Financially troubled cities like Chicago and Detroit serve as a reminder that out-of-control pension costs are not just a state government problem. The Atlanta Journal-Constitution’s recent reporting on metro Atlanta municipal and school system pension plans should be a call to action to address these fiscal challenges before they reach a crisis.
Mismanagement of public pensions has a human impact. In a worst-case scenario like Detroit, the city’s bankruptcy threatens the benefits of retired city employees. While there is an insurance system in place for employees of private firms declaring bankruptcy, no such system exists for public pensions.
Current government employees are also impacted by the rising burden of pension costs. As the cost of employee benefits has increased nationally, local government salaries have remained flat.
Other spending, such as education, is also crowded out. In the Atlanta Public Schools, for example, the AJC reports that pension payments amount to “roughly $1,000 per student that can’t go toward books, computers or other needs.”
Local governments should focus on three priorities: protecting retirees, keeping promises to current employees, and providing sustainable benefits to new employees.
The first step is to stop the bleeding. The private sector stopped offering “defined-benefit” pension plans many years ago. Local governments should follow the lead of private businesses and many state governments by converting to 401(k)-style defined-contribution plans for all new employees. These plans provide flexibility and portability for employees, financial predictability for local governments and limited opportunities for the political cronyism that has plagued traditional defined-benefit plans.
Local governments should also address another looming fiscal challenge: retiree health care. School systems and other government employers should question whether retiree health care benefits are really necessary to attract good employees. Higher upfront salaries may well be more important, plus many employees will be eligible for subsidized health care plans next year. At the very least, governments should make sure their health care plans are not more lavish than comparable private-sector plans.
Local governments should next give existing employees an option to join either a defined-contribution plan or a “hybrid” plan that offers the benefits of both types of retirement plans. A recent study found that in Florida, which offers a choice of plans, a quarter to a third of new teachers voluntarily chose defined-contribution plans.
The pension mess took many years to create and will take many years to fix, but the solutions become more difficult the longer tough decisions are put off. In Chicago, Mayor Rahm Emanuel recently remarked, “Doing nothing will force me to choose between either letting our pension funds go bankrupt, or raising the City’s property taxes by 150 percent.” Let’s not let metro Atlanta governments fall into a similar trap.
Kelly McCutchen is president of the Georgia Public Policy Foundation.