PROVIDENCE, R.I. — Solutions to the public pension funding crisis go beyond numbers crunching, according to a pension expert.
"In addition to running the numbers, we need to focus more on the behavior of state politicians," Daniel DiSalvo, a senior fellow at the Manhattan Institute for Policy Research and an associate professor of political science in at City College of New York, wrote in a paper, "
DiSalvo examined the pension crisis in his book last year, Government Against Itself: Public Union Power and Its Consequences.
"I think the big takeaway, to use a Clintonian term, is 'it's the politics, stupid,'" DiSalvo said in an interview.
Despite efforts since the 2008 recession to rein in costs of public pension systems, said DiSalvo, pension politics creates huge obstacles to pension reform. They include poorly informed voters; pressure from interest groups including public-sector unions and financial advisory firms that seek to win business from pension funds; a defined-benefit model that fosters opaqueness and short-funding to free up revenue for other priorities; legal constraints and political culture.
"Whether a new style of pension politics will emerge and endure, or prove fleeting, remains to be seen," said DiSalvo.
DiSalvo praised Rhode Island, New Jersey, Utah and Virginia for such measures as increasing contribution rates; suspending or eliminating cost-of-living adjustments; forming new pension committees and even requiring convicted felons to forfeit benefits.
"In Rhode Island, Gina Raimondo's leadership was obviously essential. You need leadership willing to burn some political capital," DiSalvo said of the current governor, who as state treasurer championed a landmark bill in 2011 that overhauled benefit packages for state employees.
The state in June settled on a lawsuit challenging the law and preserved 90% of originally projected savings.
Raimondo, a former venture capitalist, wielded credibility as a crusader for pension overhaul with her financial background and status as a political outsider at the time, said DiSalvo. Timing helped her as well, he added. The Central Falls bankruptcy filing that year, in which the 19,000-population city reported an $80 million unfunded pension liability, underscored the urgency of the pension problem.
While Raimondo and New Jersey Gov. Chris Christie - whose state survived a state Supreme Court ruling in June -- were the public faces of pension overhaul in their respective states, budget pressure and the recession pushed reform onto the agendas in Utah and Virginia.
Legal constraints are also at play. For example, said DiSalvo, Illinois in 2013 raised the retirement age for younger employees and capped cost-of-living adjustments, or COLAs, for current retirees. This year, though, the state's Supreme Court invoked a constitutional provision against modifying benefits.
Retiree benefits account for roughly 24% of Illinois' current general fund expenditures, Moody's Investors Service said Monday. Retiree healthcare benefits costs, rising about 6.5% annually according to Moody's, is also intensifying the funding pressure.
"The state's ability to manage these pressures will be a primary determinant of future rating actions. Given the state's ironclad protection of benefits for current workers and retirees, Illinois requires a long-term plan to ensure it can at least comply with statutory funding requirements," said Moody's senior credit officer Ted Hampton.
Pension plans lost about $1 trillion in assets from the last recession, according to the Center for Retirement Research at Boston College. The center's Alicia Munnell estimates that Illinois, New Jersey and Connecticut could run out of assets within five years.
"I look at Connecticut and Connecticut looks terrible," said DiSalvo. "[Gov. Dannel] Malloy, for all the controversy he had with the public employees, didn't end with much. No serious reform was taken. Connecticut's in a tough situation."
According to DiSalvo, many states that pushed financial decision-making out to the future will find the going more difficult. "The simple, easy things won't be so simple the next time we have a downturn, and we know there will be one."
