ABILITY OF GOVERNMENTS TO MAKE BAD LONG-TERM DECISIONS
In the September 13 New York Post, columnist George Will wrote a column entitled “Pension Perils,” which made the same point I have made in several blogs: governments at all levels have made irresponsible commitments for unsustainable retirement benefits for government employees that the governments are unable to honor without severely cutting services or increasing taxes.
But I want to focus on a broader point Will made in his column:
“Human nature – the propensity to delay the unpleasant – rears its ugly head. When pension benefits come due, the people who promised them, thereby buying labor peace and winning elections, are gone.”
Will might also have pointed out that, at the time these commitments were made, there was no way to account for them on the governments’ financial statements. Even today, there is no requirement for government accounting, unlike private sector accounting, that future year costs of retirement benefits for state employees be part of current-year income statements, although, at least now, the total future cost has to be disclosed on the governments’ balance sheets.
The bigger point Will made is that it is often too easy for elected officials to make decisions that are popular today, but whose negative consequences are both too far into the future and too difficult to quantify at the time they make them. In Connecticut, Governor Rowland entered into 20-year collective bargaining agreements with state employee labor unions in 1997, an agreement which provided for future retirement benefits that were unsustainable even then and probably more unsustainable today. Moreover, both the active and retiree medical benefit designs are not in keeping with plans that reward plan participants for engaging in healthy, financially prudent behaviors.
He left office over four years ago, but the legacy of his decision is that Connecticut now has a total retirement benefit of around $40 billion obligation. The state has between 60,000 and 80,000 employees. That’s right: the state’s future retirement benefit obligations average over $500,000 per employee.
At the time that decision was made, it appeared that Rowland had gotten concessions from the union in the form of contributory pension and health plan increases. However, any agreement that has a 20-year life and that has effects for the entire lives of those who benefit from it will have costs far beyond the tenure of any elected official.
I believe this is wrong. No leader should be able to make significant financial commitments that significantly increase the burden on his or her successors so far into the future without a much more complete disclosure to stakeholders, and, ideally, stakeholder consent. Even though the state employees with whom I have worked are dedicated, high-performing people whom we want to reward and retain, excessive pension and retiree medical contributions are taxpayer commitments that will cripple the ability of future governments to fulfill vital state needs, including the ability to offer competitive pay packages for future generations of state employees.
The problem with retirement benefit obligations is that, not only are they long-term, but their size is unknowable when commitments are initially made. Medical inflation estimates change every year, and, for significant periods of time, go up. Pension obligations appear to be more predictable because the size of the benefit is known. However, salary assumptions can increase, as can life expectancy, and investment return assumptions can decrease. All of these factors can combine to make pension obligations unpredictable as well.
While lawmakers have attempted to attack fiscal irresponsibility by requiring annual spending caps or balanced budgets, they have not gone far enough. Voters should demand that lawmakers commit themselves to limiting long-term and unpredictable obligations to a small portion of the annual budget, and should require super-majorities, like 2/3 vote, to approve these obligations. The size of these obligations, although ultimately unknowable, should be subject to the best available estimate. Finally, there should be significant advance notice to citizens, as well as detailed disclosure of costs, to give them a chance to weigh in on these decisions before they are made.
September 19th, 2008 at 7:13 am
Mr. Critelli,
Good job last night at the FCPRA! It was great to hear your blogging story as well as meeting you and talking about the 1972 flood in upstate New York.
Keep up the good work…your voice and your knowledge are truly an asset to the blogosphere (especially when talking about how one politician like Rowland can make one bad ass (sorry, can I say that here?) decision which has affected the State and the taxpayers for 20 years or more!)!
Valorie Luther
Creative Concepts
October 1st, 2008 at 3:08 am
Mike-
Voters can demand but the inherent goal of any politician is to be re-elected; why else would Rowland have promised such a long term commitment. For one, Rowland’s concessions left him $100 million short on his goal. At the time, Democrat and Speaker of the House, Tom Ritter, said the Rowland’s proposal to eliminate the pension-fund payments and health-plan payments from collective bargaining would not have passed in the House; further, union lobbyists said it did not appear likely to win approval in the Republican-controlled Senate. Still, $204 million looked good back then; who knew that health costs would skyrocket? Certainly not any of the smart politicians!
Mike, we can ask for a 2/3 vote but without changing collective bargaining laws - and a host of other regulations that are responsible for this rat’s nest of “large print gives and small print takes away” - adding new regulations only complicates matters and delays real change. In your Paul Newman post, you write aloud about your next step; how about CT politics where you can re-engineer the regulatory environment that has for decades hampered the state’s ability to effect real changes?
Nice blog - I wish more CEOs were as glib as you. It’s certainly been an interesting road since those HR days…
October 1st, 2008 at 1:35 pm
Thank you for your comment, and for shedding light on what happened in 1997, and why. My reaction to your comments is as follows:
• While I am sure Governor Rowland did what he did because he thought it was politically helpful, there are many other things he could have done that would have enabled him to be reelected that would not have been as risky. I doubt that even the parts of the collective bargaining that appeared to be good for the public interest in the short run were pivotal to the public perception of Rowland for his next campaign. He had a very high popularity rating already. This was just an irresponsible action.
• I was not suggesting that Rowland unwind an existing collective bargaining agreement, but I would question whether the laws relating to collective bargaining would preclude the state from passing a law constraining an elected official from agreeing to provisions that would be irresponsible if they were in the agreement. The only national labor relations law requirement is that the state bargain in good faith; constraining an elected official from doing a 20-year agreement would not prevent him or her from fulfilling the obligation to bargain in good faith.
You make the point that it was difficult to anticipate in 1997 that health care costs would skyrocket. I could argue with that, based on what had happened previously with health care costs, and based on the growing discontent with managed care systems that were keeping health care cost increases down in the 1990’s. However, I am making a more fundamental point: because of the inherent inability to project the state of the world 20 years out from a point in time, no one should create essentially open-ended commitments or undeterminable size that far out.
I am flattered by your suggestion that I consider running for elective office, but I am not inclined to do so, for the following reasons:
• Elected officials in Connecticut, the federal government, and other states are heavily constrained in their freedom of action by pre-existing collective bargaining agreements, as well as broad-based civil service protection. One of the basic tools a leader has in effecting fundamental change is to get people into place who have the will and the ability to make that change, and to manage and improve the performance of the people in place. Connecticut, like most governmental units, has effectively severely constrained a leader’s ability to manage performance or get new, innovative thinking into place. We have many exceptionally dedicated state employees, who, given the right leadership, do respond, but our leaders and those employees have to overcome huge obstacles relative to the minority of employees who can stymie change.
• Elected officials have to spend a lot of time continually running for office and raising money. They also have a considerable portion of time spent on ceremonial activity. The amount of time available to govern gets smaller year after year. I would love to have an impact at the points in time at which elected officials agree that a problem needs to be addressed, and to engage with government officials to solve the problem. The remaining time is very inefficiently spent.
• Connecticut has a deep-seated distrust of governmental power, except at the very local level. We have no county or regional government and no special authorities available to tackle problems that are best tackled at a level above what towns can do, but below what the state can manage. We also have an unhealthy mix between private and public ownership of key assets.
• The state’s spending restrictions, which are directionally correct, are not designed to allow for multi-year investments in basic capability for the state to be competitive, whether the investments relate to health, transportation and infrastructure, education, energy policy, or environment. The state can use bonds, but it already has a $14 billion bonded indebtedness obligation, which will become increasingly constrained by requirements that the state raise revenues sufficient to cover the interest and principal repayments on this indebtedness.
I believe the solutions to our big problems are going to come from partnerships between the private and the public sectors. I also believe that the state’s elected officials have great sensitivity to the issues which matter most to the public. What they have to do is to find ways to address these issues separately from the complex work that goes on to achieve a balanced budget.
Other states have been more highly rated by organizations such as the Government Performance Project on such dimensions as strategic planning capability, the ability to supplement strategy with human resources planning, and the availability of financial and investment tools to enable a state to be accountable to its citizens. Connecticut has significant foundational work required before it would be an attractive place for anyone to govern.