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In spite of mass opposition to the president’s plan, efforts to privatize retirement security using a new vehicle—your defined-benefit pension—are surfacing in an increasing number of states.
Lawmakers in more than two dozen states are using shortfalls in public employee defined-benefit pension systems to fuel so-called reform.
Their final destination is the same as that of the Bush administration’s Social Security overhaul: individual accounts that offer no guarantees, no retirement security.
Who are the pension predators?
Elimination of defined-benefit pensions has been a plank in the anti-tax/anti-government movement for years.
Before the stock market decline in the early 2000s, activists like Grover Norquist, president of Americans for Tax Reform, argued that public employee pension boards had too much money under their control, which gave them an undue influence over corporate governance and Wall Street. Eliminating defined-benefit pensions is one step in Norquist’s blueprint on how to cut the size of government in half by 2025.
As the pension systems moved from the black to the red when the stock market tanked, activists like the Americans for Prosperity Foundation’s Barry Poulson argued that the deficit would be shouldered by taxpayers.
Noticeably absent from their rhetoric, however, is the fact that public employees have been paying their share for the retirement benefit through regular payroll contributions. The same cannot be said for their employers.
A significant part of the reason for the pension system shortfalls is that employers—state and local governments—haven’t been making their payments into the systems. During the stock market boom in the 1990s, state and local governments relied on investment earnings to cover their share.
Colorado was privatization battleground in 2006
In January 2006, the Colorado Public Employees’ Retirement Association (PERA) started offering a defined-contribution retirement savings plan. Newly hired state employees were given a choice: enroll in PERA’s existing guaranteed defined-benefit plan or PERA’s new 401(k)-like defined-contribution savings plan.
But offering that option wasn’t enough for Republican Gov. Bill Owens and state treasurer Mike Coffman.
Following passage of the defined-contribution plan in 2004 by the then Republican-controlled Legislature, the governor commissioned a “study” of the PERA in 2005.
Coffman led the effort, forming a 10-member group to develop recommendations “to restore fiscal stability” to PERA, which was facing an estimated $12 billion shortfall.
To the general public, the commission had the appearance of a citizen-based panel. Colorado Federation of Public Employees (CFPE) president Jo Romero, however, knew otherwise.
The commission consisted predominantly of business executives and Barry Poulson, an economics professor at the University of Colorado and a “distinguished scholar” for the Americans for Prosperity Foundation, a Washington, D.C.-based group that “believes reducing the size and scope of government is the best safeguard to ensuring individual productivity and prosperity for all Americans.”
While the commission was developing its recommendations, Romero was preparing for battle, mobilizing an army of 10 labor unions that represent a broad swath of public employees, at every level of government, who would be affected by PERA changes.
Romero’s assessment of the commission was accurate. Its study served as the backdrop for proposals by Gov. Owens and Coffman to cut benefits to current PERA participants and force all new public employees who go to work for one of PERA’s 400 affiliated employers into a defined-contribution system.
Meanwhile, Poulson wasn’t going to rely on the now Democratic-led Legislature to approve the governor’s proposals. With the financial backing of the Americans for Prosperity Foundation, a 501(c)(3) organization that is funded through tax-deductible donations, he filed a proposed ballot initiative that sought wholesale conversion to a defined-contribution plan.
But before the governor’s proposals or the ballot initiative surfaced, public employees in Colorado were already fighting for their golden livelihoods thanks to the Colorado Coalition for Retirement Security, formed by Romero.
The coalition developed its own proposal that, unlike the governor’s and Poulson’s, actually addressed PERA’s shortfall.
“It was an unprecedented effort in coalition building, sustenance and perseverance,” says Romero.
Colorado’s Legislature backs union-proposed fix
In May, the coalition—Colorado’s working families who also happen to work for city, county and state government as well as school districts—declared victory.
The Legislature overwhelmingly approved the coalition’s plan.
The funding fix: Starting in January 2008, six years of annual pay increases for nonretired PERA members will be automatically reduced by 0.5 percent. That money will go straight into PERA to shore up the shortage.
Days after the Legislature’s action, Poulson and his co-sponsor of the ballot initiative, Christine Burtt, field director for the Americans for Prosperity Foundation, withdrew their initiative, citing lack of “political steam.”
It’s questionable, however, whether the Americans for Prosperity Foundation ever had political steam.
The union coalition diffused allegations that PERA was in crisis by educating lawmakers and the public.
The system, which covers approximately 380,000 current and retired public employees, is at 75 percent funding, Romero notes, adding that in the 1960s and 1970s, the funding level had been as low as 45 percent. The average monthly benefit is $2,400. The cost of state employee retirement benefits is less than 1.5 percent of Colorado’s budget.
“Public employees need to be aware of these attacks [on their defined-benefit pensions],” says Romero, “and do whatever they have to do.” In Colorado, public employees had to put in a little extra money, she says, “to not give the other side an excuse to take away retirement security.”
Playing politics with people’s retirement security
Efforts by politicians and anti-government activists to unload defined-benefit pensions are based on the same premise as the Bush administration’s so-called Social Security reform: the ownership society.
Proponents argue that individuals should be in control of their money. What they don’t tell the American public, however, is the risk—and fees to Wall Street firms—individual investors face.
The risk of losing the retirement security of a defined-benefit plan is even greater for public employees who don’t participate in Social Security.
That’s the case for Colorado’s public employees who work for city, county and state governments as well as school districts.
In addition to Colorado, most public employees in Alaska, Massachusetts, Nevada and Ohio do not participate in Social Security.
In other words, the guaranteed benefit public employees accrue through participation in defined-benefit pension systems is the one retirement savings vehicle they can bank on.
Defined-benefit pension systems are much like the Social Security system. Defined-benefit pensions are funded with employee and employer contributions that are a percentage of a worker’s salary.
Social Security is funded with a 12.4 percent payroll tax. The workers’ responsibility—6.2 percent of gross wages—is taken straight out of their paychecks.
At retirement, defined-benefit pension systems provide workers with a guaranteed monthly benefit based on salary and years of service, which also is similar to Social Security.
AFT local preparing to file suit over policy destined for failure
Alaska Gov. Frank Murkowski has spent the better part of a year trumpeting the May 2005 passage of his public employee retirement “reform.” But all his talk may very well be hot air.
At press time, the Alaska Public Employees Association (APEA) was preparing to file a lawsuit to stop implementation of the so-called reform that closes enrollment to public employees’ defined-benefit pension plans, which include retiree health benefits, and offers in their stead a defined-contribution 401(k)-like individual investment program and a defined-contribution health benefit for employees hired starting July 1.
APEA president Bruce Senkow says the new law is too flawed to be implemented.
It’s not just the union that thinks the law has problems, either. Legislators acknowledged the problems during the 2006 session. Several bills were introduced aiming to correct the problems, which include questions over the new plans’ tax status under Internal Revenue Service regulations and violations of federal tax law.
Gov. Murkowski’s apparent indifference to the flawed law, combined with his failure to address the shortfall in the defined-benefit systems—which he claimed necessitated the change—smacks of policy driven by ideology rather than economics.
“Their big thing last year was the retirement system—that something had to be done,” says Senkow. “So they passed the new plan, which they didn’t even address this year.”
The fact Gov. Murkowski has not made it a priority to fix the new law’s flaws or shore up the shortfall in the defined-benefit plans—the state is projecting an excess of at least $1.5 billion in oil revenue this year—is both reckless and irresponsible, according to APEA.
Join your union’s effort to protect retirement security
Protecting the retirement security of its members is a fundamental priority for the AFT and its affiliates.
The nature of the attacks, however, has markedly changed. The social value of a secure retirement is being challenged by some politicians, as well as by corporations that are using bankruptcy laws to default on their retirement obligations to rank and file workers.
The AFT is working with affiliates across the nation, as well as the AFL-CIO and other labor unions, to blunt the attacks. John Abraham, deputy director of the AFT’s research and information services department, and Bill Cunningham, an associate director in the legislation department, are among the national staff experts working with the AFL-CIO and assisting affiliates in research, strategy development and coalition building.
“The same characters who would privatize government services are the ones promoting this agenda,” says AFT president Edward J. McElroy. “It is nothing more than an attack on working families. But it can only be stopped through collective legislative and political action.”
In November, it is up to you if the pension predators will have to answer to working families.
THE RACE TO THE 'MARKET-BASED' BOTTOM GETS ONE MORE PLAYER IN THE RELAY
The Bush administration’s latest exploitation of American workers came April 27. That’s the day the Department of Energy (DOE) announced that it will not do any new business with government contractors, companies including Johnson Controls Inc., Bechtel and Lockheed Martin, that offer their workers a secure retirement and affordable, comprehensive healthcare—even if the benefits are provided by a collective bargaining agreement.DOE secretary Samuel Bodman, a former executive of mutual fund giant Fidelity Investments, issued the mandate. The policy requires contractor pension plans and medical plans “to meet two market-based performance benchmarks,” which the DOE contends “will ensure that pension plan and medical benefit plan costs to DOE are competitive and consistent with market trends.”
The benchmarks: Neither plan can exceed the “market average” total benefit by more than 5 percent. The per capita cost as a percent of payroll can’t exceed the “market average” per capita cost as a percent of payroll by more than 5 percent either.
“What does this mean? It’s hard to tell precisely,” according to Monique Morrissey, a policy analyst with the Economic Policy Institute (EPI). “The DOE directive uses obscure and unfamiliar terms—Relative Benefit Value Index, for example—and is fuzzy on specifics. But here’s a clue: Benefits are limited not just by cost but by ‘value.’”
DOE’s swipe at workers has President Bush written all over it: No defined-benefit pension plans will be approved. But DOE will reimburse the allowable costs for a contractor to provide a one-time opportunity for its existing contract workers covered by a defined-benefit pension plan to transfer to a market-based defined-contribution retirement plan.
“These are outrageous restrictions designed to undermine public employee retirement and healthcare benefits,” says Steve Porter, director of AFT Public Employees. “The AFT is at work with the rest of the labor movement to see that the Department of Energy policy is reversed. It is unthinkable that the administration would seek to punish employers providing decent pensions and healthcare coverage.”
AFT alerted key lawmakers in Congress to the issue, which prompted senior Democrats to send letters to President Bush demanding that he rescind the policy. The DOE’s action could set a precedent for other federal agencies to adopt similar restrictions not only for contracts but also for thousands of grants, AFT warns.
Meanwhile, EPI’s Morrissey says the directive is an apparent attempt by the Bush administration to “destroy traditional health insurance and pensions by agency fiat.”
Morrissey questions why DOE would discourage its contractors, who largely work at nuclear sites, from negotiating the best health benefits they could get for their money. “We suspect it has something to do with health savings accounts,” she says. “The idea that Americans are somehow over-insured and healthcare costs will go down when people are forced into high-deductible plans that make them think twice before seeking medical treatment.
“In the administration’s ‘market-based’ society, people are left to fend for themselves in a supposedly free market, while insurers, drug companies and financial firms are sheltered from competition,” Morrissey says.
