The State of the State’s Pensions Is Not So Strong

The State of the State’s Pensions Is Not So Strong

The governor covered quite a few topics in Thursday’s State of the State address, some of them in more detail than others. But one he skimmed over that should have received more attention is the state’s public-employee pension crisis. It was mentioned only twice, both times references to a reform bill that was passed in 2012.

Gov. Jerry Brown knows the danger of runaway public-employee pensions. Earlier in the New Year, Bloomberg reported that “Brown said he has a ‘hunch’ the courts would ‘modify’ the so-called California rule, which holds that benefits promised to public employees can’t be rolled back.”

The opportunity to cut benefits might arrive “when the next recession comes around,” Brown said when he released his last state budget, giving the governor then in office “the option of considering pension cutbacks for the first time in a long time.”

“There is a lot more flexibility than is currently assumed by those who discuss the California rule,” Brown said. “At the next downturn when things look pretty dire, (pensions) will be on the chopping block.”

Adequate cuts will come only if it’s an industrial-size chopping block. Of the nearly $1 trillion in retirement benefits that are owed to public employees in this state, at least 30 percent, and possibly as much as 60 percent, of that liability has no funding, when risk is properly accounted for.

It’s an unsustainable position. As PRI senior fellow Wayne Winegarden has said, “if not properly addressed,” the unfunded liability, “will either result in large future tax increases, large future spending cuts, or significant reductions in promised pension benefits to future retirees.”

Winegarden has long suggested that the California Rule be repealed. He also recommends freezing the defined-benefit program workers are currently in and offering them a choice between “receiving a payment equal to the present value of their benefits” or remaining “in a reformed defined-benefit program that would include, among other adjustments, appropriate policies to accommodate market risk.” In defined-benefit plans, retirements are calculated in advance and are not based on how much workers contributed while working. They put employers in positions of high risk.

Meanwhile, says Winegarden, future employees should be placed in defined-contribution plans, which are portable, allow workers to manage their own money and help governments avoid costly unfunded liabilities.

We appreciate Brown taking a pragmatic, sensible approach to the state’s pension crisis. We just wish he would look at climate (black carbon? really? is that the warming alarmists’ next catch phrase?), his bullet train dream that’s turning into a nightmare, and road repair in a similar fashion.

Kerry Jackson is a fellow with the Center for California Reform at the Pacific Research Institute.

 

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.