Pension Reform or Bust

During the Great Depression “California or Bust” was the slogan of economic refugees from other parts of the country on their way to the Golden State. But if Sacramento fails to reform our government employee pension system immediately the slogan for those fleeing California will likely be “Busted by California.”

According to the Governor the Big 5 have agreed on a “framework” for resolving the record breaking budget stalemate. We hope so. And we hope that part of the agreement entails serious pension reform. If it does not these obligations will continue to overwhelm the state as well as local governments drive the state into virtual bankruptcy and leave no revenue for essential services.

The direct cost to taxpayers to pay pensions for now-retired workers has skyrocketed over the last decade from $150 million to $3.5 billion a big part of the reason Democrats want to raise taxes by $4.4 billion. Meanwhile a recent Stanford study found CalPERS the California State Teachers Retirement System and the UC Retirement System have an unfunded liability of a half a trillion dollars.

Because this horrific situation is only getting worse it is imperative that lawmakers end their procrastination in dealing with this issue.
The main problem of course is that any defined benefit plan is a gamble for taxpayers. Unlike defined contribution plans taxpayers are utterly exposed to bad decisions by those who manage the funds. The foolish investments by CalPERS and CalSTRS in equities and real estate coupled with huge increases in pension benefits (by as much as one-third) have left taxpayers on the hook to make up massive shortfalls.

Reforms must be enacted now as part of the budget deal and those reforms must be substantial not minor.

First of all the rules for new hires must be changed. Long term savings can be achieved by switching from a guaranteed benefit system to a system that provides a guaranteed retirement contribution as is the standard in the private sector.

Second we must more strictly define those who qualify for the higher pensions provided to those defined as “public safety” workers. Most taxpayers support superior benefits for those who put their lives on the line like police officers and fire fighters but do not think that milk and billboard inspectors should receive higher payments.

Third since a major contribution to the pension crisis is that public employees enjoy earlier retirement than private-sector workers we must insist that those earning full benefits work longer. Currently public safety workers can retire with full benefits at age 50 after putting in 30 years service and others can retire at 55.

Fourth the system must be changed that allows workers to spike their pensions by saving up vacation time and other benefits until their final year of service thereby inflating their final years’ compensation on which their pension benefits are based. In most other states pensions are based on the average income for the last three years — or longer — of work.

Despite clear evidence of impending disaster the legislative majority has blocked pension reform choosing to protect labor interests over the public interest. This year they blocked SB 919 by Senate Republican Leader Dennis Hollingsworth which would have implemented a number of reforms using cost-cutting methods already adopted in 17 other states.

We need reform now that includes realistic forecasts based on reliable actuarial probabilities greater public disclosure tighter pension plan qualifications adjustments in retirement ages and payouts and restraints on pay and pension spiking all aimed at controlling costs and bringing equity between government and private pensions. Ultimately a major shift to defined contribution plans is necessary if we are ever going to climb out of the existing public pension hole. Without these reforms California governments and taxpayers risk going “bust.”

Jon Coupal is president of the Howard Jarvis Taxpayers Association — California’s largest grass-roots taxpayer organization dedicated to the protection of Proposition 13 and the advancement of taxpayers’ rights.