In a recently published opinion piece, Governing Magazine’s Girard Miller forecasts: “The only way to balance the books for some, perhaps many, state and local government pension plans will be to freeze public-employee salaries for most of this decade.”
From the full article:
The bottom line is that the cost of preserving today’s benefits levels for current employees will be a long-term freeze in salaries for many, actual pay cuts in some distressed municipalities, and skinny pay increases for the luckiest — raises that still won’t keep up with inflation. We won’t see “catch-up” pay increases for years to come.
The problem in many states is that pension benefits cannot be rolled back for incumbent employees under state constitutions or case law. This asymmetrical bias toward ever-increasing benefits with a “ratchet effect” can be reversed for newly hired employees under what are called “new benefits tiers.” But in some states it is impossible to trim prospective benefits accruals for current employees — even for their future service. In the 1930s, the classical economist John Maynard Keynes called wages “sticky downward” because of unionization and “wage illusion” during deflationary periods. The modern equivalent is public pension benefits that are now sticky downward.
This awkward and ill-conceived legal structure gives public employers very few tools to make adjustments to pension plans, which are now the primary drivers of rising governmental labor costs. The two commonly available “blunt instruments” are to raise employee contribution levels and to install new, lower benefits tiers for new hires. But when there are no new hires because the employer is shrinking its payroll to pay, the short-term savings from lower formulas for new hires are puny. And recent increases in employee contributions, although painful to the workers, are a mere drop in the bucket compared to the hefty increases in employer contributions now required to balance the books.