Maryland Ain't Wisconsin and O'Malley has not Betrayed State Workers

Imagine the scene: thousands of public employees taking to the streets, crowding the state capitol, denouncing changes to their benefits. Speakers took to stage and denounced the governor, "enough is enough" they said, "leave our pensions alone" and one employee for the Department of Social Services declared "I am in an abusive relationship, with the state..."

Is this a day in the life in Wisconsin? No, the scene I just described was of Annapolis, Maryland on March 14th. Thousands of state and county employees took to the streets to protest proposed changes to the state pension and retiree health plans, and many more came to denounce Governor Martin O'Malley's proposal to fund K-12 education at last year's level.

Maryland faces a $1.4 billion dollar budget shortfall this year and after calling a special session in 2007 and signing a significant tax increase into law, O'Malley vowed to balance the fiscal year 2012 budget without raising taxes again. During his tenure as governor, O'Malley has cumulatively cut nearly $7 billion from General Fund spending. Those cuts, coupled with tax increases, and federal aid allowed the state to balance its budget every year. But the federal aid is gone and a slow economy continues to hit tax revenue.

That said, O'Malley increased K-12 education funding by over $1 billion between FY 2007 and FY 2012 - increasing funding every year except for this year. For FY 2012 O'Malley has proposed holding funding at the FY 2011 level of $5.7 billion.

With regard to pensions and retiree health, O'Malley has publicly stated that he is committed to protecting the state's defined benefit retirement system. To that end, he proposed a series of reforms that would stabilize the pension and retiree health system - systems that currently have a combined unfunded liability of roughly $34 billion.

Under the O'Malley proposal:

Current retirees will see no change in their benefits.

For current employees and teacher, a one-time choice is offered for all service beginning in FY 2012:

1. Continue to pay 5% of salary towards retirement, benefits earned prior to FY 2012 will be unchanged, but there will be a reduction to benefits earned for FY 2012 and beyond; or,
2. Increase their contribution to retirement from 5% to 7% of pay and continue to earn benefits at the current level.

All employees hired in FY 2012 will be automatically required to to take the 7% contribution requirement. It will also take 10 years, instead of the current 5, to be vested and early retirement will increase from the current 55 to 60. Finally, retirement benefits will be calculated based on the employees highest five years of salary rather than the highest three years.

As for reforms to employee health benefits, the most significant change would be a gradual shift of employees from a state prescription drug benefit to the Medicare Part D drug benefit.

So to recap - O'Malley's proposal would achieve 80% funding of the state pension system by 2023 (the actuarially recommended level) and have no impact on current retirees and no impact on benefits already earned by active or former employees/teachers. Facing a $1.4 billion shortfall, O'Malley has maintained funding for K-12 education and introduced modest reforms to the pension system meant to protect it's long term health. And though state employees (myself included) have faced multiple furlough days, there have been no layoffs.

In Wisconsin, by means of comparison, the state faces a $136 million budget shortfall for FY 2011. The Legislative Fiscal Bureau estimates that "more than half" of the shortfall stems from a series of three tax cut measures signed into law by Governor Scott Walker after being passed in a special session of the legislature that he called. Governor Walker's budget includes a $900 million cut to K-12 education over two years, Walker has also proposed that state workers begin paying 5.8% of their salary into their pansions (up from zero) and that their contribution to their insurance premiums double from 6.2% to 12.6%. He recently signed legislation that strips from state workers their collective bargaining rights for health benefits, and limits their annual salary increases. He had threatened to layoff 1,500 state employees. To be sure, even after the increases in pension and premium contributions, Wisconsin public employees will contribute much less toward their benefits than most private sector employees and whereas Wisconsin public employees would still retain some collective bargaining rights Maryland public employees have very limited collective bargaining rights. Though some Maryland employees are represented by unions and have the right to bargain, there is no binding arbitration in the state and no right to strike.

But when comparing the real impact on workers, their wages, and their current rights the changes that have been proposed in Maryland pale in comparison to what is happening in Wisconsin. Governor O'Malley has proposed modest changes in an effort to protect the state pension system, protesting those changes seems misguided and counterproductive.

The Problem is Collective Cowardice, not Collective Bargaining

In a report issued last year, the Pew center determined that there was a $1 trillion gap "at the end of fiscal year 2008 between the $2.35 trillion states had set aside to pay for employees’ retirement benefits and the $3.35 trillion price tag of those promises." Since then that gap has only grown and is estimated to now be closer to $2 trillion.

The report continued "In 2000, just over half the states had fully funded pension systems. By 2006, that number had shrunk to six states. By 2008, only four—Florida, New York, Washington and Wisconsin—could make that claim. In eight states—Connecticut, Illinois, Kansas, Kentucky, Massachusetts, Oklahoma, Rhode Island and West Virginia—more than one-third of the total pension liability was unfunded. Two states—Illinois and Kansas—had less than 60 percent of the necessary assets on hand."

In Connecticut, the state government has $9.35 billion in assets in its pension fund, but $21.1 billion in obligations. In Maryland, the state pension and retiree health health benefit system is underfunded to the tune of $35 billion. In New Jersey, the state's pensions are underfunded to the tune of $54 billion.

The impact of these pension obligations have come to head recently in Wisconsin where Governor Scott Walker has introduced legislation to increase state employee contributions to their health care and pension programs. In Maryland, Governor O'Malley has proposed changes to the state's pension system as well - essentially telling state employees that they can either pay more to receive current benefit levels, or pay current amounts and receive less. New employees would simply face greater costs to fund their beneifits, and receive less than under the current system.

Indiana, New Jersey, New York and myriad other states are attempting to deal with these unfunded obligations - but in Wisconsin, Governor Walker has gone a step farther. In addition proposing that public employees contribute more toward their benefits, he is proposing to eliminate the right of public employees to engage in collective bargaining for non-wage benefits. He argues that this must be done to allow the state and local governments restore fiscal order.

The idea that the budget troubles in states like WI, NJ, NY and CA (or, well, everywhere) are the result of public sector unions and collective bargaining is ridiculous. Certainly states face tremendous deficits owing to the legacy costs of retiree pensions and health - but the fault does not lie with the unions, it rest solely with the governments that made the deals then chose to not fund them (or that chose to invest them, ignoring the risks of a down market).

States agreed to the retiree benefits, wages, and health benefits, states agreed to wage increases, states made promises to their workers and then chose to not fund those promises. Doing so during tight times would have meant tax increases, program cuts, or both. Instead state goverments, governors and legislators, promised the moon and stars to everyone - great benefits for state employees, low taxes and public services for the taxpayers.

Now, the bills are coming due. States are facing the harsh reality of their unfunded obligations and realizing they have run out of options. And the magnitude of the problem has grown to the point where there are no easy solutions. Increasing taxes to close the gaps would require significant tax increases, cutting programs or benefits would require dramatic cuts - the only real option is a combination of tax increases and spending cuts. Promised benefits will need to be curtailed, Americans who have enjoyed the services provided by government will now have to start paying off the debt incurred by habitually underfunding them.

But even if pensions and benefits are cut, even if taxes need to be raised - curtailing or eliminating collective bargaining rights accomplishes little. We have not come to this point because unions demanded too much, we're here because policymakers made promises they never paid for.

At the federal level we see the same issue with the looming funding crises for Social Security and Medicare, the problems stem from promises made that we chose to not fund. The Social Security unfunded liability, in other words, what government has promised compared to what we have committed to fund, is projected to be $17.5 trillion. For Medicare, the unfunded obligation is greater than $80 trillion. Social Security will begin to pay out in benefits more than it takes in this year. Medicare faces a solvency crisis in about 6 years.
 
The unfunded liabilities of Social Security and Medicare are no more the fault of workers and retirees than are the unfunded state pensions - they simply reflect promises made that have not been funded. It's a situation not unlike the decision to authorize wars in Iraq and Afghanistan at an annual cost of $200 billion while simultaneously reducing government revenue via tax reductions.
 
States face $2 trillion in unfunded obligations, the federal government tens of trillions, our current federal deficit is $1.6 trillion in a $3.7 trillion budget, our accumulated national debt stands at $14 trillion, and our interest payments on that debt are set to soar.
 
We cannot tax our way out of debt, we cannot cut our way out of debt, we cannot grow our way out of debt - the magnitude of the problem demands a combination of painful cuts and tax increases in the near term, coupled with reforms and ultimately reductions in entitlement programs (or, at the state level, retiree benefits) long term. Had we been more proactive and begun to deal with these problems sooner, it would have been less painful. Had we promised less, or actually funded the promises we made we would not be where we are... but we didn't, and we are.

How likely are we to make the tough decisions that are now required? At the federal level a very reasonable proposal from the National Commission on Fiscal Responsibility has already been rejected by Congress and the President that created the commission. Instead, Congress and the President agreed to extend the Bush era tax rates at a cost of $550 billion.

In the states, Republican governors like Chris Christie in New Jersey or Scott Walker in Wisconsin speak of fiscal discipline and budget cuts, all while cutting taxes and decreasing revenue. In Illinois, a Democratic legislature and governor raised income taxes by 66% to close a budget gap, but on the spending side merely restricted spending growth to 2% - a rate greater than the inflation rate. My award for political courage and common sense goes to Connecticut governor Daniel Malloy who has proposed solving his state's budget crisis with $1.8 billion in spending cuts and $1.5 billion in tax increases - neither Democrats nor Republicans are happy with his plan, which means it must be a pretty responsible and balanced plan. In Maryland, Governor O'Malley signed tax increases into law in 2007 and since then has submitted budget cuts totaling $6.6 billion, and has begun pension reform - other states need to follow the lead of Malloy and O'Malley.
 
In the end, the problem is not collective bargaining, the problem is a collective cowardice on the part of those who made easy promises and avoided tough decisions - and ultimately the collective willingness of the American public to believe that no bill would ever come due for all that we've enjoyed.