have led the way. State Treasurer Phil Angelides is credited with pressing the California Public Employees’ Retirement System (CalPERS), valued at $180 billion, and the California State Teachers’ Retirement System (CalSTRS), at $125 billion, to adopt reforms in the way they invest. The funds dropped tobacco from their portfolios, eliminated markets that abuse labor standards, and supported companies with innovative environmental policies. Labor representatives have been intensely involved in these funds.

Angelides believes much of Schwarzenegger’s attack on pensions results from the activist agenda of the pension funds. “This is about attacking
CalPERS and CalSTRS and [about the power of] the university system pension fund to clean up corporate America after the greatest wave of corporate scandal,” he said in a recent pension education film produced by the California Federation of Teachers. “We’ve been the ones standing up against excessive CEO pay. We’ve been the ones suing Enron and WorldCom to get our money back. We’ve been the ones cracking down on investment banks. The governor and his allies want to stand up for their corporate friends, not for ordinary men and women who work for a living and work for the state.”

Unions, and especially the AFT, will continue to represent these public servants and win for them the retirement they deserve. “After a lifetime of public service, we believe people are entitled to retire with dignity,” says Abraham. “That means Social Security, pension and retiree health benefits.”