A PENSION reform bill was just signed with much fanfare. But that should be the beginning, not the end, of the pension reform conversation. To that end, what is happening in Essex County may ultimately be more important. There, local leaders are finally declaring enough is enough.
As communities struggle through a difficult budget season, Essex County leaders were told of massive increases in their pension assessments. The vast majority of the increases were due to losses in the market. But other troubling details emerged - a special law for the well-connected, credit for no-show volunteer service, costly reclassification of certain employees after the fact, a top-heavy administration, and highly optimistic assumptions about how quickly the pension fund would grow.
What do the people of Essex County get in return? A pension system that had enough money for under 40 percent of its liabilities improved to a still-inadequate 68 percent by Jan. 1, 2008. (The fund then shrank by 33 percent in 2008.)
These troubling results come only as a result of investment and funding assumptions that the state pension oversight entity characterizes as “extreme.’’ After more than 20 years of paying off the unfunded pension liability, Essex County residents must feel like they have been standing still.
The unfunded liability means they will be paying into the fund in higher amounts and, most likely, for a longer period of time. One community estimates that its payments will increase by more than 40 percent. With property tax increases capped and local aid payments in decline, other services, like schools, public safety, and roads, will be cut.
Unfair practices, poor management, and unfunded benefit expansion can no longer be considered cost-free. Last year, when an unfunded increase in the cost-of-living adjustment base threatened to increase the state’s unfunded pension liability by close to $900 million, one lawmaker called it “revenue-neutral.’’ That would come as a surprise to future taxpayers footing the bill. Similarly, even as pension reform is heralded, there were still 85 bills filed this year seeking to reclassify certain employees to enhance their pensions.
The new pension reform bill is not enough. It is heartening to hear the commitment of prominent state leaders, including the governor, that this is only the first phase of reform. A special commission has been meeting to provide recommendations on reforms, but we should be wary of depending solely on this panel.
A few years back, another “blue-ribbon’’ commission examined the pension classification system. Almost all its recommendations are gathering dust. The current commission may be headed for a similar fate. It has already declared its recommendations will be cost-neutral, so anyone hoping for fiscal relief will be disappointed. Commission meetings have also been highly contentious with a lack of consensus on the most basic of items, even the scope of the commission.
Given these hesitations about the reform commission, the Legislature and the governor should be prepared to address the system’s shortcomings themselves.
One part of the solution should be to enact pay-as-you-go provisions to changes in the pension system. Right now, changes in the pension system are an opaque means to burden future taxpayers. Subtle changes in wording can result in huge increases in funding liabilities. Under pay-as-you-go, every change in the pension laws would require an appropriation of current dollars to accompany it.
More broadly, lawmakers should be asking if our public pension system is best designed for our future workforce needs. It rewards those who work more than 20 years in the public sector. That’s a commendable achievement, but one that is rare in the broader workforce, where younger workers have an average of over 10 jobs before age 42.
Right now, our system obscures costs, rewards insiders, burdens taxpayers, and fits poorly with workforce trends. As taxpayers face a myriad of new taxes and fees, all passed in seemingly record time, they also demand that lawmakers apply the same dispatch and focus on finishing the job of pension reform.
Steve Poftak is director of research at the Pioneer Institute. 
