A recent Fox & Hounds article by Jonathon Karpf acknowledged the need for pension reform but cautioned against hasty, “hysterical” solutions.
Professor Karpf teaches anthropology and may be new to the debate over public pensions. He could benefit from a short history lesson.
Financial analysts warned about the unsustainability of traditional defined benefit plans long before pension costs helped drive Vallejo into bankruptcy in 2008. Assemblyman Dave Elder (D-San Pedro) authored several key pension reforms before he left office 20 years ago, including legislation to fully fund the California State Teachers Retirement System and bills to improve transparency and governance of public pension systems.
In 2005, while the stock market was still strong, San Fernando Valley Assemblyman Keith Richman warned that pension debt could stall California’s economic growth and attempted to qualify a pension reform measure for the ballot that would have required government employees to share the risk of retirement plan investments with taxpayers in defined contribution plans.
Two years later, Governor Schwarzenegger appointed Gerald Parsky to chair the Public Employee Post-Employment Benefit Commission, which heard almost 100 hours of testimony in public hearings across the state. The Commission’s report contained 34 recommendations to reform public pensions.
In 2010, the Little Hoover Commission held a series of public hearings and meetings with legal and financial experts and released its recommendations early in 2011, which formed the basis of the Governor’s 12-point plan.
Countless hours of public hearings have been held in the Capitol and city council chambers from San Diego to Redding.
It’s time for action. Pension costs are the fastest growing expenditure for city and county governments, and will consume 17 percent of city budgets this year. According to Stanford’s Institute for Economic Policy Research, pension costs grew 11.4 percent per year between 1999 and 2010, twice the spending growth rate for education, public safety, parks, health and sanitation.
While other services are cut, pension costs go nowhere but up.
If pension fund investments perform reasonably well, the unfunded liabilities of California’s largest state and local pension systems are about $500 billion. Dan Borenstein of the Contra Costa Times did the math: California’s pension debt amounts to $30,500 for every household in the state.
This issue has been studied to death, and the fundamental conclusion is that the traditional defined benefit model is unsustainable. There is no rational justification for taxpayers to absorb all the risk of pension plan investments. The hybrid plan proposed by Governor Brown strikes a balance that preserves defined benefits for public employees, but with limits. Those who want to save more for retirement can augment their benefits with a defined contribution plan.
The Governor’s plan isn’t perfect, it provides higher benefits than those offered by most of the state’s top private sector employers, and recognizes the legal realities that block a more comprehensive solution. The Legislature should pass it next month.