NEAL CONAN, HOST:
This is TALK OF THE NATION. I'm Neal Conan in Washington. Here are two really ugly words: unfunded liability. Across the country, states and cities are struggling to put enough money aside to pay for the pensions they've promised to past, present and future workers: cops, firefighters, teachers and all the rest.
In many cases, lawmakers raided pension funds to pay for day-to-day operations and avoid raising taxes. But now the bills are coming due, and present state and city officials have stark choices: raise taxes and reduce benefits, or cut funding to other government services like education and infrastructure.
We're going to focus on the scale of this crisis and later talk with one state official who bit the bullet and came up with answer. And we want to hear from you. If you get or expect to get a government pension, what's your part in the solution? Tell us your story, 800-989-8255. Email us, [email protected]. You can also join the conversation on our website. That's at npr.org. Click on TALK OF THE NATION.
Later in the program, another sweep for "Modern Family" at the Emmys on The Opinion Page this week. But first the pension crisis, and nowhere is the situation more dire than the state of Illinois, where the pension was the lowest funded of any state in the nation in fiscal year 2010. Illinois faces a funding gap of more than $75 billion.
Ray Long covers the state house for the Chicago Tribune and joins us from member station WUIS' State House Studio in Springfield, and nice to have you with us today.
RAY LONG: Good to be here, thank you.
CONAN: How bad is it?
LONG: It's a mess, it really is. It is - the debt - you know, the fancy term unfunded liability can just be kind of explained as debt. Illinois has something that would approach $93 billion in debt if they don't do anything. That could hit that mark of $93 billion by next summer.
CONAN: And they did something back in 1994, when there was another crisis.
LONG: Right, they did attempt to try to rein in the debt problem. In 1994, during an election year, one Democratic candidate, Dawn Clark Netsch, had tried to push legislation when she was a senator in Springfield, got it in place, but it didn't have enough of a hammer for them to go ahead and pay the bills.
Then the Republican candidate for governor was the incumbent, Jim Edgar, who then put in place a very long ramp-up, so long that a lot of the early years, payments would be made that would go up slowly and slowly and try to catch up.
CONAN: So pain-free in the early years, but then there's a balloon payment down the road.
LONG: Right, it's going up a billion dollars a year or more that they have to pay to pay off these bills. And when you're in a weak economy, and there isn't as much money coming in, well, you just have a real problem here. And that means in the last couple of years they've actually had to cut back on the money going to elementary and high schools.
CONAN: Another governor who's also going to prison, that Rod Blagojevich, then asked for $10 billion to help this problem out, back in, what, 2007?
LONG: 2003 actually is when it happened.
CONAN: Oh, excuse me.
LONG: Yeah, that's right. He just came into office then, and right then the interest rate seemed pretty low. He sold the idea of having a $10 billion pension bond. The legislature went along with it. They were able to sell bonds at a very low interest rate, you get it at a pretty good deal, at first it seemed like a good idea, but then they only gave about 75 to 80 percent of that money to the pension systems and used the rest for operations.
That became a problem, and then we have the economic problem across the nation. It ran smack up against that, and their investment went downhill when the markets went down, too.
CONAN: And then there were, well, some unusual arrangements with union officials.
LONG: Well, yes, in 2007, there was a law put on the books that was passed in the post-election veto session in which Governor Blagojevich was actually re-elected. The unions, one of the unions that had given half-a-million dollars, a teachers' union, the Illinois Teachers Federation, had given a half-a-million dollars to Blagojevich, half-a-million to House Democrats, $300 or $400 million or - I'm sorry, $400,000 to Senate candidates also, Democrats.
And what happened was shortly thereafter, there were a couple of windows put into legislation that passed. We're just now finding the full impact of those. There were a couple of lobbyists for that union who got into the teachers' union. We exposed that last October...
CONAN: Got into the teachers' union by teaching one day as a substitute.
LONG: One day as a substitute. It was quite a revelation. And then they've scaled that back, the lawmakers and Governor Quinn. Just yesterday we had a story in the Tribune that told of another lobbyist from the same union who got into a different pension fund. She had to pay $666,000 to get in, but she was able to buy more than 20 years of time she spent in the union.
She had only spent about seven years, not enough to get into the pension fund and state government, but the legislation gave a window that she jumped through that allowed her to count almost 30 years of time when she added up her union time and her state time. She might not have even gotten a pension after that, originally, but then she ended up with $100,000-a-year public pension, and that's what she's getting right now.
CONAN: And if she lives to what the actuarial tables say is average, 78, she could collect three mil.
LONG: That's what is showing out. That's what our calculations show. So she - if she lives more than seven years, she'll be getting more than her money back that she put in. And these are the kinds of things that have people outraged. My email was filling up after that story ran. And when you write about these different types of things, there are people out there in the general public who just can't figure out what's going on.
CONAN: So what is going to be the solution? How is Illinois going to get out from under this crushing debt?
LONG: Well, it's been tough. There have been negotiations between Democrats and Republicans. Democrats are the majority party here. With an election coming up, and of course we've realigned all of the legislative districts, so the lawmakers are running in new territory, nobody wants to take a tough vote that means cutting back on pensions before an election.
So we have the likelihood that is setting up here that in January, when there is still time with the outgoing legislature, the ones who will be lame ducks will be much freer to cast some tough votes. So we could see a rollback, a scale-back in some of the benefits in the legislature for public workers throughout the state at that time.
CONAN: But for now they're just kicking the can down the road again.
LONG: Well, that's what a lot of people are saying here. So they claim they're going to push for a solution. We'll have to see.
CONAN: Ray Long, thanks very much for your time today.
LONG: Thank you.
CONAN: Ray Long is the statehouse reporter for the Chicago Tribune, joined us from member station WUIS in Springfield. And joining us now is David Draine, a senior researcher for the Pew Center on the States. The organization recently released a report called "The Widening Gap," about state funding for pension programs. He's here with us in Studio 3A. Nice to have you on TALK OF THE NATION today.
DAVID DRAINE: Thank you, good afternoon.
CONAN: And Illinois may be worst off, but how bad is it elsewhere?
DRAINE: Well, the story continues in many other states. Ultimately, states racked up a funding gap of $757 billion for their pensions, and that's the difference between what they should have set aside to pay for these promises and the money they had on hand. And then an additional $620 billion in a funding gap for the retiree health care obligations.
CONAN: So that adds up to well over a trillion dollars.
DRAINE: $1.38 trillion, as of 2010.
CONAN: As I understand it, the funds are supposed to be 80-percent funded, and they are, on average, how much of a percentage?
DRAINE: I mean, these funds ultimately should be 100-percent funded. That's the way that these are safe against downturns and really in the best position to pay for retiree promises. And what we've found is that for pensions, these funds are about 78 percent funded, and that's below the 80-percent thresholds. You know, being above it doesn't mean you're healthy, but being below it means you're really a cause for concern.
CONAN: Let's see if we can get a caller in on the conversation. 800-989-8255. Email [email protected]. We want to hear from those of you who get or expect to get a government pension. Sherry's(ph) on the line with us from Durham, North Carolina.
SHERRY: Well, hi there.
CONAN: Hi.
SHERRY: Well, I am an attorney for a local government, the city of Durham, and we are part of the North Carolina State Retirement System. So municipal employees and state employees, as well as the universities, are all different accounts of the same retirement system.
And I want to say that it's extremely important for those of us, especially who are highly skilled, to keep people in public service for a long enough period of time that you really are effective and have an institutional memory that matters. This defined benefit system, these pensions, are extremely important. That's the reason that I remain in local government, or a very important reason.
CONAN: And David Draine, that's an important point. These are defined benefits. They say you will get X thousands of dollars per year and the following health benefits upon retirement, as opposed to the 401(k) that most of us in business get.
SHERRY: That's exactly right. Now, in North Carolina, I have to give kudos to our state treasurer, Janet Cowell, and her predecessors, who have kept our state system very healthy. But even here, where the system is almost fully funded, very close, there's a lot of pressure from Republicans to dismantle the defined benefit system.
And I want to say that I think that to have government regulation be effective, you need people who are there for the long term, who are career employees, and that it's by and large entrenched economic elites who don't want to be effectively regulated who press for these systems to be dismantled. And I think it's very important to have effective government, efficient and effective government.
CONAN: Sherry, thanks very much for the phone call. And David Draine, she's got a point, but there's also a point at which - I don't know about North Carolina - but a state say we've got to stop the bleeding.
DRAINE: Well, and I think there's three great points built into what she just said. First, there's a lot of variation how all these plans are funded. You have states like Illinois, Kentucky, Connecticut, which have major funding gaps and real problems in making their annual contributions.
And then you have states like North Carolina, Wisconsin, Washington, that are in much better shape.
CONAN: And we'll get to your two other points after we come back from a short break. If you would just stay with us, I'm Neal Conan, we're talking about the looming pension crisis in many states and many cities, too. If you get or expect to get a government pension, what's your part in the solution? Call us, 800-989-8255. Email [email protected]. It's the TALK OF THE NATION from NPR News.
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CONAN: This is TALK OF THE NATION. I'm Neal Conan. We're talking about the funding crisis in public pensions, in all some 3,400 plans in the United States, as of 2010. According to census data, the average annual pension payout across the U.S. was just under $26,000 in 2010, though that average varies widely, state by state.
The highest, Connecticut, with an average public pension payout just over $38,000 a year. Tennessee had the lowest, a bit over $14,000. The numbers vary, but the problem is nearly universal. States, and many cities and counties, owe money to their pension programs, more than a trillion dollars all sum. Meeting those obligations could mean cuts to pension benefits or local services or hikes in taxes or what public employees pay into their pension plans, or a combination of all of the above.
We want to hear from you. If you expect to get a government pension, or if you get one now, what's your part in the solution? 800-989-8255. Email [email protected]. You can also join the conversation at our website. That's at npr.org. Click on TALK OF THE NATION.
Our guest is David Draine, senior researcher with the Pew Center on the States. You had a couple of points I took away from you as we were going into the break.
DRAINE: Well, as I mentioned, first, you know, we had a caller from North Carolina, a well-funded state, and that just shows there's tremendous amount of variation how states are handling this. This is something that if states want to be disciplined about and want to manage these liabilities well, they can, and it's really policymakers in other states who chose to fail to make contributions and to raise benefits without paying for them.
Second, you know, as the caller mentioned, these are important parts of how states recruit and retain the talented public-sector workforce we depend on. And so it's very important that policymakers, as they think about pension policy, think about what's the impact on our ability to get the lawyers, the cops, the teachers that we need.
And then third, you know, we've heard a lot of conversations about different kinds of pension plans, whether it's the 401(k)-style individual retirement accounts, whether it's the traditional pension, whether it's approached as a combined aspects of both.
An what policymakers need to think about when they are considering these plans is, first, how do I share risk. Do I want the taxpayer to bear all the risk under - like in a tradition pension? Do I want the worker to bear all the risk like under an individual retirement account? Or do I want to look at some systems that share risk across the different parties?
And then second, how do people earn benefits? The traditional pension is very back-loaded. You get a lot of your retirement wealth late in career. That may really help keep talented workers within the public sector, and it may give a very - it may not put mobile workers who switch careers on a secure path to retirement.
CONAN: It's also do you break your promises to people that no longer work for you, who were promised these benefits all along and now find out they may be taken away from them? Gina Raimondo is the treasurer for the state of Rhode Island. She helped enact reforms to that state's employee pension program and joins us now on the phone from her office in Providence. Nice to have you with us today.
GINA RAIMONDO: Hi, Neal, nice to be here.
CONAN: And you're the state treasurer. How did you get people to focus on this problem?
RAIMONDO: Well, we had a six to nine-month-long public education effort, which I led. It started out with a report that my office issued, called truth in numbers, and it was 15 or 20 pages of just the facts. And we laid out the problem for people. And in Rhode Island, we had a very serious problem. Our public pension system was about 48 percent funded. So it wasn't very hard - once I started to talk about the problem and put the facts out there, it wasn't very hard to get people to focus.
CONAN: So as you then went around to talk to people about potential solutions, all of these things are painful.
RAIMONDO: No doubt about it. All of these things are painful. There - it's a set of very difficult choices. And you know, I spent a year saying to public employees that I had great sympathy for them and the fact that we had to make changes. However, it was in no one's interest to not be candid and realistic about the magnitude of the problem because at least in Rhode Island, our situation was such that it was truly unsustainable.
And you know, today we were arguing about will you get a cost-of-living increase in retirement. But if we didn't do what we did, in 10 years from now we'd be arguing about will you get a pension. So it was absolutely difficult, but we felt it was the right thing to do to attack the issue and solve it.
CONAN: Now that cost of living adjustment was suspended.
RAIMONDO: It was, that's right. So one of the pieces of the reform, which our general assembly enacted last November, was to suspend the cost of living increase. There had been a three-percent cost of living increase for retirees, and what we said to retirees was that their pensions were secure, and they were going to continue to earn what they were earning, but starting next year, until the system was healthy, they were not going to receive a raise in retirement.
CONAN: And that - we were talking about risks before. If inflation suddenly kicks in, well, that's the risk.
RAIMONDO: That is the risk. All state employees in the state of Rhode Island are covered by Social Security, and about half of our teachers are in Social Security. So they will continue to receive the Social Security cost of living increase. But, you know, absolutely, it is a sacrifice that our public employees are making, but it was a necessary one to preserve the health of the system, and also it was a necessary one to make sure that Rhode Island was able to move forward and invest in, you know, other necessary public benefits that we provide.
CONAN: Are taxes being raised?
RAIMONDO: Are taxes being raised? You know, that varies town to town, you know, property taxes. Rhode Island, I don't know if state income taxes will be raised. I can tell you that prior to the reform, about 10 percent of state tax revenue was earmarked for the pension, and if we had not reformed the system, it would have gone up in a year to about 20 percent and on its way to 25, 30 percent.
So the crowding out of other public services was very real and substantial.
CONAN: I gather you've been named in several lawsuits by unions unhappy with this.
RAIMONDO: Yes, the governor and I are currently defendants in a handful of lawsuits being brought on behalf of public labor unions.
CONAN: So those obviously (unintelligible), so we're going to have to see how these comes out. But I also wanted you to tell us a story. I gather you were at the Democratic convention in Charlotte and approached by someone from the Rhode Island delegation who said to you that you had cost him $30,000.
RAIMONDO: Well, it was a woman, and she approached me, and she said: Treasurer, you know, my husband and I are both retired teachers and we kept hearing you talk - telling us to do the math because, Neal, during the pension reform, my mantra was this is math, not politics. You know, we have to be honest about the math.
But in any event, she said, OK, let's listen to this lady, and let's do the math. And she said she and her husband sat down, and they calculated that if they each lived another 20 years, that I cost them $300,000 in their COLA, in their cost of living increase, to which I then thought she was going to say, you know, I'm not happy with you, Treasurer...
CONAN: Or you dirty rat or something.
RAIMONDO: Right, exactly, yeah, something along those lines. But in fact she said: I looked at my husband and said thank God she saved the system. It's going to blow up. So I think, you know, when people sit down and realize just in their household, their two modest pensions, it's $300,000, and then you do that math times 60,000 employees, it becomes pretty clear, in her words, the system's going to blow up.
And, you know, what she said - she actually gave me a hug and said thank you for saving the system.
CONAN: We have a caller on the line from South County in Rhode Island who may or may not have the same opinion. Jim's with us. Hello, Jim, you're on the air.
JIM: Oh, good afternoon, thanks for taking my call.
CONAN: Sure.
JIM: Let me pull over on the side of the highway. I'm a Rhode Island teacher, as my wife is, and Ms. Raimondo, with all due respect, there are many things published about some of the figures you used, some of the mortality rates you used, but I really - I first dialed the phone when the first gentleman was speaking, and you used three anecdotal, or three examples of union crooks who were stealing money.
And a point that never comes up in our local press, which is not particularly favorable to the unions, is - I'm a science guy. I was actively recruited to be a teacher with a phone call to get me to be a teacher. I wouldn't have taken the job without the COLA on the pension. I wouldn't have stayed in the job. I had other business opportunities.
And that - how does that play into the discussion of the pensions? I know that right now it's neutral for people still working, but it's the retired people that are being described as the unfunded liability. But aren't I owed that COLA if it makes $300,000 difference? I didn't save any money for retirement above the pension. I understood the COLA and how the interest rate would compound.
You got me to take the job only because of the COLA. I was retired for three years, and then it was pushed through our statehouse in a local election year (unintelligible) didn't even know what they were voting for.
CONAN: Jim, give Gina Raimondo a chance to answer.
JIM: Yes, please.
RAIMONDO: Yeah, I appreciate that, Jim. And you know, as I said, change is hard, and these weren't easy decisions, and quite frankly, I wish we didn't have to do to them. But on the flipside, if you are a teacher a year ago before the system was reformed, if you're an active teacher in the state of Rhode Island, you're paying in nine and a half percent of your pay into a pension system that the actuaries were telling us would be out of money in 20 years, and about two-thirds of that contribution was going out the door to pay for retirees.
So, you know, this system was deeply unfair to our active teachers. You know, they are - and all public employees. They're working hard every day, haven't had a raise in a long time, paying nine and a half percent of their pay into a system. And by the way, the pension - they wouldn't have had a pension there for them at the end of their tenure. The system that we reformed, you know, at the end of the day, this is all about retirement security.
And the reform that we did provides retirement security. David earlier was talking about risk. We maintain a defined benefit system. We kept a defined benefit system which keeps the risk on the taxpayer, as David explained. And then on top of the defined benefit, we put a defined contribution. So when folks retire now from the state of Rhode Island, they will have - I can say with integrity and the benefit of facts that they will have a secure retirement. And I couldn't agree with you more.
We need a retirement system that allows us to attract and retain the best and the brightest. You know, I send my kids every day to the public schools and thank God for those teachers. They deserve a secure retirement. And quite frankly, the system we had before wasn't secure, and the one that we have now I believe is.
CONAN: Jim, I doubt you're going to be happy with that.
JIM: Well, I think there is an answer to it, though, and the answer would be for the people who are already retired in our state, the pension fund still has billions of dollars, has money to continue for a few years. We had a massive tax cut for people in the upper (technical difficulty) percent in Rhode Island. It's part of the problem. There were years when the state didn't put their money into the system.
RAIMONDO: That's not true, Jim.
JIM: And - but my answer is if you're taking my retirement in order to help with the pension crisis, why doesn't every one contribute? I didn't make the mistake. I didn't steal money or make a bad deal. Why isn't every one contributing some of their pension reserves they put away over their lifetime to help the state?
CONAN: Jim...
JIM: Why are only the people in the pension system bailing out the state? We didn't do it.
CONAN: Jim, I'm afraid we're going to have to leave it there...
JIM: Yeah, yeah.
CONAN: ...because we promised Gina Raimondo that we would let her go, and she's been kind enough to stay in fact a couple minutes past the deadline she gave us, and I apologize. She's the state treasurer and has other meetings. And did you want to comment on that last bit or...
RAIMONDO: Yeah. I'm happy to. You know, again, you know, Jim makes an excellent point, and we are asking for some sacrifice. But the nature of the reform that we implemented in fact requires everyone to sacrifice. You know, we reamortized the debt which puts additional tax load on the taxpayer. We changed the pension system for everyone. You know, one thing that's very important - was very important to all of us who worked on it was we didn't target just the young or just the retired, every one gave a little bit.
The taxpayer contributed more. Retirees pitched in their COLA. Active workers gave something. And because we came together, everyone gave something, we now have a system which is stronger and is fundamentally fixed for decades to come.
DRAINE: Gina Raimondo, thank you very much for your time today.
RAIMONDO: Thank you.
CONAN: Gina Raimondo, state treasurer of Rhode Island, joined us from her office there in Providence. You're listening to TALK OF THE NATION from NPR News. And, David Draine, are solutions like that in Rhode Island likely to be some combination, some variant of these moving parts? Is that going to - is that - we're going to see that in state after state?
DRAINE: Policymakers in many states need to do three things. First, like they did in Rhode Island, they need to have a credible way of closing their funding gap, not all at once but over time, and show the fiscal discipline going forward to make sure that that bill gets paid. You know, this is the debt of the state, and they need to find a way to make good on that debt. Second, policymakers are going to need to make sure that the plans that they put in place going forward are not going to expose the state to undue risk, are not going to expose public employees to undue risk and are not going to expose taxpayers. These plans need to be secure, sustainable and affordable.
CONAN: Let's see if we can get one more caller in on the conversation. Let's go to Jean(ph). Jean is with us from Wilmington, Delaware.
JOAN: Hi. Actually, my name is Joan.
CONAN: Oh, Joan. Excuse me. I just looked at the screen wrong and got a vowel wrong. Please forgive me.
JOAN: No worries. I've been with the state of Delaware for six years now, and I'm a registered nurse. And it kind of frustrates me that a lot of individuals in the public who are not state employees don't really understand some of the sacrifices that we have indeed made. Back in 2009, our salaries were cut by 2.5 percent. And in the six years that I've been here that was eventually reinstituted, but I've only gotten 3 percent over the entire six years in the way of a cost of living.
Now, I listen to the news broadcast all the time on all of the public media and the news broadcasts in the television media, and it's very frustrating because they're saying that government workers are so highly paid. I really want folks to know that we are actually underpaid. I've been a nurse for 30 years, and I am definitely making at least 30 percent less than my colleagues, RN friends in the public forum. In fact, it's so difficult for me that I have to work a second job, and I also have a third job doing online teaching.
So we've made very painful cuts, and our new state of Delaware employees coming in are now expected to be vested for 10 years, and they have to pay more towards their pension, as we all do. We all pay toward our pension but we - they are not required to pay more to their pension and are - have to wait 10 years to be vested. So I really do believe state workers get a terrible rap, and I wish it would be known. I want the folks out there to know that we do work very, very hard, and we are not paid anything near what the federal government employees get paid and what the private sector gets paid. And I would just appreciate you having allowed me to verbalize that.
CONAN: All right. Joan, thanks very much. And, again, forgive me for messing up on your name.
JOAN: No worries. Thank you.
CONAN: Thanks very much. And that kind of a righteous anger, well, David Draine, you can understand it. These are promises people were made.
DRAINE: And as you described, they paid in every year. They paid what was asked of them, and in many cases, the policymakers chose not pay in what was asked - what was their duty. So - and furthermore, you know, these pension costs, these retirement costs are crowding out both spending on needed public services but also the ability to hire more public employees and to give raises to those already in the system. So, you know, compensation is not just your retirement benefit but is your ability to have, you know, a decent salary. And when those conflicts, it really squeezes workers.
CONAN: And as the debt mounts up, it also affects the state's credit rating, its ability to borrow money for anything else so - and, David Draine, thank you very much for your time today.
DRAINE: Thank you.
CONAN: David Draine is a senior researcher at the Pew Center on the States, an organization that recently released a report called the widening gap about the pension crisis. The Emmys coming up next on the opinion page. Stay with us. It's the TALK OF THE NATION from NPR News. Transcript provided by NPR, Copyright NPR.