Increasing Number of Experts Project “Meltdown” of California’s Public Pension System

David Kersten
Kersten Institute for Governance and Public Policy

An increasing number of experts are projecting a “meltdown” of California’s public pension system, or similar catastrophic collapse of California’s system for financing public pensions for state and local public employees.

Dan Walters, dean of the Capitol press corps, recently opined that the state’s growing unfunded pension liabilities appear to be approaching a “point of no return.”

Moreover, the state is currently attempting a precarious balancing act between trying to stem the rapid acceleration of its unfunded pension liabilities “while simultaneously trying to prevent pension contributions from driving local governments and school districts into insolvency,” Walters wrote in a recent column.

Walters concludes that a possible future court decision to overturn the “California rule,” “could be the only way to prevent a complete meltdown of California’s already precarious pension systems.”  The “California rule” is a legal interpretation of the state’s constitution, which opponents of pension reform say prevents the state from reducing public pension awards in any way regardless of the state’s ability to pay.

Walters is well respected around the state for his long track record of honest, fact-based journalism, but the calls of Walters and other journalists and experts who continue to report on the impending pension catastrophe continue to fall upon deaf ears in Sacramento.

Even the California State Public Employees’ Retirement System (CalPERS) is taking an increasingly defensive position, given the clear indications that an increasing number of local public agencies are approaching the verge of municipal bankruptcy.

Walters clearly articulates what many experts saw coming long ago.

In 2010, Governor Arnold Schwarzenegger attempted to reverse SB 400, a 1999 bill approved by the California Legislature that dramatically increased pension benefits for public employees and locked in exorbitant and completely unsustainable pension formulas.

Unfortunately, Gov. Schwarzenegger’s attempt to push pension reform in the California Legislature stalled in 2010 with both Democrats and Republicans refusing to cross the state’s public employee unions, who refuse to consider even modest changes in the pension formulas for current public employees.

In 2012, Governor Brown succeeded in getting the state’s public employee unions to agree to modest changes in public pension formulas for newly hired public employees, but as the Los Angeles Timesand others have pointed out, the cost savings from the 2012  effort have been miniscule.

Since 2012, there has been no serious effort, or even discussion in the California Legislature about the issue, despite the fact that most experts believe the problem has the potential to bankrupt many local governments, and possibly even the State of California.

“At some point the system will break,” states Stanford University Professor Joe Nation, who has been a pioneer on the pension issue since it came to the fore in the run up to Governor Schwarzenegger’s reform efforts from 2009-10.

Nation says the California Legislature needs to take some action to significantly curb the costs of public pension benefits for currently employees.  He does not see a way around higher taxes to pay for escalating costs, but says higher taxes should not be the only solution.

Another critical change should be increasing the retirement age for public employees, which has been lowered to age 50 for many public employees under SB 400 from 1999, Nation says.

Nation says he comes from a family of public employees, and is perhaps the most worried about the ramifications that collapse of the system would have for public employees.  There would be widespread layoffs, reductions in benefits, and many public workers could lose their pension and health care benefits, Nation says.

Former Mayor of San Jose Chuck Reed also believes the current system is “unsustainable” and warns that its collapse will be the most damaging to public employees through lost pensions and benefits.

Reed, a local pension reformer turned national reform advocate, recently wrote “while pension debt isn’t new, neither is the decision to cut retirement benefits when plans can’t pay up.  One just needs to look at Stockton, San Bernardino and Vallejo—all forced into bankruptcy with massive pension obligations, causing retirees to lose their health-care benefits,” according to a recent column that appeared in the East Bay Times.

Reed is one of the few high-profile elected officials in California who have actually proposed reforming the system, having proposed ballot measures that would significantly curb public pension costs.

Both the Los Angeles Times and the East Bay Times have continued to publish an increasing number of articles and editorials that document the causes and impending “meltdown” of the existing system, but there is little indication that all this press coverage is having any impact in Sacramento.

Ironically, the pension issue appears to be similar to the global warming issue—in that it is a policy issue that is so extremely important to the entire state and nation, yet something that most of the nation’s political systems are ill-equipped to handle in a substantive way.

California has made a lot of “progress” on the global warming issue, even though the state’s total emissions compose less than 1% of the world’s greenhouse gas emissions.

Yet, on the public pension issue, which could be eradicated by a single constitutional amendment in California, there is only a small minority of state politicians who will even discuss the issue, let alone discuss reform options.

On a global scale, it has long appeared to some experts that the world as a whole may not take enough action to curb its reliance on carbon fuels in time to stem the most damaging implications.

Similarly, on the public pension issue it appears likely that the state’s political system may not have the willingness to act until it is too late.

Maybe the time has come for the California Legislature to consider taking action on a critical issue that it actually has the power solve.

David Kersten is the president of the Kersten Institute for Governance and Public Policy—a Bay Area-based public policy think tank and consulting organization. Kersten is also an adjunct professor of public budgeting at the University of San Francisco. 

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