Writing in Forbes, Josh Barro highlights why public sector pension reform is such an important issue — in even the deepest blue of states like California and Illinois. In Illinois, as the chart below shows, pension expenditures have risen from 6 percent of general fund spending in 2008 to a proposed 15 percent of spending in fiscal year 2013.
Illinois did tackle pension reform in 2010, but only for new employees, such as teachers. The 2010 reform divided the state’s teachers into those hired before January 1, 2011, and those hired after. The new teachers pay at the same level of contribution—9.4 percent—as those hired before 2011, but they have significantly reduced pension benefits. Barro concludes:
This means that existing employees may continue to accrue benefits on a schedule that the state has decided is unaffordable and unnecessary to recruit and retain a workforce, in many cases for decades to come. Because so few workers are earning benefits in the new, cheaper system, the reform did not put a major dent in Illinois’ pension costs. The state desperately needs a pension reform that will reduce the benefits that current employees earn.
But even if the politics align, Illinois and many other states focus on new employees for a reason: strong legal protections against reductions in pension benefits for current employees or retirees. In California, one of the most strict states, adopting a new benefit calculation is impermissible if it results in even a single participant receiving a lower benefit than they would have received under the old formula.
As states across the nation wrestle with pension reform, they must strike the right balance in navigating legal constraints, which are often either overlooked in public discussions or overly feared by those involved. States that ignore legal precedents and constitutional protections will find themselves on the losing end of costly court battles. Those that are too timid and tinker only at the edges may also suffer by allowing pension problems to fester and grow. Our new policy brief, A Legal Guide to State Pension Reform, describes these legal issues and profiles four states (California, Illinois, New Mexico, and Ohio) to provide a representative sample of the range of protections mandated under state laws.
PS — We’ve also created a single web page for all of our work on pension reform, including our guide for state legislators and a policy brief examining Rhode Island’s recent landmark reforms.