Teachers, states, and public pension reform

School budgets and teacher quality are intimately connected to compensation and benefits, and in recent years many states have revisited and revised the pension and health care commitments they have made to their teachers. A number of states have chronically underfunded their pension and health care obligations and the unfunded liability is putting a severe strain on state and school district budgets.  The New Jersey Supreme Court recently overturned a lower court decision and ruled that Governor Chris Christie did not have to make the state’s full annual payment into the pension system for teachers and other public sector workers as called for by the pension reform legislation he signed in 2011.  The ruling forces the Democrat-controlled legislature into another round of difficult negotiations over the state budget and how to address the large unfunded liability in the state’s pension system.

The political barriers to pension reform are high, but in a 2014 Brookings paper, I analyzed the political dynamics around pension reform nationwide and provided comparative case studies of reforms that were enacted in four states: Utah, Rhode Island, New Jersey and Illinois. (Earlier this year the Illinois Supreme Court declared that state’s 2013 pension reforms unconstitutional, so, like NJ, the state has re-opened deliberations on how to reform their pension system.)

The nature of any particular state’s public pension system challenges—as well as the political environment for reform—varies widely.  But several lessons and recommendations emerged from the four state case studies that can guide policymakers in this work.

States should make their complete actuarial payment every year

This is an obvious point but nonetheless crucial; making the actuarial payment is a necessary (if often not sufficient) condition for having a sustainable pension system. Reformers should seek to make it a legal (or even constitutional) requirement that their state make its full actuarial pension payment every year and that the state retirement board and legislature have to act if the pension fund gets severely underfunded again.  Public sector unions should be prepared—and empowered—to sue in court to force the state to make its required payment when it fails to do so. (Though even a legal requirement may be inadequate, as the NJ ruling demonstrates.)

Need a credible and visible reform champion

Given the contentious nature of pension reform, the credibility, visibility, and skill of the messenger is very important.  NJ State Senate President Stephen Sweeny (because of his history as a union leader) and RI Treasurer Gina Raimondo (because of her experience in the financial sector) were uniquely positioned and qualified to deliver the message of pension reform. While pension reforms are supported by many Republicans, having a Democrat lead the effort goes a long way towards countering the charge that reforms are merely a conservative attack on labor. 

Gather and disseminate the hard data

Would-be reformers need to start by collecting updated and unbiased information about the status of the pension fund and its projected future health.  This data and a simple explanation of what it means can bring transparency and clarity to an opaque and confusing issue.  Policymakers should request more accurate cost projections using more realistic actuarial assumptions.  These changes are likely to result in a larger unfunded liability than previously thought, creating a sense of urgency around reform.  Treasurer Raimondo’s work with the actuarial board in RI and the publication of her “Truth in Numbers” report is a great example of this.   

Communicate and educate

It can be difficult to convince the public and political leaders that pension problems that may not fully hit until many years in the future need to be addressed today, particularly when doing so requires political and financial pain. Reform advocates need to simplify complex issues for policymakers and the public alike and convey a sense of urgency, to bring immediacy to problems whose greatest impact may be far down the road.  It is important to take the issue directly to the public by investing time and resources in implementing a multi-faceted communications strategy utilizing social media, town halls, television, newspapers, radio, and mailings. 

Build a diverse coalition and a statewide advocacy campaign

Public sector unions have large memberships and extensive resources and typically deploy their extensive political influence to oppose pension reform.  In order to be successful, reformers need to build a counter-weight to the unions, a pro-reform coalition that can work to persuade policymakers and the general public of the need for pension changes. It is important, however, that the conversation not simply evolve into a business versus labor dynamic.  Ideally, the pro-reform coalition will be diverse and broad-based and include groups from across the political spectrum—not just conservative and business groups but also social services groups who are concerned about how pension costs may affect their own state spending priorities. 

Avoid turning pension reform into an ideological issue

Reform leaders in successful states emphasize the need to run a positive campaign that does not seek to blame unions or make the issue ideologically charged but rather lets the numbers drive the conversation about fiscal realities and budgetary trade-offs.  The unions may or may not endorse the final pension reform bill but it is important to give them a voice and an opportunity to participate in the process. 

Demonstrate pensions’ impact on taxes and other state spending priorities

The pension problem needs to be connected to broader state tax and budget issues.  Teachers and other public employees feel targeted by pension cuts, so reformers need to demonstrate how such cuts are part of a broader package of steps to address state budget problems that will reasonably and equitably distribute pain.

Sell the benefits of pension reform to state workers and school reformers

Most of the debate about pension reform focuses on the negative financial impact of changes on retiree benefits.  But pension changes should be framed as ultimately in the best interests of pension participants relative to the consequences of the pension plans getting to the point where they can’t meet their obligations.  In addition, recent research has demonstrated convincingly that the structure of compensation and benefits for teachers and other public employees has a major impact on labor market dynamics and that existing pension systems impair states’ ability to recruit, retain, and deploy a high quality workforce. 

Anticipate legal challenges

The U.S. constitution (along with many state constitutions) gives a high level of legal protection to contracts and this has opened the door to court challenges to pension reforms in many states.  The outcome of these cases depends on a state’s specific statutory and constitutional language and the interpretation of the courts.  As a result, significant pension reform may be delayed or even prevented unless these state and federal legal barriers are removed.  Reformers also need to be strategic in designing reforms that can survive inevitable legal challenges.