In the span of a few hours on December 3, two Midwestern states changed America’s relationship to its public employees, perhaps irrevocably. If courts approve plans for bankruptcy in Detroit and a new law in Illinois, retirees who worked their careers as sanitation engineers and teachers, firefighters and police officers, public defenders and city clerks, under a promise of pension benefits protected by state constitutions, will not receive their promised share. “This is a bipartisan collection of politicians who essentially don’t respect democracy,” says Steve Kreisberg, director of Research and Collective Bargaining for the public-employee union AFSCME. “They authorized a violation of their own state constitutions.”
The implications for the future of public pensions are grave. Michigan and Illinois are two of just seven states with clauses in their state constitutions prohibiting cuts to public pensions. If they can nevertheless slash benefits, cities, and states with less stringent laws will leap at the chance to shed their obligations to retirees. And no collective bargaining agreement could in good faith agree to defer compensation into retirement if even constitutional guarantees on that money can be ignored. Pensions would become a thing of the past in the public sector, just as they have become in the private sector, where retirement security stands on shaky ground. The slow disappearance of public pension funds, $3 trillion pools for capital investments, would have much broader negative consequences for our economy.
The circumstances in Detroit and Illinois are different, but for the affected workers, the outcome is the same. In Detroit, the decline of manufacturing, a population exodus, and mismanagement by city leaders led to $18 billion in longterm debt (a number which has been disputed as inflated, I should add). Kevyn Orr, the emergency financial manager empowered to make fiscal changes without input from local elected officials, sought bankruptcy in federal court, in part to get around the Michigan constitution, which expressly prohibits cuts to pension benefits for retirees. Last Tuesday, Judge Steven Rhodes ruled that federal bankruptcy law pre-empts any extraordinary state protections on pensions. The judge added, “This court will not lightly or casually exercise power … to impair pensions,” but the ruling virtually guarantees cuts for 23,000 retirees and 9,000 current workers, who will have to get in line with other creditors for a partial payout from the city. With the average pension in Detroit a paltry $19,000 a year, this will likely throw retirees into poverty. State Republicans approved $450 million in public funds to build a new hockey arena in Detroit at the same time. Public workers and retirees plan to appeal the bankruptcy court ruling.
In Illinois, lawmakers chronically underpaid contributions to pension funds for decades, making a false assumption that late-1990s stock run-ups that boosted the funds would perpetuate. With a large projected deficit, workers this year negotiated a pension reform bill that passed the State senate twice. But each time, Democratic House Speaker Mike Madigan refused to bring it up for a vote. “We had a solution that was fairer to workers,” says Roberta Lynch of AFSCME Council 31 in Illinois. “There’s no reason it couldn’t have passed, except the Democrats wanted to take more money out of working people's pockets.”
The final deal, passed by a Democratic legislature and signed into law by Democratic Governor Pat Quinn, caps benefits, cuts cost-of-living increases for retirees, raises the retirement age by up to five years for younger workers, and offers an optional 401(k) plan to lure workers to leave the pension system. Workers will contribute 1 percent less to their retirement funds under the plan, in an attempt to compensate for the $100 billion in givebacks. But a retiree can expect to lose thousands of dollars a year under the new law, and workers would be barred from changing the plan through collective bargaining in the future. The average Illinois public employee pension is $32,000 a year, but 80 percent of state workers affected do not participate in Social Security, as Illinois is one of 15 states which covers their employees instead through their public pension program. So these pensions represent the sum total of Illinois public employees’ retirement income. “When you cut someone’s wages, at least that person can say, I’m not working for you,” says Ross Eisenbrey, vice president of the Economic Policy Institute. “By cutting retiree pensions, this is literally reaching into their bank account and stealing from them after the fact.”
Like Michigan, Illinois has a constitutional restriction on impairing pensions for retirees. But unlike Detroit, Illinois was not forced into pension restructuring due to bankruptcy. In fact, Illinois is a wealthy state, with the fifth-largest GDP in the nation, a low tax burden that includes a flat 5 percent income tax (residents with poverty wages pay the same percentage as millionaires), and a history of corporate tax giveaways. On the same day that pensions were cut, the state Senate also approved a multimillion-dollar tax break for the agribusiness giant Archer Daniels Midland. “They didn't even have the respect to wait a day,” says AFSCME’s Steve Kreisberg. The union is part of a coalition planning to sue over what they consider an unconstitutional theft.
Detroit and Illinois public workers aren’t the only ones facing an assault on their pensions. Cities across the country are using pension crises, or at least the perception of them, to impose cuts on workers who paid into their pensions dutifully throughout their careers. A conservative coalition called the State Policy Network, according to leaked documents revealed by The Guardian, is planning campaigns to cut or eliminate public pensions in several states. The current federal budget deal being negotiated may include cuts to federal employee pensions. As Georgetown Law professor Adam Levitin points out, states and cities are watching Detroit and Illinois closely. “If Detroit can shed its pension obligations in bankruptcy, then bankruptcy enables municipalities to slough off decades of promises made to their employees,” he wrote. Similarly, if Illinois can ignore constitutional protections on pensions, any state could do the same.
Given what happened in Detroit and Illinois, public employees have no reason to believe that any pension they obtain through collective bargaining will actually be there for them in retirement. “The level of cynicism and distrust that every public employee in this state feels right now is massive,” says AFSCME Illinois’s Roberta Lynch. Future public employee contracts will likely feature nominal wage hikes, in exchange for significantly lower future retirement security, paradoxically hurting local economies. “Cities cannot strengthen local economies by cutting the buying power of retirees,” says Jordan Marks, executive director of the National Public Pension Coalition.
The biggest consequence of disappearing pensions would be similar to what we’ve seen in the private sector, a conversion into defined-contribution, 401(k)-style plans. These plans impose 46 percent higher costs than pension plans, according to the National Institute for Retirement Security, with much of that money landing in the hands of Wall Street investment managers. And 401(k)s have contributed to a looming retirement crisis for workers, who are accruing debt faster than they generate savings, according to a report from the research firm Hello Wallet.
Not only would public employees suffer from a shift from pensions to 401(k) plans, so would the entire economy. Public pension funds, which distribute benefits to workers, hold $3 trillion in wealth, and they invest that money in everything from mortgages to infrastructure. Because public pension funds have a long time horizon, they can invest in long-term projects in ways other investors cannot. Shutting them down would radically transform what gets investment capital in America, and over time, funding would shift away from safer, long-term projects and into shorter-term investments. This increased risk through chasing short-term profits was a major cause of the financial crisis.
Because so few private-sector workers receive pensions anymore, opponents of public pensions try to divide the population, pitting taxpayers without retirement security against public workers with pensions. Despite this tactic, recent polling in Detroit and Illinois shows that people do not want public employees to lose their pensions, especially when they learn that they are modest benefits that workers spent their lives earning. But public opinion has not driven the political response. “There was incredible public resentment against AIG when they got those bonuses,” says Steve Kreisberg of AFSCME. “But they got their money, because of the sanctity of contracts, we were told. Where’s Larry Summers now talking about these pensions? The broader issue is that it depends on who the contract is with as to whether they can be broken.”
Cutting the safety net for public workers, especially those without Social Security as a fallback, will likely mean higher costs elsewhere in the form of food stamps and housing vouchers. But more than that, this represents another in a string of broken promises to middle-class workers. “To me this is a sign of moral decay,” concludes the Economic Policy Institute’s Ross Eisenbrey. “That people can accept the work of tens of thousands, promise them a certain wage, and then renege on it? I find that appalling.” As for the looming court cases on these proposed cuts, Eisenbrey quips, “Hopefully the judges recognize they have a public pension too!”
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