House Bill 4804 would make it easier for local governments to get out of defined benefit system
A bill that would help local governments wind down their unsustainable “defined-benefit” pension systems is causing unions to rev up their spin machine to stop it.
House Bill 4804, sponsored by Rep. Pete Lund, R-Shelby Township, would make such systems a “prohibited subject” in collective bargaining negotiations, meaning that once a city council or county board has decided to close their existing defined-benefit pension system to new employees, the decision could not be overruled by future collective bargaining agreements. The bill is pending in the House Local Government Committee.
These defined-benefit pension systems were a contributor to the mountain of liabilities that finally drove the city of Detroit to seek federal bankruptcy protection last week. Across the country, they are widely perceived as ocean liners racing toward clearly visible icebergs, with few of the policymakers at the helm doing anything meaningful to reduce speed or change course.
Instead, the tendency has been to adopt supposed reforms that actually do little or nothing to fix the core problems. In large part this is because the unions representing employees who have the biggest stake in reform refuse to acknowledge the problem. As Walter Russell Mead recently observed about reform efforts, “The public worker unions will hate this; their business model is based on the ability to use concentrated political power to extort impressive but unrealistic pension promises from pandering politicians.” So even modest reforms meet with opposition, which is what’s happening to the bill proposed by state Rep. Lund.
The legislation would facilitate the decision of locals to stop enrolling newly hired employees in these systems, instead granting them 401(k)-type “defined-contribution” retirement benefits. Rep. Lund’s chief of staff Bob Mauseth told Capital Confidential that the intention is to amend it to more explicitly clarify that this would also have the effect of allowing local citizen initiatives to require the transition.
Going local in this way may be part of a national trend. For example, in San Diego and a number of other municipalities across the country voters have been given an opportunity to choose whether their officials should be allowed to offer costly defined-benefit pension plans. While such local initiatives don’t fix the centralized state and school pensions systems that represent the largest pools of unfunded liabilities, they are still useful and positive steps.
Nevertheless, a recent MIRS News article illustrated Mead’s point about unions resisting such reforms, usually by refusing to acknowledge the real sources of the systems’ dysfunctions. In the piece, union lobbyist and former legislator Nick Ciaramitaro pulled out every excuse in the book to torpedo Rep. Lund’s idea. At first he makes unions seem friendly to reform: "We're just as angry by the abuses (sic) you are seeing to these funds because it depletes the retirement for our members who need this money to live on."
But actions speak louder than words. One example is when government unions call for early retirement incentives and pension sweeteners that blow giant holes in these systems. That’s what happened here in 2010 when the Legislature enacted a “reform” that added nearly $1 billion in of unfunded liabilities to the school employee retirement system.
Ciaramitaro also resurrects a false “transition costs” claim invented by pension bureaucrats and promoted by the MEA union last year to prevent House Republicans from adopting a transformational Senate-passed reform. If the House had gone along, the defined benefit for school employees would have been closed to new hires, placing the state on glide path to eliminating the largest source of employee “legacy costs.”
MIRS then describes this union lobbyist’s resort to a common cover story employed by state politicians when they want to give their municipal buddies more room to engage in fiscal malpractice — “local control”:
“The Lund legislation is another effort to undermine the collective bargaining process by allowing state government to micromanage local units of government, Ciaramitaro added.”
Of course, the legislation actually makes the decision to close a pension system something that local voters would be able to decide, whereas current policies prevent this. That’s because collective bargaining agreements currently take precedence over local charter and ordinance provisions, making it impossible for citizens to prohibit them, and requiring local officials to get union buy-in for any changes. That’s something unions are unlikely to grant, per Walter Russell Mead above, and historically have not granted.
Moreover, although unrealistic investment gain projections are among the prime sources of pension underfunding, unions rarely if ever acknowledge that pensions need stricter actuarial assumptions in order to prevent this. Ciaramitaro perpetuates the state of denial, saying, "We have credible retirement systems that, by law, you have to prefund."
As he knows full well, the record proves that officials have been spectacularly bad at meeting this requirement, making government pension systems anything but “credible.” For decades, politicians have instead promised unrealistic future benefits and left it to their successors to figure out how to pay for them.
Making things worse, union officials have frequently promoted costly benefit “sweeteners” that drain the systems, and defended abuses like employee benefit “spiking.”
In the end, all the abuses and can-kicking are why the only real, permanent reform for government retirement systems is to transition out of defined benefits and into 401(k)-type defined contribution plans. Lund’s bill would help locals do that. After blowing an opportunity to do the same at the state level in 2012, the House should give future taxpayers a break by finally doing it right this year.