Pension Reform Goes Nowhere in California
Despite some encouraging details in California Gov. Jerry Brown’s recently announced pension-reform proposal, there’s virtually no chance the state will seriously reform—or even seriously attempt to reform—a system creaking under the weight of about $500 billion in unfunded liabilities.
The proposal isn’t bad. It doesn’t go far enough to fix the problem even if implemented in its entirety, but it goes further than most pension reform advocates had expected from a Democratic governor who, to date, has governed as an extension of the public-employee unions that elected him to office.
But the plan probably is dead on arrival in the union-dominated Legislature. One might even argue that Brown is being cynical here—offering reasonably tough reform proposals that he knows will go nowhere. Then he can claim that he has tried to fix the problem but could not surmount the insurmountable.
On the budget, Brown has ended up like Arnold Schwarzenegger—kicking the can down the road. But he did pull out the stops for his tax-hike ideas. They are bad ideas, but he tried to get them approved. What are the chances he will try equally as hard on the pension matter given that they seem to go against his nature? As a friend of mine says, the ballpark chances are somewhere around zero.
On taxes, Brown only needed to overcome Republican opposition and win over a few legislators, but he failed. On pensions, he needs to shift the thinking of his entire party, including the two top Democratic leaders who have spent years working in the government employee union movement. As the Sacramento Bee reported, “California’s powerful labor interests objected to major parts of the plan, and the leaders of the Democratic-controlled Legislature—neither of whom attended Brown’s announcement—reacted warily.”
You can’t argue with these defenders of the current system. The unions are trying to protect lavish compensation packages for themselves and their members and their legislative allies are supporting their benefactors. “It is difficult to get a man to understand something when his salary depends on his not understanding it,” Upton Sinclair once wrote. How is Brown going to promote renewed understanding of the pension debt in the light of this reality?
Regarding specifics, Brown would require public employees, including existing employees, to begin sharing in the cost of their own retirements. Frequently, and especially in the case of public-safety workers, the taxpayer pays the employer and the employee share of the cost. Per Brown, “Given the different levels of employee contributions, the move to a contribution level of at least 50 percent will be phased in at a pace that takes into account current contribution levels, current contracts and the collective bargaining process.” The increased contributions often are made up for with salary increases, so it’s imperative—for taxpayers, any way—that the one hand doesn’t give back what the other hand takes away. I doubt unions will give an inch during the collective-bargaining process, where they tend to exert the most power.
Another key component of the Brown plan is a hybrid system that combines a defined-benefit plan public employees currently enjoy (a guaranteed amount of benefits) with the 401/k-style defined-contribution plan combined with Social Security that’s common in the private sector. Unfortunately, Brown would require a study to come up with the specifics and the devil always is in the details.
Brown would increase retirement ages, which is a great idea. Currently, public safety officials can retire at age 50 and they often do so and then begin double-dipping—drawing retirement and a new salary as they continue working. Other government employees can retire as early as 55. As Brown explained, “We have to align retirement ages with actual working years and life expectancy.” For most employees, retirement will be pushed out to age 67, which is in line with the retirement ages for those of us in the private sector.
Furthermore, Brown wants reasonable limits on pension-spiking abuses. He would require that pensions are based on the final three years’ work rather than on the absurd California-only policy of basing retirement pay on the final year. He would strip pensions from felons– something that his colleagues in the Legislature refused to even consider this year – and require that pensions be based on regular pay rather than on pay and the padded benefits often included in the formula. He would stop the scam called “airtime,” in which public employees can buy additional retirement benefits often for pennies on the dollar. He would start to reform the scandal-plagued California Public Employees Retirement System.
He would also ban the practice of granting pension increases retroactively. The courts have allowed boards of supervisors and city councils to grant retirement increases back to the first day of an employee’s service, thus granting them an unearned gift of public funds but they will not allow legislatures to reform pensions by going backwards. As always, the rules are rigged on behalf of the unions. The Brown plan would at least start to fix that.
These are all good reforms. But most of these items apply only to new hires, which does virtually nothing for the current pension debt because it doesn’t do much about current employees. As the Little Hoover Commission reported, public employees should receive all the pension benefits they’ve been granted through today and start earning pension benefits at a lower level tomorrow. But the specifics of the plan aren’t as important as the politics of the California government.
Will the governor use his political capital on behalf of this proposal? Will Democrats in the Legislature face the pension mess and agree to these reforms? Probably not and definitely no. That leaves, as always, the initiative process. It’s time for pension reforms to agree on a serious reform and start collecting signatures. Only a naïve person would put much faith on Brown’s plan becoming reality.