A Big War in a Little State

With over $2.7 trillion of unfunded state and municipal pensions staring local legislators in the face, as states have to slash infrastructure, education and uniformed services just to pay retirees, something’s gotta give! Some say the notion of a purely seniority-based “tenure” system (originally created at the university level to insure unbridled free speech among controversial academics) for public primary and secondary schools is one of the biggest parts of the problem. It keeps highly compensated bad teachers (with the highest pensions) in place at the expense of more qualified junior instructors.

A June 10^th California lower court ruling has awakened constituents and unions alike that the situation is no longer tolerable: “In June, Superior Court Judge Rolf M. Treu ruled in Vergara v. State of California that five CaliforniaEducation Code provisions violated the state’s constitution by depriving some of the state’s 6.2 million students of a quality education… The filing came in a lawsuit by nine students who contended that the last hired-first fired layoff rules saddled schools — especially those in poor and minority neighborhoods — with bad teachers who effectively couldn’t be fired.” SanFrancisco.CBS.local.com, September 3^rd. The teachers’ union is appealing.

Further, political concessions to such state and municipal pension benefits (not just to teachers!) by past incumbents – mostly Democrats but with enough Republicans to make it interesting – to secure powerful public union campaign contributions and voting support added the death blow to a lot of state and local solvency, the tipping point that has led to the numerous bankruptcies of municipalities from Stockton to Detroit. Absent a substantial abrogation of local support for essential services, there is no way that states and municipalities can actually pay these benefits. Illinois has grappled with the issue, and the recent debate between GOP gubernatorial candidate Neel Kashkari and Democrat-but-fiscally-conservative incumbent, Jerry Brown, highlighted this harsh reality in California.

But in the tiniest state in the land, Rhode Island, this mega battle rages in their own gubernatorial primary contest. What is strange is that in this rather traditionally Democratic state (with more than its fair share of Republican governors!), the candidates with the differing perspectives are all Dems. Unions sense betrayal, pushing to elect a liberal candidate, Angel Taveras, the mayor of Providence and a Dominican, who will maintain the status quo over a candidate, state treasurer Gina M. Raimondo, who “marshaled the state’s Democratic political establishment to increase the retirement age, cut benefits and suspend annual cost-of-living adjustments for state employees until the finances of the underfunded system improved. The move was meant to save $4 billion over two decades and slow state property tax increases. The public approved. But her former allies — the state’s public employee unions — were infuriated, and the matter is being contested in court.” New York Times, September 7^th.

But as Taveras, whose track record in supporting unions is itself checkered, is not faring well in the polls, the unions are hedging their bets: “He is trying to leverage his support in the state’s growing Latino community and its urban centers, but he trails in fund-raising and has slipped in the polls… And the teachers’ unions are still seething at Mr. Taveras, 44, for having fired (then rehired) nearly all of Providence’s teachers in 2011 in an effort to patch a gaping budget deficit.

“As a result, the teachers are backing a third candidate, H. Claiborne Pell, 32, scion of an old Yankee family, who goes by Clay. The grandson of a six-term Rhode Island senator of the same name [think “Pell” grants] and the husband of Michelle Kwan, the figure skater, he has served in the Coast Guard and spent six months in the Obama administration as a deputy assistant secretary at the Department of Education. Mr. Pell has poured $3 million of his money into the race.

“‘It’s a high-risk strategy by the teachers’ union,’ said Wendy Schiller, a political scientist at Brown University. ‘If Pell loses and comes in third, that diminishes their bargaining power.’” NY Times. This in-fighting may push the Republicans back to the fore, but this most definitely is a result that the teacher’s union would not want to see. “‘The Democratic Party is really not cohesive on this race,’ [GOP candidate Ken Block] said, campaigning at [a] Greek festival. ‘And I seriously doubt that the winner of the Democratic primary can pull all those constituencies together. A lot of what are normally Democratic votes will be coming my way, so we like the way the race is shaping up.’” NY Times.

Local politics aside, it is increasingly obvious that dealing with these unsustainable public retiree benefits can no longer be a partisan issue. Outside of union membership, public support for such union retiree largesse is dwindling fast, notwithstanding the cry of unions that they worked for lower pay (is that still the case today?) precisely for the security that these retirement benefits represent. They argue further that these benefits are vested and cannot be taken away.

But defined benefit plans – those typical in public unions that set  fixed annual number (usually with cost-of-living escalators) based on the highest earnings years regardless of funding – have all but disappeared in the private sector, where defined contribution plans (you get what the fund actually has when you retire with no certainty of benefits) now dominate.

That we cannot afford to pay, simply do not have the money, appears to be a fact that angry and fearful unions simply refuse to deal with. But where we are going, if we do not want to keep bankrupting local governments, is rather clear. But if we don’t change course, we are going to have to add a new chapter to federal bankruptcy laws to apply to states… the Bankruptcy Code currently only allows “municipal” bankruptcy. And public sentiment is anything but ambiguous in this area.

 I’m Peter Dekom, and change is often difficult to live with, but it imposes its reality sooner or later.