Pension reform begins with the current workforce

Loren Kaye
President of the California Foundation for Commerce and Education

While Governor Brown
was acknowledging yesterday that pension reform is a
possible element of a budget solution, a bipartisan, independent state
commission released a report charting a bold path for
pension reforms that would create both short- and long-term budget savings.

The Little Hoover
Commission, of which I’m a member, unanimously adopted Public Pensions for
Retirement Security
, calling for Legislative action to establish the legal
authority to allow state and local governments to freeze pension benefits for
current workers, and allowing those workers to accrue future benefits under
more sustainable pension plans.

After ten months of
public hearings and background research, Commissioners concluded that
California’s pension crisis cannot be solved without addressing the obligations
of current employees, many of whom have accrued generous benefits augmented
during the go-go years of the dot.com and real estate bubbles.

Without doubt, the
proposal will face significant political and legal hurdles. But ignoring the
burden that the current obligations place on government budgets and on
taxpayers is like pretending the underwater earthquake won’t create a tsunami.
The disaster will happen, the only question is how soon. In the words of the
Commission’s report, "Pension costs will crush government."

The Commission
included a number of forward-looking reforms, too. We recommended a "hybrid"
pension model that combines a lower defined-benefit pension formula with an
employer-matched and risk-managed defined-contribution plan. We also suggested
that the State explore extending Social Security old-age benefits to uncovered
state and local employees, as is the case with the federal workforce.

The Commission also
added its voice to the bipartisan chorus who have called for tighter controls
on benefits and better oversight and accountability of pension administrators,
including:

  • A cap
    in the $80,000 – $90,000 range of the maximum salary that could be used to
    calculate pension benefits.
  • Eligibility
    ages for pension benefits that do not encourage early retirement.
  • A
    requirement that employees and employers share the normal costs of funding
    their pension plans.
  • Clear
    definitions of final compensation to prevent "spiking."
  • A
    prohibition against contribution "holidays" when employers do not pay into the
    funds.
  • A ban
    on retroactive pension increases.
  • Steps
    to improve accountability and transparency.

The Commission has provided a comprehensive and
well-documented road map for state and local pension reform that can help
resuscitate government budgets while maintaining fair and competitive benefits
for public workers. Small changes now will avoid a future of severe service
cuts and punishing tax increases.

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