Pension Battles Loom Across the U.S.

A pension war is brewing, and it's likely to pit state and municipal employees against citizens who foot the bill for government pension plans with their state tax dollars.

While employees of most companies have watched their 401(k) plans, and their retirement hopes, shrivel in the bear market, public employees have been smiling. They've been promised lucrative pensions, which have increased over the years as cities and states negotiated labor contracts. Now those public employees are about to find out they are not immune from the ravages of the stock market.

The Center for Retirement Research at Boston College estimates that state pension plans have losses greater than $865 billion, a loss of nearly 40 percent in just the past year. Add those current losses to the fact that many municipalities have gotten away with under-funding those pension plans for years, and you have trouble brewing.

Now, the double-whammy of stock-market decline and lower tax revenue in this recession is causing state and local governments to take a second look at how they will fund those promises.

The options are few. Tax hikes, whether income or property or sales tax increases, will be hard to pass in this economic slowdown, as well as counterproductive. Will the voters stand for cutbacks in services, from snow removal to education funding? Or will cities ask public employees to make up the gap with a combination of benefit cutbacks or increased plan contributions?

All those choices are political dynamite, which may explain why state legislatures have been so slow to face reality.