The Golden Goose in the Crosshairs: The Transition to Defined Contribution Pension Plans in the Public Sector: Unintended Consequences

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INTRODUCTION

State, county, and local governments are confronting a myriad of economic issues, based on shrinking tax revenues combined with increased expenditures. Of these, defined benefit (DB) pension plans are perhaps one of the most serious issues facing many public employers. The city of Philadelphia, for example, is facing a "quiet crisis" because its employee pension plan has more claimants (recipients) than current workers, leading to an unfunded liability of $3.9 billion in 2007 (Barrett & Greene, 2008). The City of San Diego, meanwhile, has been dubbed "Enron by the Sea" by the Wall Street Journal because of its $1.2 billion pension deficit (Broder, 2004). Data from the Bureau of Labor Statistics, National Compensation Survey (2011) also shows that from 2004 to 2010, total employee compensation for public sector employers increased from $1.86 (or 7.2% of total wages) to $2.75 (or 9.1% of total hourly wages), an increase of approximately 68%, while other research has determined that state and local employer debt has increased from $1.2 trillion to approximately $2.3 trillion from 2004 to 2009 (Edwards, 2010) where pensions are often the reported cause. Public sector companies are not exempt from this issue: United Airlines filed bankruptcy because of its $10 billion pension fund obligations (Martin & Rafsky, 2007), while pension fund deficits among Fortune 500 companies were estimated in 2005 at $145 billion (Clark & Monk, 2006).

In an effort to deal with these long-term pension obligations and insurmountable debt load, many public sector employers are transitioning from a defined benefit (DB) to defined contribution (DC) pension plan (Munnell, Aubry & Quinby, 2010). For example, data from the Michigan Employee Retirement System (MERS), a statewide pension management organization that manages over 1,000 retirement plans for public sector organizations in the state of Michigan, reported from the period 20002010 close to a 100% (5.6% versus 10.9% respectively) increase in DC plans, and subsequent reductions in the number of DB pension plans offered by employers (MERS, 2009). The U.S. Department of Labor (2010) also reports a shift to DC plans by public employers. In 1990, 91% of public sector pensions were defined benefit. In 2007, 83% of public sector employers had such programs, suggesting that the "golden goose" pension is now in the "crosshairs" for elimination in many municipalities.

This transition may not be easy for a variety of reasons. First, public pension plans are complex socioeconomic institutions that include pension sponsors, taxpayers, employers, and employees. These pension plans also raise a myriad of financial issues that include the source of funding, the use of pension funds, and the funding levels of public pensions (Schneider, 2005). Next, pension plans are also often politically charged, where employers, public taxpayers, and other stakeholders, including future and existing pension holders, have a keen interest in this issue, combined with the fact that many pension plans have unique characteristics in the context of benefit structure and governance which are regulated by state constitutions, laws, and administrative rules. Finally, when combined with the fact that pensions are a mandatory subject of bargaining, requiring the pension issue to be negotiated in good faith during collective bargaining proceedings (Block, 2006), unions and their constituents may have strong positions and objections to any changes in the status quo. Therefore, these issues may combine into a "perfect storm," making the transition to the DC plan difficult.

Of interest, however, is that very little, if any, research has been directed toward the impact that the shift to a DC pension plan will have on public sector labor relations and human resource management. In an effort to correct this deficiency in the literature, this article explores this issue by concentrating on public employees who operate under specific forms of legislation that govern public sector labor relations and are exempt from the National Labor Relations Act which governs unions in the private sector. …