Arnold Schwarzenegger barreled into the governor’s office seven years ago after winning an unprecedented gubernatorial recall campaign and immediately accomplished a major reform in fixing the workers compensation system. As he nears the end of his two terms in office, Schwarzenegger is attempting to go out by notching another big time reform of the public employee pension system.
There are similarities to the two efforts. One is the jump in costs in each of the systems and how they do damage to the fiscal situation in California. Workers comp premiums paid by California employers roughly doubled between 1999 and 2003. This dramatic increase pressured many businesses to cut employees or reduce inventory to cover their costs. Some businesses even packed up and left the state. Reduced business meant reduced tax revenue for governments.
The private sector was not the only one to feel the workers comp pinch. Public entities also had workers comp costs and the more they paid for increased premiums the less they had to pay for programs under their control.
Schwarzenegger attacked the workers comp problem head on. While he negotiated with legislators over a workers comp reform, he threw his support behind an initiative to solve the problem if the legislature would not agree to a mutual solution. (Disclosure: I was proponent of the workers comp reform initiative.)
In the end, agreement was reached between the governor and the legislature and a workers comp reform was enacted that saved the public and private sector billions of dollars and the economy prospered.
Now, the economy is down again as are government budgets and the governor has set his sites on a reform of the public pension system. Like workers comp, public compensation and benefits have seen dramatic increases since the legislature authorized increased benefits a decade ago. According to the governor’s office, pension costs have increased 2,000% over the past 10 years from less than $150 million a year to more than $3 billion a year. During the same period state revenues increased 24%.
If the government must back these benefits with tax dollars there will be less to spend on public services. David Crane, special advisor to the governor for jobs and economic growth, has been the governor’s voice in many forums calling out for pension reform. He points out that over the last ten years while the parks’ budget is flat or down, higher education is in the same predicament, and health and human services is only up slightly, public employee compensation has taken a dramatic leap forward. Saying that reform must come through the legislature, Crane, a Democrat, said, "In a world like that, I can’t see how the Democrats can stand still and not allow pension reform to pass."
But, passing pension reform won’t be easy. And, the governor doesn’t have all the tools at his disposal he had when he took on workers comp.
Serving out his last few months in office, many legislators look at the governor as a lame duck whose popularity is nowhere near the astronomical heights he enjoyed when first elected. Further, the threat of an initiative to end run a recalcitrant legislature does not exist.
Still, Crane argues the governor has leverage to bring pension reform about. Schwarzenegger has said time and again he will not sign the budget bill unless reforms to the pension system are passed. Crane argues that the governor is in a "unique position because he is not running for another office." Under the circumstances, Crane insists Schwarzenegger can hold fast to his demand.
The initiative threat was a powerful tool for Schwarzenegger in the workers comp battle. Prior to the 2005 special election, the governor supported a pension reform initiative but pulled that support when public sector unions argued that widowed spouses of police officers would be denied pension benefits.
Crane says the time was not right for pension reform in 2005. However, the issue has gained visibility and traction since then.
A sign that Schwarzenegger’s strategy is working is the proposal the governor has worked out with the California Association of Professional Scientists. According to the Sacramento Bee the proposal offers cuts in retirement benefits for future hires and a promise to stay out of the governor’s way as he presses to cut the state’s pension costs.
In the end, holding firm on his demand for pension reform before he signs the budget, Schwarzenegger may achieve another major reform to bookend his governorship.