The recent elections defying the recall of Wisconsin Gov. Scott Walker and enacting pension reform in the cities of San Jose and San Diego have been cast as referenda on public employee unions. But this misses the deeper unifying theme - the necessity of bipartisan government reform to fix state and local budgetary shortfalls.
With local and state budgets under tremendous stress, we're long past the point where policymakers can sit idly by and hope for a robust economic recovery to erase annual budget deficits. The Center on Budget and Policy Priorities recently reported that 30 states have projected shortfalls totaling more than $54 billion for fiscal year 2013. Budgets across the nation are in need of structural changes to place them on a more sustainable path.
In the recent elections, voters demonstrated their willingness to stand up for structural reform and reform-oriented politicians. In Wisconsin, Gov. Walker overcame a recall vote that was launched in revenge for his controversial public employee reforms last year. Walker's defense, which the voters supported, was that the reform package gave state and local governments the ability to address looming budget deficits. True to Walker's claim, local governments and school districts have saved more than $1 billion, a significant chunk of the $3.6 billion deficit the state faced at the beginning of 2011.
California's second and third largest cities, San Jose and San Diego, enacted sweeping public pension reforms that not only make their short-term costs more manageable but also fix their systems for future generations. San Jose's pension cost had more than tripled over the past decade, growing to make up more than 20 percent of general fund spending, despite seeing the number of public employees decrease. San Diego similarly saw its pension cost grow at a double-digit rate over the past decade, far outpacing all other spending categories, including education, health and safety.
San Jose and San Diego are not peculiar in their ailments. The skyrocketing cost of public employee retirement benefits is a huge budgetary stress across the nation. Our own city of Houston has seen its pension cost increase dramatically since 2002. According to data recently presented before the City Council's Budget and Fiscal Affairs Committee, the city currently faces an unfunded liability of more than $4 billion, and contributions are set to increase by roughly 45 percent by 2017.
Persistent underfunding has led to cost increase at the very moment when it can least be tolerated.
Because of retiree benefit shortfalls, states, municipalities and school districts will soon be forced to take more drastic measures - either dramatically increasing taxes, or, more realistically, massively cutting services that are critical to society, such as public safety, roads and education.
Mayor Rahm Emanuel, a Democrat, recently made this case in Illinois. The city of Chicago faces $20 billion in unfunded liabilities and will soon spend a staggering $1.2 billion per year just on pensions, or roughly 22 percent of the city's entire budget. As Emanuel put it, "Our taxpayers cannot afford to choose between pensions and police officers, or pensions and paved streets."
Doing nothing is not an option; neither is indiscriminate cost cutting. Slashing benefits might yield short-term gains, but it solves little in the long term. Trimming pension plans back to the bone could harm governments' ability to recruit a talented work force, further hobbling economic viability. Even a modest retirement benefits package can create further budgetary stress if poorly designed or purposefully underfunded. Many states and municipalities have passed pension reforms over the past decade but continue to face steep pension cost increases because, instead of fundamentally fixing the problem, they merely placed a Band-Aid over the wound. For example, Pennsylvania has passed pension reform legislation three times since 2003 but continues to face a $30 billion unfunded liability and a triple-digit cost increase over the next four years.
Public employee benefit reform is both technically complex and politically charged. In many jurisdictions, it will take shared sacrifice across several constituencies to fully fill the hole that currently exists. However, public employee benefit reform is not intractable. Wisconsin and California proved that, as did the past and current reform efforts in places as varied as Utah, Rhode Island and Chicago. Contrary to the belief that pension reform is a "third rail," leaders who have dared to take on this difficult issue have been recently rewarded. Treasurer Gina Raimondo, the touted pension champion in Rhode Island, is now the most popular politician in her state, primarily due to her leadership on this difficult issue.
Other leaders would be well-served to heed Raimondo's mantra, "This is about math, not ideology," before they fall into a budgetary abyss.
McGee is vice president for Public Accountability Initiatives at the Laura and John Arnold Foundation.