How Republicans can succeed where Democrats have failed: Part II
“You can’t be a progressive and be opposed to pension reform,” says the governor-elect of Rhode Island, Gina Raimondo.
Raimondo, a lifelong Democrat and self-styled progressive, is a Harvard graduate in economics and former Rhodes scholar. She left her career as a venture capitalist to campaign for state treasurer in 2010 — after realizing the negative impact that mounting government pension obligations were having on the quality of public services.
Unfunded liabilities owed to present and future retirees grow every year in which a state’s public-sector pension plan fails to reach its assumed rate of return on investments. In Nevada, as in most states, statutory provisions allow pension administrators to assume an 8 percent annual return into perpetuity — even though that rate has only been achieved, when looking at smoothed returns, three times this century.
Decades ago, when these laws were written, it was reasonable to assume an 8 percent annual return because such returns were available through very low-risk investments, such as U.S. Treasury bonds.
Since the early 1990s, however, monetary “easing” by the Federal Reserve — its wholesale purchase of Treasury securities from banks to inject nominal capital into them — has driven down the returns of such low-risk investments.
Consequently, it’s now more the exception than the rule for public-sector pension plans to achieve 8 percent annual returns. When they do not, the unfunded liability owed to present and future retirees grows. Looking at this growing debt, actuaries tell public employers to dedicate ever-larger shares of their operating budgets to help defray this growing liability. Thus, money gets diverted from classrooms and fire protection and other functions just to keep up with mounting pension debt.
When Raimondo examined that situation, she concluded, “you can’t have well-funded and flourishing public schools and public buses and an underfunded pension system. It’s just not possible.” So she made pension reform the defining achievement of her tenure as state treasurer.
But again, Raimondo is the exception. Among Democrats — even among those who recognize that the need for reform is based in math, not politics — pension reform has remained elusive.
That’s because the types of reforms Raimondo successfully pushed through Rhode Island’s Democrat-controlled legislature — suspending cost-of-living raises for those already retired and creating a hybrid system that allows workers to opt into a 401(k)-style alternative — have been vociferously opposed by a key Democrat constituency: public-employee unions.
It’s interesting that public-employee unions nationwide have remained so adamantly opposed to pension reform, given that many public employees actually benefit from the kind of reforms sought by Raimondo. Young professionals increasingly show that they value job portability and neither want nor expect to stay in a single occupation throughout their careers.
For this rising generation, traditional pensions offer little value, since benefits don’t vest until workers have spent years on the job. Moreover, if workers change jobs, sums paid into the pension system on their behalf remain locked in the system. That makes 401(k)-style savings plans — in which the employer matches employee contributions into an individual savings account — far more attractive.
Unions, however, are notoriously the mouthpiece of older workers with established seniority — not workers who are relatively young or just entering the workforce. Raimondo’s bill, consequently, encountered fierce resistance from unions and many in her own party. During the Democratic primary this year, as Raimondo campaigned for governor, the Washington Post noted the “vicious attacks” against her by labor unions in reprisal for her actions.
Nationally, public-employee unions are the largest donors to political campaigns. According to the Center for Responsive Politics, the top spender since 1989 has been the nation’s largest teacher union, the NEA, followed by AFSCME. (ActBlue, nominally first, operates as a pass-through entity — in turn, largely funded by public-employee unions).
Nearly all of this union support goes to Democrats, making it difficult for a Democrat to oppose union policies and also remain in office. That’s why pension reform, like education reform, has enjoyed far greater success in states where Republicans dominate.
It’s also why Tuesday’s election results could spell good news for all Nevadans who — like Raimondo — want to see “flourishing public schools” and cities but know that the road to get there passes through pension reform.
Interestingly, the reform package Raimondo shepherded through deep-blue Rhode Island is nearly identical to the plan from deep-red Utah on which NPRI’s pension-reform plan for Nevada is modeled.
The imperative for pension reform in Nevada is clear. Official statistics list the system’s unfunded liability at $12.9 billion, or roughly four years’ worth of state general-fund spending. In fact, however, the problem is far larger because public-sector pensions benefit from special accounting rules that would be illegal for private-sector pension plans. Using Generally Accepted Accounting Principles, Nevada’s unfunded pension liabilities would exceed $41 billion.
If Republicans make pension reform a top priority in 2015, it will help Nevada flourish for decades to come.
Geoffrey Lawrence is director of research at the Nevada Policy Research Institute, a non-partisan, free-market think tank. For more, visit http://npri.org.
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