THE ECONOMICS of public-sector pension reform are straightforward enough. Funds that states and municipalities must devote to employees’ retirement benefits are funds that they cannot spend on parks, libraries, transportation, public safety and other services. This trade-off is manageable when elected officials adopt honest accounting and tailor promises of deferred compensation to their jurisdictions’ ability to pay. When politicians over-promise and under-prepare, their constituents and employees will eventually face fewer services, higher taxes, broken promises or some combination of the three.
Politically and legally, however, pension reform is anything but simple — as the recent experience of financially stressed governments across the United States demonstrates. In Rhode Island, a 2011 law spearheaded by a courageous Democratic state treasurer, Gina Raimondo, seemed to have saved that state from a looming financial squeeze. It would havecut the state’s $9 billion unfunded liability by roughly half, through a combination of increased retirement ages, reduced cost-of-living adjustments and greater use of 401(k)-like instruments. Public unions sued, claiming that the plan amounted to a breach of contract. Earlier this year, Ms. Raimondo and Gov. Lincoln Chafee announced a deal with the unions that would have avoided a trial while preserving 94 percent of the savings. But the “no” vote of a single police union scuttled the deal, and the case is now set for trial in September, with the entire reform project, upon which Ms. Raimondo has staked her campaign for governor this year, riding on the outcome.
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In California, meanwhile, another Democratic reformer, San Jose Mayor Chuck Reed, has been forced to withdraw his plan for a statewide referendum that would have authorized local governments to change current employee benefits as part of pension reform. He was thwarted when state Attorney General Kamala Harris, a union-friendly Democrat, issued an official description of the measure that said it would “eliminate constitutional protections” for teachers and nurses. Mr. Reed challenged that language as unlawfully tendentious in state court; a judge’s ruling against him forced him to postpone his ballot drive. So, for now at least, there will be no statewide repeat of the success Mr. Reed enjoyed locally in 2012, when San Jose voters approved a measure that trimmed retirement costs eating up about one out of every five budget dollars. Unions sued to stop that measure, too, and persuaded a state judge to strike down the higher contributions the measure imposed on them. Still, the court upheld reforms worth about $20 million in savings.
