Governors Stray from Party Lines on Health Care and Pension Reform

Governors Stray from Party Lines on Health Care and Pension Reform

by Lou Cannon

Although politicians who challenge party orthodoxy are often putting their careers at risk, several Republican and Democratic governors are doing just that on health care and pension issues.
 
During the protracted battle waged by Republicans against President Obama's health care law, the Affordable Care Act (ACA), Michigan Gov. Rick Snyder broke ranks and accepted the legislation as the law of the land even before the Supreme Court upheld its constitutionality. His realism earned Snyder the label of "RINO" - Republican In Name Only - among GOP true believers, while his conservative positions on other issues still alienate Democrats. Snyder is presently running an uphill campaign for re-election in 2014 with an approval rating of only 37 percent. 
 
Now, it is Gov. Rick Scott of Florida, an even stauncher conservative, who is under fire from hard-core GOP partisans for reversing course and accepting a key feature of the ACA: expansion of Medicaid, the federal-state program that provides health care for the poor and disabled, to cover persons up to 138 percent above the poverty line (See Governors in the issue). Other Republican governors including Jan Brewer of Arizona, Chris Christie of New Jersey and John Kasich of Ohio also agreed to do this, but Scott's decision was the first crack in a solid Southern bloc of GOP governors opposed to expansion. 
 
The Florida governor points out that he would receive something in return from the Obama administration: a federal waiver allowing Florida to use a managed-care approach to Medicaid long advocated by Scott, a former health care executive. But this hasn't quieted Scott's critics or pacified the Republican-controlled state legislature, which has rejected Medicaid expansion in committees of both chambers. Opposition to Obamacare, as Republicans uniformly call the law, has been a touchstone of GOP orthodoxy since the law was approved in 2010 on party lines. 
 
Democrats are as dogmatic in their support of public employee unions as Republicans are in opposing federally mandated health insurance. Unions are big Democratic contributors, and Democratic legislators have shown their appreciation by resisting right-to-work laws-passed over their opposition in Michigan and Indiana - and dragging their feet on public pension reform. 
 
But state and municipal governments can no longer ignore their pension-related obligations. Unfunded pension liabilities, meaning the gap between promised retirement benefits for public employees and funding for these benefits, amount to $1.4 trillion, according to a 2012 report by the Pew Center on the States. Some estimates are considerably higher. 
 
Illinois and California are often considered the poster children for unfunded pension liabilities, although at least a dozen other states are also in serious trouble. Both California and Illinois have Democratic governors who have favored pension reform, and both have legislatures with Democratic super-majorities that have resisted meaningful changes. 
 
In California last year Gov. Jerry Brown (D) offered a far-reaching proposal for pension reform that pleased Republican legislators but was greeted coolly by the Democratic majority. But Brown persevered, as he often does, and eventually obtained a modest version of his proposal. Emulating past California governors - his father, Pat Brown, and Ronald Reagan come to mind - he then celebrated a half-a-loaf victory as if it were an entire bakery. 
 
In Illinois, Gov. Pat Quinn (D) has little to celebrate. Five state pension funds are in the red by $97 billion - $21,000 for each household in the state, which now spends nearly 20 percent of its general funds to make the annual pension payments. But apart from a recent minor reform that will save at most $1 billion a year, the Legislature has buried its head in the sand on pension issues and rebuffed Quinn's pleas for major changes. 
 
"It's time for you to legislate," Quinn said in a budget message to the Legislature earlier this month in which he pointed out that Illinois would soon be spending as much for pension liabilities as it does for education. "What are you waiting for?" 
 
The Legislature, backed by the unions, was unmoved, knowing that Quinn lacks political clout. In part that reflects a generally low opinion of Illinois voters for the office of governor. Although Quinn's administration has been scandal-free, four of seven previous governors were convicted of various crimes. 
 
Quinn has an approval rating of only 25 percent and faces a steep uphill battle for re-election next year. But Quinn is right about his state's pension plight. On Monday (March 11), the federal Securities and Exchange Commission accused the state of fraud for falsely claiming that it had been properly funding public employee retirement funds. The SEC pointed in particular to the period from 2005 to 2009, before Quinn was governor. 
 
Politically speaking, it's a different situation in California, where the 74-year-old Brown, who served two terms as governor in the 1970s, has a 57 percent approval rating and is a solid favorite to be re-elected if he runs in 2014. But neither Brown's popularity nor the modest pension fix he extracted from the Legislature, have led California out of the pension-liability woods. In fact, the Golden State has the highest teacher pension liabilities in the nation, according to a report issued in February that was funded by the Bill Gates Foundation and the Joyce Foundation. This report, "No One Benefits: How Teacher Pension Benefits are Failing Both Teachers and Taxpayers," puts California's unfunded teacher pension liabilities at $57 billion, with Illinois second at $43 billion and Ohio third at $40.7 billion. 
 
Nor is it just teacher pensions that are out of balance in California. Moody's Investors Services has proposed new evaluation standards, beginning in 2014, for pension liabilities that would in a stroke raise California's unfunded liabilities for state and local pensions from $128.3 billion to $328.6 billion. At the higher level, pension liability per household in California would be $8,600. 
 
The huge discrepancy between the two standards demonstrates how difficult it is to put a precise price tag on unfunded pension liabilities. The amount of liability depends upon many factors but most of all on the rate of return a pension fund receives from its investments. The California Public Employee's Retirement System (CalPERS), the biggest U.S. public pension fund, estimates a 7.5 percent return. The new standard proposed by Moody's would reduce the projected return to 5.5 percent. 
 
CalPERS reported in January that it posted a return of more than 13 percent in 2012, a year of strong investment gains. But the fund fell short of even the 5.5 percent figure during several years of the recent fiscal recession. Luke Martel, a pension expert with the non-partisan National Conference of State Legislators, said many state public pension funds project returns similar to CalPERS. A study by the Center for Retirement Research at Boston College issued March 11 said that these earning projections are overly optimistic. 
 
No one has an unclouded crystal ball when it comes to future earnings, but The Economist issued a warning last week that should put most states on edge: "American pension funds should be aware that, with bond yields low and equity valuations high, future investment returns are likely to be low." Try and tell that to the Illinois Legislature. 
 
Meanwhile, governors who depart from the party line, with the notable exception of Jerry Brown, are struggling politically. Snyder in Michigan and Quinn in Illinois both trail potential challengers next year in trial-heat polls. 
 
In Florida, Scott also has low approval ratings, but his apostasy on Medicaid expansion has proved a stepping-stone to more moderate positions on education and the environment, dismaying conservatives and puzzling liberals in the process. "Medicaid expansion, Obamacare, teacher bonuses - who is this guy?" State Senate Democratic leader Chris Smith asked on Twitter. 
 
Perhaps it's something in the water in the governor's mansion in Tallahassee. A previous Republican governor, Charlie Crist, moved left after he was elected and was soundly defeated in the GOP primary by Marco Rubio when he ran for the U.S. Senate in 2010. Crist, now a Democrat, said recently he is thinking about running for governor again. But if Scott continues on his present centrist course, he may have to overcome a conservative challenger in the Republican primary before he faces any Democrat.

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