Politicians Fail on Pensions, Voters Must Step Up Again

Dan Pellissier
President of California Pension Reform

Although Governor Brown’s last minute announcement of a pension deal with the legislature left little time for review, analysis and comment on its complex provisions, experts have developed some rough numbers which show just how far short the plan falls of solving California’s pension crisis.

A team of independent actuaries looked at the proposed legislation and estimated the savings from increasing retirement ages by just two years, capping pensionable pay and limiting salary spiking.  The extra two years of work would save 5-10%.  The three year averaging of final salary would save 2%.  The salary caps would save a few more, though the San Jose Mercury News reported the caps apply to just 5% of local employees and less than 4% of state employees.  In total, the benefits being offered to new employees would cost only about 15% less, when fully implemented, than the ones currently breaking our government budgets.  Those savings are worthwhile, but they fall far short of solving California’s pension crisis.

Yesterday Brown’s supporters trumpeted a CalPERS review which pegged state and local government savings at up to $60 billion during the next 30 years.  Stanford professor and former Democratic Assemblyman Joe Nation was quick to calculate a much more modest $16 billion by applying two key adjustments.

Since the bulk of the legislative measures apply only to new employees, government agencies will only save money as the number of employees hired beginning in 2013 grows in their workforce.  Nation estimated that 3% of new employees join the government work force every year, so the bulk of the savings will be during the last 10 years.  Once you adjust for inflation, those dollars saved from 2034-43 become quite modest, especially when you consider state and local pension deficits exceed $300 billion.  In total, it is just a 5% solution.

So what is the real solution to California’s pension math problems?  Among other things, charging current employees half the total cost of their pensions.  While the Governor and legislators would require many government employees to pay half of their new pension costs, they would not include any share of the pension plans’ unfunded liabilities.  The deal leaves taxpayers to pay for the bad investments and bad assumptions made by the state’s pension funds.

Real pension reform would protect earned pension benefits, but allows government agencies to adjust future benefits as circumstances change.  It would also require all pension board members to be subject matter experts, independent from the trust funds they administer.  Furthermore, we must give taxpayers a vote before they are obligated to pay for future unfunded pension liabilities.  Finally, all of these changes must be locked in the constitution, safely away from the whims of future legislatures.  If not, they could be undone just as quickly as they were created.

Back in 1978, Governor Brown and legislative leaders dismissed the growing voter revolt over rapidly increasing property taxes and a statewide initiative, Proposition 13, settled the matter.  It looks like the politicians have failed once again.  Thankfully, recent polls show more than 70% of statewide voters are ready to join the voters in San Diego and San Jose who approved strong pension reform solutions just two months ago.

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