Dec. 5 (Bloomberg) -- Bev Johns sat before Illinois lawmakers and asked why they hated teachers.
The 67-year-old retired special-education teacher and administrator from Jacksonville thought she had a secure pension in return for 34 years of work. She wanted the people considering reducing benefits to rescue the worst-funded U.S. state pension system to know whom they were affecting.
“You are punishing people who devoted their lives to educating children,” Johns told a committee in Springfield on Dec. 3. “You are harming individuals who have educated children, worked long hours, paid for materials out of their pocket and often fed and clothed children.”
The legislature’s vote that day to approve the $160 billion restructuring, on the same day that a federal judge ruled that bankrupt Detroit may cut retirement benefits, shows the erosion of a social compact. For generations, public employees accepted modest wages for the promise of a secure retirement. The decisions, coming after efforts to curb public-employee power in states such as Wisconsin, Indiana and Michigan, may embolden other municipalities, leave workers more vulnerable and prompt unions to new tactics of opposition.
Retirees are already seeing reduced benefits in cities such as Central Falls, Rhode Island, where a judge last year approved cutting pensions to help it emerge from insolvency. In California, San Jose Mayor Chuck Reed is leading the push for an initiative that would let cities cut benefits already promised to employees.
“It is an American value that if you work hard and you play by the rules, that the promises that have been made to you will be kept,” Randi Weingarten, the president of the American Federation of Teachers, which represents 1.5 million workers, told reporters in Washington yesterday. “And the unraveling of that social contract is an unraveling of democracy.”
States and municipalities increasingly face pressure to alter what once were considered inviolate compacts.
When Wall Street’s 2008 credit crisis sent stocks into freefall, public officials were faced with a widening gap between revenue and expenses. That forced them to put billions more in taxpayer money aside for retirees just as tumbling tax collections led to cutbacks for schools, infrastructure and other programs.
By 2012, city and county pensions that were fully funded five years earlier -- based on the market value of their assets -- had 69 percent of what they needed to pay promised benefits, according to a survey by Wilshire Associates Inc., a Santa Monica, California-based firm that tracks retirement plans.
Before Detroit’s bankruptcy, Emergency Manager Kevyn Orr proposed canceling $3.5 billion in obligations to the pension and $1.4 billion in unsecured bonds the city issued in 2005 and 2006 to fill a hole in its retirement system.
The decision by U.S. Bankruptcy Court Judge Steven Rhodes that may allow that to proceed is not likely to have an immediate impact on cities outside Michigan, said Mark N. Berman, a bankruptcy partner at Nixon Peabody LLP. That’s partly because only a handful of states have similar constitutional protections and partly because fewer than half allow cities to seek court protection from creditors, he said.
In the handful where similar protections are constitutionally enshrined, the ruling could make bankruptcy a more attractive possibility for local governments, Berman said.
“It makes the prospect of restructuring pensions in bankruptcy much more inviting,” he said.
In Illinois, lawmakers decided to limit annual cost-of-living allowances and raise the retirement age for some workers. That would produce the bulk of $160 billion of savings during the next 30 years, according to the plan.
Other states and cities are likely to go down the same path as Illinois, said Charles Craver, a labor law professor at George Washington University in Washington.
“All the power has gone from the employees back to the employer,” Craver said in a telephone interview. “I can’t remember any period when I think workers are so threatened.”
Chicago Mayor Rahm Emanuel issued a statement after the Illinois pension changes passed. He said the crisis is not truly solved “until relief is brought to Chicago and all of the other local governments across our state that are standing on the brink of a fiscal cliff because of our pension liabilities.”
Chicago and surrounding Cook County have the largest pension burdens among the 50 most indebted U.S. local governments, according to Moody’s Investors Service.
The trend raises a question about how municipalities will recruit teachers, firefighters and trash collectors if the pensions aren’t secure, said William Jones, a labor historian at the University of Wisconsin-Madison.
“These are services that are essential, that makes everybody’s quality of life better,” Jones said. “If we expect people to provide them for very little amount of compensation, we’re not going to get them.”
Union groups are vowing legal fights to overturn the Illinois legislation and the Detroit bankruptcy ruling, and only through collective action can workers meet the challenges facing them, said Steve Kreisberg, director of bargaining for the 1.6 million-member American Federation of State, County and Municipal Employees in Washington.
“I don’t think any worker can count on a social compact in any industry in the United States of America,” Kreisberg said. “When you see people using the levers of our democratic institutions and political power to essentially violate that which has always been considered to be sacrosanct, which is our constitutional foundations of government, that’s alarming.”
After Republicans took control of governor’s offices and legislatures in the 2010 elections, public-worker union rights became a flashpoint in Wisconsin and Ohio. Those states sought to require workers to contribute more toward their pensions and health-care coverage and targeted collective bargaining, which officials said would help schools and governments control costs. Indiana and Michigan passed so-called right-to-work laws, ending exclusively unionized workplaces.
The percentage of both public and private workers who are union members was 11 percent in 2012, according to the U.S Labor Department, down from 20 percent in 1983. Public employees now form the backbone of the labor movement: there were 7.3 million government workers in unions in 2012, accounting for more than half of the 14.4 million union members, data show.
Kreisberg noted that while Republicans have led the charge in the past targeting worker pensions, now Democrats supported by labor groups are taking similar actions. The Illinois House and Senate that passed the pension bill are controlled by Democrats, and Democratic Governor Pat Quinn has said he’ll sign it.
Michael Madigan, the Democratic speaker of the Illinois House, blamed the state’s predicament on retiree benefits approved in better economic times that made the pension systems “just too rich to be afforded as the state goes forward.”
Harold Schaitberger, the general president of the International Association of Fire Fighters, said workers are being unfairly blamed for the decline of Detroit and pension underfunding.
“We have to do a better job to make sure this doesn’t become a strategic way to get out from under their obligations,” Schaitberger said in a telephone interview.
Dennis Hunter, 42, a Detroit firefighter for the past 15 years, said his pay has already been cut by 10 percent, and he’s paying more for his insurance. He cuts hair on the side to make up for his lost income.
“We made a promise: you work hard, you pay into your pension, the city would pay into your pension and you’d get your retirement,” he said. “To actually sit and watch this is devastating.”
Johns, the retired Illinois educator, said she’s wading through the law to see how it will affect her monthly pension check of about $3,900. She expects she’ll have to cut spending and charitable contributions.
She didn’t become an educator for the money, she said, working first with autistic children and then running a public school for children with severe behavioral problems. Still, she’s angry that lawmakers targeted pensions.
“I don’t think any of us had any idea that they would make an effort to cut what we constitutionally were told we had,” she said.
To contact the editor responsible for this story: Stephen Merelman at firstname.lastname@example.org