With California facing a structural $19 billion budget hole, Governor Arnold Schwarzenegger has argued that the state will need to tap its general fund for billions to prop up faltering public-employee pension funds.
With California facing a structural $19 billion budget hole, Governor Arnold Schwarzenegger has argued that the state will need to tap its general fund for billions to prop up faltering public-employee pension funds. The funds face massive losses because of a down economy, increased pension obligations, and some badly leveraged investments. Some critics charge that the governor is merely trying to generate pressure for pension reform, but in any case it’s clear that generous pension plans for public employees have drained the budgets of government services—especially the kinds dear to the hearts of Democrats. Yet most Democratic leaders refuse to acknowledge this reality, preferring instead to rail against the horrors of budget-slashing Republican proposals.
A recent Stanford University report pegs the state’s unfunded pension liability—or debt—at a scary $500 billion. The situation has become particularly dire at the local level. As the Los Angeles Times reported in August: “The cost of retirement benefits for Los Angeles city employees will grow by $800 million over the next five years, dramatically eroding the amount of money available for public services to taxpayers. . . . By 2015, nearly 20% of the city’s general fund budget is expected to go toward the retirement costs of police officers and firefighters, who now have an average retirement age of 51. The figure was 8% last year. Once civilian employees are factored in, nearly a third of the city’s general fund could be consumed by retirement costs by 2015.”
Cities and counties throughout California are wrestling with the pension problem. In a case that could have statewide implications, the Republican-dominated Orange County Board of Supervisors is pursuing a lawsuit that challenges the retroactive portion of a previous board’s 50-percent pension hike for deputy sheriffs. The board has required an increased contribution from county retirees for their health care—a non-vested benefit, which allowed the changes to pass court muster. Shasta County has also approved some viable pension reforms. But these are conservative counties. In California’s biggest cities—which will be hit with the first waves of the pension tsunami—reformers will need to come, at least in part, from the ranks of the Left.
Fortunately, at least a few self-styled “progressive” urban Democrats are breaking with the party leadership’s union-controlled ranks to offer serious pension-reform proposals. Given California’s political dynamics, the emergence of left-leaning pension reformers is remarkable. Not surprisingly, they’re being treated as traitors by the state’s traditional liberals and subjected to the kind of union bullying usually reserved for conservatives and Republicans.
Governor Schwarzenegger’s chief pension adviser, David Crane, is a prominent progressive who is making the pension-reform case on a statewide level. Marcia Fritz, president of the California Foundation for Fiscal Responsibility and creator of the CalPERS $100,000 pension club database—which reveals the names of over 9,000 retired state workers receiving six-figure pensions—is a Democrat. But the center of the newest pension-reform debate is San Francisco, where Public Defender Jeff Adachi—a Democrat with impeccable progressive credentials—recently sponsored a ballot initiative, the Sustainable City Employee Benefits Reform Act, which would force city employees to pay a larger share of their retirement costs. As Randy Shaw wrote in July for the alternative online daily, Beyond Chron: “We are about to embark on a campaign that could bitterly divide progressives, while empowering San Francisco’s moderate and conservative forces.” In late August, Judge Harold Kahn approved the initiative, Proposition B, for the November ballot despite the efforts of the city’s muscular public-employee unions to kill it.
The measure grew out of years of escalating public-employee pension costs in the city. In 2002, voters approved the Proposition H amendment to the city charter, which increased pension benefits for police officers and firefighters. The proposition did require that “any year in which, based upon the retirement system’s annual actuarial valuation, the employer contribution rate exceeds 0%, the employee organizations representing safety members shall jointly meet and confer with city representatives to implement a cost sharing arrangement between the city and employee organizations.” But city officials never made any attempt to secure the extra contributions, refusing to follow the law, critics claim, because they feared the unions’ wrath. Proposition B’s language is far more direct and harder to circumvent: “All active employees who are uniformed members of the police and fire departments shall contribute 10% of each payment of compensation from participating retirement system employers to the retirement system, to be credited to the individual account of the member.”
In 2007, San Francisco voters also approved pension enhancements for the city’s miscellaneous (non-police and fire) public employees. (For over a century, San Francisco’s city charter has mandated public approval of such enhancements, a move that conservative bastions like Orange and San Diego counties have recently emulated.) These pension increases hiked city costs by 3.5 percent. While the city’s charter, in the language of the Adachi ballot measure, “authorizes City employees to pay up to 10% of salaries for pension benefits,” San Francisco’s miscellaneous public employees have paid considerably less than that—between zero and 7.5 percent. Proposition B would require them to bump up their contribution rate to 9 percent.
Proposition B, Adachi concedes, won’t fix the pension problem entirely, but it will certainly help. The unions have challenged the legality of raising pension costs on public employees. Until now, California municipalities have generally refrained from touching pensions, and courts have tended to view pension deals as binding legal contracts. But Adachi’s initiative merely asks voters if they want to approve higher contribution rates already mandated or allowed by law, and Judge Kahn found that the initiative would bring the contributions in line with a section of the city charter. Kahn also offered an interpretation of state law that should give hope to other pension reformers. California, he ruled, “permits increases in pension contribution rates by employees after they have been hired if there is some ‘commensurate’ or ‘comparable’ advantage to the employees such as protecting the financial integrity of the pension system.”
Adachi and his fellow reformers also cite a June grand jury report, “San Francisco’s Pension Tsunami: The Billion Dollar Bubble.” It paints an alarming picture: “The San Francisco Controller has projected the pension and health care costs to increase from $413 million for the current fiscal year to nearly $1 billion in five years. These obligations will increasingly impact the general fund and threaten to move resources from other needs of the city. Reform must be undertaken in order to find a balance between keeping the city’s promise to retired workers and maintaining the critical services that make our city great.” The report estimates the total cost of retiree benefits at about one-third of the city’s general fund and notes that this level of spending is “unsustainable.” Citing these figures, Adachi resisted calls to negotiate with the unions and delay reform.
So far, however, the progressives’ arguments have fallen on deaf ears in Sacramento. That’s because California’s Democrats are, in essence, wholly owned subsidiaries of organized labor (Assembly Speaker John Perez, D-Los Angeles, previously worked as a union organizer, for instance).
I was in the Senate chamber when the Republicans pushed forward a reform (SB 919) that would create a lower pension benefit for new hires. The state would still offer a defined-benefit plan—that is, a plan that offers a guaranteed level of benefits upon retirement, as opposed to defined-contribution plans, in which the agency agrees only to a set contribution. But at least under SB 919, the plan would require later retirement ages, higher contribution rates, and slightly lower benefits. David Crane testified on behalf of the bill, which the Schwarzenegger administration supported: “One cannot both be a progressive and be opposed to pension reform,” he said. “The math is irrefutable that the losers from excessive and unfunded pensions are precisely the programs progressive Democrats tend to applaud. Those programs are being driven out of existence by rising pension costs.” Crane added: “All of the consequences of rising pension costs fall on the budgets for programs such as higher education, health and human services, parks and recreation, and environmental protection that are junior in priority and therefore have their funding reduced whenever more money is needed to pay for pension costs.”
That’s a concise expression of the progressive case for pension reform. But Democrats on the committee didn’t bother to address any of Crane’s arguments. Democratic Senate pro Tempore Darrell Steinberg of Sacramento claimed that Democrats, who control the state legislature, would listen to GOP proposals on pension reform. During the session, however, his caucus killed SB 919, revived a measure that would make it nearly impossible for municipalities overburdened by labor costs to declare bankruptcy (though it didn’t pass), and watered down to meaninglessness a bill that would limit the most egregious pension-spiking scams. Democrats insisted that any pension problems could be handled at the negotiating table—where unions are strongest and where most of the current problems were created.
It’s anyone’s guess what will happen with the state budget, which was due on July 1st, the start of the new fiscal year. In California, budgets require a two-thirds vote for passage, but that might change if the Democrats get their way and win approval in November of Proposition 25, a measure that allows budgets to pass with a simple majority vote. It would also give the majority party more power to implement its first answer to everything: higher taxes. For Democrats, the recent budget “debate” was mostly posturing; they’re clearly biding their time until the November vote on Prop. 25.
If Prop. 25 passes, legislators will have even less incentive to address the pension crisis. Clearly, reform must come from outside the Capitol—in municipalities and through the initiative process. This is why the Adachi measure is worth watching.
Getting a “yes” vote in a notoriously liberal city like San Francisco will be a tough task, but Adachi exudes an unflappable confidence. When I talked to him early in the campaign, he shrugged off union efforts to portray him as a tool of big business and conservative forces. He knows he faces an uphill battle in building public support, especially considering what he’s up against: the unions have retained the former Clinton spin doctor, Chris Lehane, who described the initiative as the equivalent of opposing Mother Teresa. “Pensions are not a sexy subject,” Adachi told me, “not like saving the redwoods.” But he wants to “inform the public about the impact of escalating pensions on basic, core services of government.” His budget has been slashed so much that it’s impeding his ability to provide constitutionally mandated legal representation for the poor.
If pension reform passes in the progressive hotbed of San Francisco in November, then it can pass anywhere. Reformers need to build these alliances on the left by reminding voters that without such changes, the programs they value most are imperiled. Those of us who question why the government provides many of these services in the first place should hold our tongues and take up that debate another day.
Steven Greenhut is director of the Pacific Research Institute’s Journalism Center (www.calwatchdog.com), author of Plunder! How Public Employee Unions Are Raiding Treasuries, Controlling Our Lives and Bankrupting the Nation, and a columnist for The Orange County Register.