States face hurdles in cutting worker benefits

By Joan Gralla and Jim Christie

NEW YORK/SAN FRANCISCO (Reuters) - State governors working to close yawning deficits are again eyeing a tempting target -- the billions of dollars in benefits and wage hikes that public workers won in boom times.

So far, they have achieved only limited success due to ironclad union contracts, federal and state constitutional protections and lawsuits filed by public workers and others.

The stakes are high. All 50 states have a collective $1 trillion shortfall in their retirement funds, says the Pew Center on the States in Washington.

Some states have hired private workers in certain fields, from prisons to computers. Others have merged agencies, such as Massachusetts, which twinned its mass transit and highway arms.

But another initiative that Massachusetts hopes will save $1 billion over 20 years is more challenging. The commonwealth is waiting for a court to say whether it can cut health benefits for unionized transit workers, said Michael Widmer, president of the Massachusetts Taxpayers Foundation.

"This could be the straw that breaks the back," he said.

The case in Massachusetts, where riders are already expected to endure fare hikes and service cuts for the next several years, illustrates a hurdle for other states faced with unions that enjoy considerable political clout.

Courts in states from Maryland to California have partly blocked unpaid furloughs, although some unions still prefer them to lower pay, as Hawaii's Republican Governor Linda Lingle found after the teachers' union spurned graduated pay cuts.

"They said 'Oh no, we have to treat everybody the same,'" Lingle told Reuters in late April. "I couldn't get them to accept that a furlough costs a lot more to someone at the bottom of the pay scale."

The recession has corroded public willingness to pay public workers more generously.

"It's changing because so many private sector workers are taking such a big hit on their 401(k) plans and lost their defined benefit plans," said Tom Kochan, a management professor at Massachusetts Institute of Technology's Sloan School of Management. "That's what will stand out in the kind of public irritation at the public sector at the moment."

LEGAL CHALLENGES

Most states still offer defined benefit plans that promise to pay retirees set amounts. The high costs have prompted many private companies to switch to thrift plans that pay retirees only what they and their firms contribute.

But many states can only cut benefits for new hires and cannot take away benefits for current workers or retirees.

That is partly because all but a dozen or so states let public unions negotiate contracts, said Joseph Slater, a professor at the University of Toledo College of Law.

"Once you've negotiated a contract, you're pretty much bound by the contract," he said.

Even in those mostly southern states that do not negotiate with unions, statutes can tie politicians' hands and it can be a battle to change them, experts said.

New York state got around constitutional curbs by creating five tiers of less costly pension benefits.

New York City has been allowed to add four tiers since its 1970s fiscal crisis but Mayor Michael Bloomberg now wants a fifth tier. He estimates the average city worker's benefits equal 70 percent of pay -- "and that's just something we can't afford."

Although Illinois has one of the nation's most severely underfunded pension funds, it created a second tier of less generous pension benefits for new hires only this year. But Illinois also raised the retirement age to 67 for the top benefits, which could save $44 billion over 35 years.

Michigan took a different approach, looking to save its school system $3 billion over 10 years.

A new law lets school workers retire early but restricts double-dipping, in which retirees who are rehired by the public sector collect both pensions and wages. The law also requires teachers to pay 3 percent of salary into a healthcare fund.

Deval Patrick, the Democratic governor of Massachusetts, has not persuaded lawmakers to approve major cost savings that would include raising the retirement age by two years to 67 and basing benefits on the five highest years of pay instead of three years, Widmer said.

Some states are pushing their problems out to the future.

New Jersey's Republican governor, Chris Christie, wants to delay $3 billion of pension contributions and crack down on benefits and wages for teachers, firefighters and police officers. But New Jersey public workers' unions have sued Christie.

Lee Adler, who teaches at Cornell University's School of Industrial and Labor Relations, said while some union contracts remain in force after they expire, some governors are taking advantage of exceptions.

"Rhode Island's governor, after earlier failures to lower public employee benefits, was able to effectively change them by waiting for the contract expiration," Adler said.

In April, a federal court ruled for Rhode Island's Republican governor, Donald Carcieri, who persuaded lawmakers two years ago to slice retiree health benefits after the contract ended.

(Additional reporting by Karen Pierog in Chicago; Editing by John O'Callaghan)