Albert Einstein once said we cannot solve our problems with the same level of thinking that created them. Unfortunately, when it comes to the nation’s struggling public pensions, now more than $1 trillion in debt, that’s exactly what’s been happening. For years, state and local policymakers have been trying to keep their heads above water, while ignoring the coming pension debt tsunami.
That is until recently.
Over the past year, three states have made the tough decision to tackle pension reform head on. These states—Arizona, Pennsylvania and Michigan—are vastly different in size, budgetary resources, and political makeup. The common denominator has been their commitment to safeguarding their public employees’ retirement systems by enacting reforms that are fiscally responsible. These states not only rose to the challenge of pension reform, but they each saw their efforts through to success. While the adopted reforms differ between these three states, the principles upon which they were built were the same.
As a former Utah senator who chaired the committee overseeing Utah’s public employee retirement systems, I’ve personally experienced the sickening feeling of seeing the approaching wave of compounding pension debt, knowing there was no possible way of riding it out.
In 2010, Utah legislators were hit with the harsh reality that Utah taxpayers would have to dedicate as much as 10% of the state’s general fund for more than two decades to pay for the 2008 investment losses in our public pension funds. That’s when my legislative colleagues and I took matters into our hands and created a plan to shore up Utah’s public pension system and cap pension related liabilities going forward. It was a plan that worked for our state and our unique situation. Legislators in Arizona, Pennsylvania and Michigan followed a similar road map.
And this is key. Every government has unique fiscal challenges requiring tailor-made solutions designed around the specific predicaments and financial resources of each state or local jurisdiction. There is no single pension reform solution that will work everywhere. But by rolling up our shirtsleeves and making a commitment to tackle the situation, pension reform is achievable.
For example, Michigan lawmakers passed, and Governor Snyder signed into law, one of the most comprehensive pension reforms enacted by any state to-date. At the time of the bill’s passage, the Michigan Public School Employee Retirement System was struggling with $29 billion in debt, while being only 60% funded. Retirement costs consumed 36% of Michigan’s school payroll. The challenge for lawmakers was how to go about reforming this system to cap the spiraling debt, while ensuring that teachers and retirees receive every penny they were promised.
Their solution was to change the pension structure for future teachers from a structurally rigid defined benefit system to a plan that is flexible, modern and portable, providing new teachers with more retirement options without short-changing their pension savings. Further, the reform does not cut a dollar of pension benefits from any current teacher or retiree.
The reform also protects current and future generations of taxpayers by employing a first-in-the-nation mechanism that will prevent further accumulation of unlimited pension debt—a move that will pay long-term dividends for Michigan residents.
In Pennsylvania, with more than $74 billion in pension debt, lawmakers tackled both the state’s public employee and teacher pension systems, giving future public employees a choice between three retirement savings options, including two defined benefit/defined contribution hybrid retirement plans and a defined contribution retirement plan. Not only is the reform expected to cap much of the state’s pension debt going forward, it should save the state more than $1 billion and reduce existing unfunded pension liabilities by up to $4 billion.
And in Arizona, lawmakers built upon their 2016 pension reform successes (Arizona lead the nation last year with comprehensive public safety employee reform) by restructuring the state’s corrections officers’ retirement plan. At only 53% funding and an accumulated $1.4 billion debt, the long-term solvency of the plan (and workers’ and retirees’ futures) was threatened. The reform, which enrolls new employees in a modern retirement plan with 100 percent vesting within three years of service and more retirement planning choices, will help ensure the long-term solvency of the pension system while saving the state billions of dollars.
The moral of the story is that there’s more than one way to achieve meaningful pension reform. A quick study of Arizona, Pennsylvania and Michigan shows it comes in many shapes and sizes. Policymakers around the nation should take note of what these three states have been able to achieve simply by changing their thinking, determining solutions that will work for their unique challenges, and seizing the opportunity.