Normative Narratives

Economic Outlook: Rethinking Public Pension Negotiation

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Bryan Jeffries, the chief of Arizona’s firefighters’ association, has been arguing to anyone who will listen that his members — and the state’s police officers, too — should volunteer to cut their own pension benefits.

Mr. Jeffries, a fourth-generation Arizonan who has been a firefighter and a city councilor, says that emergency workers have a special obligation to protect the public not only from physical peril, but also from financial ruin. Cutting pensions for firefighters and police officers would help save their woefully underfunded retirement plan and bail out towns and cities that are struggling to keep up with their mandated contributions, he says.

“It is critical for our state, for the taxpayers and for the next generation that will be here long after we are gone, that we repair this,” said Mr. Jeffries, whose group, the Professional Fire Fighters of Arizona, is not a union but works on political issues relevant to its membership. “I know intellectually that with these ballooning payments, I feel a direct conflict with the oath I took to protect the citizens.”

His unusual proposal has been a touchy subject for many of the people whose pensions would be cut, because defined benefit pension plans are viewed as compensation for doing dangerous work and a lure to recruit new public servants. And despite the growing shortfall in the statewide pension plan that has put stress on cities and towns, which must make up the difference, politicians have been nevertheless wary of attacking these benefits, for fear of alienating two powerful constituencies and to sidestep questions about why they lavished such generous pensions on them in the first place.

“When you see policemen and firemen putting their lives on the line, you want to make sure that when they retire, they receive a reasonable retirement,” said Jeff Dial, a Republican state representative from the Phoenix area who supports the firefighters’ initiative.

The growing unfunded liabilities have forced cities and towns to pick up the tab. Tucson, for instance, contributes the equivalent of 51 percent of its emergency workers’ wages, up from about 11 percent a decade ago. That means if a firefighter’s salary is $60,000, Tucson must pay about $30,000 more toward his pension. For most police officers and firefighters, pensions make up the bulk of their retirement income, because they do not collect Social Security.

Joe Clure, the president of the Phoenix Law Enforcement Association, which represents 2,400 police officers, has worked with the firefighters on their initiative, but is wary of moving too hastily. “What you worry about is it opening Pandora’s box and making all sorts of changes,” Mr. Clure said. “We are offering up our own haircut.”

Fueling the resentment are reports of public servants who retire with six-digit pensions by exploiting rules that let them cash in unused vacation and sick days. Sal DiCiccio, a Phoenix councilman who favors giving new city employees 401(k) plans, published a list of the 50 highest pensions for retired city public employees.

“The whole system has been gamed by everyone,” Mr. DiCiccio said. “I’m supportive of pensions for police and fire, but people don’t expect that” kind of abuse.

While the most egregious cases make headlines, most pensions for emergency workers are modest. The average pension for a staff member (not including those on disability or paid to survivors) is $52,600, assuming they worked 23.6 years and were 51.3 years old when they retired, according to the pension fund administrator.

What is the purpose of a public pension? It should, when functioning properly, provide income security to men and women who dedicate their lives to careers in public service. It should not be an avenue to a lavish retirement, but rather a comfortable retirement in line with the spirit of public service. Municipalities should consider a hard ceiling on public pensions, so that those who wish to “game the system” are unable to make the 6 figure pensions that generate ire towards reasonable pensions (note, $100,000 is by no means a magic threshold; it is certainly possible to imagine a future in which a 6 figure pension is perfectly reasonable).

Pensions should also be stable, and should not be subject to “haircuts” every-time funds are invested poorly or government tax revenues fall. This calls into question the pension negotiation process. Generally union leaders try to maximize the benefits their constituents receive. The problem is that often times politicians are all to happy to acquiesce, hoping to garner support by appearing to be pro-public service. Funding shortages likely will not surface for years or decades later, by that time the politician who approved the plan will be long gone.

This time inconsistency is unfortunately inherent in public contracts (for example, subsidizing private corporate operations). Therefore, all proposed public pension plans should be scrutinized by independent commissions and opened for public comment, to ensure that they are reasonable. Similarly, since taxpayer money often acts as a backstop to shortfalls in pension fund, investment decisions should be subject to scrutiny from both independent investment professionals and the general public.

There is also an element of responsibility for union negotiators. It is unfair to ask people to work under certain conditions, only to have those conditions changed after the fact. Union negotiators could try to trade some of the benefits their constituents are due to receive in exchange for iron-clad agreements that agreed upon pensions will, under no circumstances, be reduced. The problem is that such clauses often already exist in many state constitutions, so an even stronger guarantee may be difficult to craft. Perhaps by doubling-up on the issue, having it both in the Union contract as well as the state constitution, such a trade-off can be made in good faith.

As municipal bankruptcies become a more prominent issue in American politics, public pensions will naturally come under closer scrutiny. Future negotiations should bare this in mind, and try to reconcile the legitimate needs of public servants with the larger responsibilities of taxpayer dollars.

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One thought on “Economic Outlook: Rethinking Public Pension Negotiation

  1. Pingback: Economic Outlook: The Flawed Logic Behind New Bank Rules on Liquidity and Municipal Debt | Normative Narratives

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