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States and cities grapple with cuts to pensions that workers have already earned

Illinois joined other cities and states in cutting pensions as way to curb costs. Should public employees who have already earned their retirement be subject to cuts? Judy Woodruff talks to Andrew Biggs of the American Enterprise Institute and Steven Kreisberg of the American Federation of State, County and Municipal Employees.

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    Tuesday's decisions in Detroit and Illinois put a dramatic spotlight on public workers' pensions and why they're under increasing pressure in states and cities facing huge debt problems.

    The fights are charged, with more skirmishes to come in court, but this week's action may be changing the landscape.

    The battle over the public employee pension crunch in Illinois, the nation's worst, came to a head yesterday, as state lawmakers voted to eliminate a $100 billion unfunded liability. It passed with bipartisan support, although the votes were close, and some were more enthusiastic than others.

  • SEN. BILL BRADY, R-Ill.:

    I think it's a win-win. And the excuses I'm hearing of people who don't want to support it don't add up to me.


    This is hard for a lot of people in our state, and there's — it's not something that I feel joy about.


    The measure cuts cost-of-living increases for current and future retirees and raises the retirement age for those under 45. Many aren't happy about it.

  • MARIA PORTELA, Illinois:

    When you have been employed by the state for 20 years and you're counting on your benefits being X, and there is a possibility that that nest egg that you have been counting on is going to be reduced as a result of pension reform, it's a bit daunting.


    Governor Pat Quinn, a Democrat, says he will sign the bill, but leaders of public employee unions say they will sue.

    DAN MONTGOMERY, Illinois Federation of Teachers: We think this is the triumph of politics over the rule of law, and, therefore, we will be in court.


    Illinois is following in the footsteps of Rhode Island, which overhauled its pension laws in 2011 to reduce benefits. And bankrupt cities are moving to curb pension plans as well. A federal judge cleared the way yesterday for Detroit's bankruptcy to go forward.

    The city's emergency manager, Kevyn Orr, promised a — quote — "thoughtful and measured approach."

  • KEVYN ORR, Detroit Emergency Financial Manager:

    Approximately 40 percent of every dollar that the city takes in the general fund goes to paying legacy debts, pension obligations, some of which are unfunded, or debt.

    That's just not sustainable because, in the next three to four years, that number's going to go to almost 65 percent, almost two-thirds.


    The ruling could have implications elsewhere, especially California. Stockton and San Bernardino may tackle pension costs as part of their bankruptcy proceedings.

    We tackle the question now of whether these pension obligations should be targeted for cuts, and, if so, how they should be handled?

    Steven Kreisberg is the director of collective bargaining and health care policy with AFSCME, the American Federation of State, County and Municipal Employees. The union is appealing the judge's decision in Detroit. And Andrew G. Biggs is a resident scholar at the American Enterprise Institute. He served as the principal deputy commissioner of the Social Security Administration under George W. Bush.

    Welcome to you both.

    STEVEN KREISBERG, American Federation of State, County and Municipal Employees: Thank you, Judy.


    Steven Kreisberg, to you first.

    The basic question here, I think, is, should public employees who have done their time working for the government, are now retired, be subject to any kind of cuts when the city or the state they work for is facing terrible fiscal crisis and an underfunded pension fund?


    Well, the underfunding of these pension funds has nothing to do with the workers. The workers, as you have said, have served their — their city. They put in their time. They have done the services that they have been paid to provide.

    The pension is a form of deferred compensation. So, typically, when people do the service, they get paid. You know, becoming a deadbeat on a pension, as the city of Detroit is proposing to do, is not consistent with the values, I think, of just about anybody in America.

    So it's really not a case where the workers who are now retired are seeking something to which they are not entitled. The pension isn't provided as a gift. It's provided in compensation for service previously provided.


    Andrew Biggs, what about this argument that these workers are entitled to this, they put their own money into it, and it's breaking faith, in effect, not to give them what they said they were going to get?

  • ANDREW G. BIGGS, American Enterprise Institute:

    I don't think you want to take an all-or-nothing approach.

    I don't think — I think it would be irresponsible, I think it would be unfair to treat retirees in a place like Detroit or California cities the same way you would treat bondholders who are all going to get pennies back on the dollar for their investments.

    At the same time, though, the cities and states need flexibility to make changes. It shouldn't mean drastic cuts to current retirees, but it should mean the ability to change the way the benefits are earned going forward, so that you can get on top of these problems.


    And let's just take a piece of that, Steven Kreisberg.

    Basically, what he's saying is, we're not talking about completely dismantling these pensions, but we're talking about, I think you suggest, Andrew Biggs, reasonable adjustments, when the entire city or state is having a face cuts.


    Well, I think what Andrew is talking about is adjustment on a going-forward basis.

    And, in fact, in the city of Detroit, we agreed almost two years ago to such adjustments. We would earn less pension benefits going forward. But what Andrew didn't suggest and what the city of Detroit is doing and what the state of Illinois is doing is taking away benefits that have already been earned.

    We don't allow that in the private sector. We have a law called ERISA, which is Retirement Income Security Act, and it protects employees. We have no such protections in the public sector, ironically, because we thought they would never be necessary.


    What about that, that this is — this is something different that Detroit and the state of Illinois are looking at?


    Oh, sure, and this is completely different. Detroit is in bankruptcy because it cannot service its debts.

    Some of the biggest obligations it has are to retirees through pensions or to retiree health benefits. So they need some way to make their finances viable.


    And are you saying that is warranted in these cases?


    Well, the judge in the Detroit bankruptcy case said, yes, it is warranted, that these should be on the table. They are contractual obligation.

    But bankruptcy is a time when contracts be changed to make the city more financially viable going forward. Steve is right that private pensions, you're not allowed to renege on past benefits. At the same time, though, if a company goes bankrupt, there are at least some reductions made to pension benefits.

    So I think things need to again be seen not in an all-or-nothing approach, where you slash benefits, but modest adjustments and especially changes going forward, I think, are needed to get things back on a better track.


    Steven Kreisberg, why aren't then moderate adjustments in situations like what we're talking about, in these — in a city like Detroit, a state like Illinois and in other municipalities that are facing this, why isn't an adjustment that is moderate, reasonable something that employees can accept?


    Well, I think, first of all, Detroit and Illinois are two very, very different circumstances.

    Illinois is the state with the fifth highest GDP, gross domestic state product. It has very high levels of income. It is not an impoverished state at all, by any stretch of the imagination. Detroit is a troubled city. It's lost tremendous employment. It's been disproportionately affected by NAFTA and the decline of the auto industry. It's lost population.

    And they are two radically different cases. But, still, to your question, which is, moderate adjustments, and the question of moderate adjustments of course are in the eye of the beholder. The average retiree in Detroit has a pension of $19,000 a year. Now, that's the average.

    There are many with $12,000-a-year pensions. So if we're talking about moderate adjustments, are you saying $10? Are you saying $100 a month? Well, the emergency manager in Detroit is talking about 16 cents on the dollar. Is that a moderate adjustment? We say not. In the state of Illinois, it is a completely different circumstance.

    This is a state that the very same day that it voted to take away retirees' pension benefits and to cut those benefits adopted a multimillion-dollar tax cut for a multinational corporation within that state. So the state is not impoverished. The state is choosing priorities that are different than the citizens have chosen by adopting the constitutional protection of pension benefits.


    Andrew Biggs, what about that, and just what about the bigger picture here, that the blame — that if there is going to be pain, the pain should be spread, that it shouldn't be — it shouldn't be mainly or even in large part these people who have worked so hard for these cities, states…



    Well, I suspect, in the case of Detroit, it's not going to be mainly or in large part on the pensioners. It is going to be mostly on the bondholders, who are going to get hit much more.

    I mean, Steve is right when he cites here the average benefits people receive from pensions. That includes a lot of people who spent a few years in public employment and are getting a very small benefit. If you are somebody who spent a full career working for the city of Detroit, you would retire with a benefit equal of around two-thirds your final salary. You would have a 401(k), on which the city guaranteed you 8 percent returns.

    You would have your Social Security benefits on top of that. You would have people retiring at age 60 with a benefit equal to 100 percent or more of their final salary. Not many private sector workers get that. So I'm not saying the impoverished should be — should be thrown out into the street, but we — I think reasonable changes here to have some parity in terms of the treatment.


    How do you respond?


    Well, I think the facts are incorrect.

    The average wage of the current work force is about $37,000 within the AFSCME-represented bargaining units. So even at a two-thirds replacement rate, we are talking about something far below what is adequate. In addition to that — and that is the average current wage. So we have retirees who retired when their wages were maybe $23,000, $24,000 a year.

    So we're seeing a replacement rate probably closer to 50 percent or 40 percent in a lot of cases as well. So the idea that there is a lot of short-timers distorting that average I guess is a mathematical number that we can debate, but the real question here is, what are our values? Is it morally right to cut people's pensions?

    I mean, unlike corporations and banks, the retiree doesn't have the opportunity to restructure and reorganize their finances. They can't hire $800-an-hour lawyers to do that for them. So they are struggling to put food on the table, prescription medicines in their bodies to keep them alive. And these are tough choices for them now that their income is going to be cut by maybe a half or more.


    Tough to deal with in 20 seconds, but how do you respond to that?


    Well, again, it's going to depend.

    And the judge in the bankruptcy case made very clear that it is going to depend on the specifics of what the city manager comes back with in Detroit. He says, you — pensions are on the table. You're not going to get anything you necessarily ask for.

    So I think they're going to have to come back with something that tries to address the concerns Steve has, but also says, how do we make these cities viable going forward? If — Detroit is in explicit bankruptcy. Other cities around the country are facing increasing pressure.


    Andrew Biggs, Steven Kreisberg, we thank you both.


    Thank you for having me.


    Thank you.