State must protect itself by reforming public pensions

Dan Pellissier
President of California Pension Reform

During his inaugural address, Gov.
Jerry Brown urged legislators to leave their political comfort zones, unite as
Californians, honestly assess our budget deficits and make the tough decisions
required for the long-term good of California.

There is no better issue to
demonstrate a welcome bipartisan resolve than reforming California’s state and
local public employee pension systems.

With projected state and local
unfunded retirement benefit liabilities as much as $700 billion, state leaders
cannot make a serious impact on our fiscal health without substantial,
fundamental change in these far too generous benefits.

Contrary to prevailing views, some
legal experts believe the California Constitution can be amended to let current
employees keep the generous benefits they have earned, and offer them less
costly, more sustainable benefits until the depleted government pension funds
fully recover.

If public pension plans resembled
those available to private employees, statewide retirement benefit costs would
be reduced by more than $6 billion in 2013. These huge savings estimates will
draw scoffs and ridicule from employee unions with million-dollar pensions to
protect, yet most California taxpayers have no chance to save that kind of
money for their own retirement, especially while paying for the public
employees’ retirement costs too.

The best approach to reforming
California pension systems starts with the question of what is a fair,
sustainable retirement benefit. The Bureau of Labor Statistics says that
private sector employers pay about 3.6 percent of salary for retirement and
savings benefits, and public sector agencies pay 8.1 percent. In California,
most public sector agencies pay at least 10 percent of salary for annual
benefits and often much more to reduce unfunded liabilities.

So a retirement benefit that costs 5
percent of salary would be more generous than the private sector offers but
less than half of what most California public employers are paying now. If
public employees are required to match the cost paid by their employer, they
could retire at age 65 and receive more than 60 percent replacement income when
Social Security payments are included. If employees want more retirement
income, they could plan ahead and build their own retirement accounts.

The common-sense notion that public
employers and public employees should equally share the cost of retirement
programs would be a huge improvement over current practice. Too many government
employers pay the entire cost of pension and retiree health care benefits,
bearing the full brunt of rising costs and insulating employees from the true
cost of their benefits package.

To reduce the pension benefits paid
to current public employees, the California Constitution would have to be
amended to freeze all pension plans that are significantly underfunded until
they reach full funding for three consecutive years. All state and local government
employees would earn the same retirement benefits package, including current
employees waiting for their underfunded retirement plans to recover.

Many public pension boards use
unrealistic assumptions to inflate asset values and understate liabilities. To
ensure sound financial practices and government transparency, solvency
calculations should be based on actual market values and a standard set of
prudent actuarial assumptions. State and local pension plans would manage their
funds using their own assumptions, but would be required to use the more
prudent ones for public disclosure. Requiring all state and local pension
boards to be composed of a majority of independent experts would boost public
confidence in their decisions and reduce the glaring conflicts of interest that
have made too many headlines.

California voters are ready to
approve a meaningful pension reform measure. Several independent surveys taken
last year show overwhelming public support for pension reform. In 1986, 72
percent of California voters amended the state constitution to reduce pension
benefits earned by statewide officeholders. Our current fiscal crisis demands
that we once again protect ourselves from unsustainable public employee pension
benefits.

Near the end of his remarks Brown
said, "We will also have to look at our system of pensions and how to
ensure that they are transparent and actuarially sound and fair – fair to the
workers and fair to the taxpayers." Significant pension reform would
provide real, permanent relief for state and local budgets. Until voters see a
pension reform constitutional amendment on the ballot, they will know the
politicians are not trying hard enough to secure our financial future.

Originally published in the Sacramento Bee.

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