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Finally, Brown flayed Whitman for a glaring deficiency in her reform ideas: They exempted public safety workers. By making this point, Brown broached one of the thorniest pension reform issues. Cops and firefighters account for more than a quarter of the total pension liability in California, and they tend to be quite ingenious at spiking their pensions. They are also uniquely immune to negative campaigning. The rough and tumble of recent union battles has driven many Californians to despise even such traditionally popular groups as nurses and teachers; but voters overwhelmingly like and want more cops and firefighters. That Brown is willing to discuss these details—and to be clear that a solution will require some powerful players to settle for smaller payouts—indicates that he is at least thinking seriously about the problem.
But the experience of his predecessor indicates how towering Brown’s task will be. It’s hard to imagine a mandate clearer than the one Schwarzenegger enjoyed after his displacement of Democratic Gov. Gray Davis in the 2003 recall. Yet it took until the end of his second term for Schwarzenegger to accomplish even a marginal correction of the Davis administration’s most important fiscal error.
In 1999 Davis signed a law that retroactively increased pension benefits for all government employees by 25 percent to 50 percent—including all workers employed at the time and all new hires. Senate Bill 400 (S.B. 400) was, in the words of David Crane, Schwarzenegger’s special adviser for jobs and economic growth, “the largest issuance of debt in California history, and it was issued without voter approval or voter knowledge.” At the time the bill was passed (after a mere five minutes of debate, according to legend), returns on capital market investments were paying 75 percent of CalPERS benefits, with another large chunk coming from the state’s general fund and a small portion from employee contributions. In a now-infamous prospectus for the bill, CalPERS told legislators the increase would leave state costs little changed for a decade.
A Long Road to Small Reform
It quickly became apparent that there were serious errors in those estimates. But it wasn’t until 2008, when CalPERS lost somewhere between a quarter and half of its portfolio, that the vast taxpayer liability became too clear to ignore. Wall Street’s subsequent series of fools’ rallies has done little to restore CalPERS’s solvency, and investments now cover only 63 percent of CalPERS’ ongoing commitments, far short of the federal government’s minimum threshold of 80 percent for basic pension plan health. Taxpayers are on the hook for the remainder.
The Golden State’s 2010 budget shortfall included an additional $3.9 billion in unexpected charges for pension payouts. Legislative sources expect that gap to increase more than threefold, to nearly $14 billion, in 2011. The gap is increasing, at an accelerating rate, year by year; and there is no realistic scenario in which market performance can begin to close it. CalPERS, whose accounting house of mirrors is still built on projections of 7-to-8-percent annual returns indefinitely, claims to be untroubled. But it also continues to ask for more help from the state’s general fund, citing market losses as well as longer retiree life spans.
Arnold Schwarzenegger, whatever his failings as a governor, quickly recognized the scope of the problem. He fought for public-sector compensation reform on several fronts—actuarial, fiscal, political, and financial. And he lost on all of them.
In 2005 the governor got ravaged by nurses unions when he tried to walk back a union-supported Davis-era law on nurse/patient ratios that was contributing to a shortage of open emergency rooms. Later that year, Schwarzenegger, having failed to push reform through the Democrat-controlled legislature, took the matter to voters in a special election that sought to undo union political influence in various ways. His slate of ballot initiatives included a spending cap mechanism, “paycheck protection” (which would have allowed union members to block the use of their dues for political campaigning), an increase in the teacher tenure requirement from two to five years, and a plan to redraw the state’s noncompetitive electoral districts.
The ensuing defeat ended up defining the Schwarzenegger administration. Labor poured resources into a vehement, vituperative campaign against the governor’s slate. The confrontational, hard-left California Nurses Association jeered Schwarzenegger at every public event, including commencement speeches at middle schools. All of the initiatives lost badly, and while Schwarzenegger went on to win a second term, he never regained the initiative. He hired a former Gray Davis staffer as his chief of staff, worked on what marginal improvements he could get by vetoing bills (and drifting toward the Democrats), and avoided engagement with his enemies in the unions—who nonetheless never lost their taste for demonizing him. It was not until the 2008 market correction revealed the depth of the pension problem that Schwarzenegger returned to the fight.
In his final-act struggle for reform, Schwarz-enegger attained something of the grace that had eluded him throughout his career in Sacramento. Showing an uncharacteristic nonchalance about public perceptions, the lame-duck governor fought ugly, allowing budget negotiations to drag out for months as the state experienced severe cash flow problems, its credit rating tanked, and public workers were furloughed, laid off, and threatened with massive temporary pay cuts. The goal was to bleed the Democrats and their union patrons until they accepted a reform.
David Crane, operating out of a quiet office (dubbed “The Crane-ium”) off the governor’s main digs in the state capitol, acted as the lead advocate on the issue, and he showed a talent for explaining pension reform in terms that liberals could appreciate. “This year we’re spending 10 percent less on higher education than we did 10 years ago, parks and recreation 40 percent less, environmental protection 80 percent less,” Crane told me in the fall of 2010, “while spending on pensions is up 2,500 percent. So when Democrats realize what is happening and act in the interest of the people they represent, they will address the pension problem in California.” Like so many other reformers, Crane is a registered Democrat who supported Jerry Brown.
Public Opinion Shifts
In the renewed fight of 2009 and 2010, Schwarz-enegger had an unexpected ally: a recession-era shift in public opinion nationwide that saw support for unions drop (according to Gallup) from 58 percent in 2007 to 42 percent in 2010. The still-unfolding scandals over compensation and corruption in Bell, Maywood, and other towns in southeastern Los Angeles County helped stir the pot. Schwarzenegger also managed to peel off those public-sector unions attuned to popular attitudes.
“Highway patrol officers and firefighters care very deeply what the public thinks,” Bob Wolf, president of the California Department of Forestry firefighters union, told me during the budget battle in October. “We believe our neighbors down the street, whom we protect, believe that we deserve fair retirement and fair wages and decent working conditions. That’s all we’re asking for. We’re not asking for pie in the sky.”
Along with the California Association of Highway Patrolmen and four other unions, Wolf’s group agreed last summer to roll back some of the past decade’s gains in public employee compensation—specifically, they supported a return to pre-1999 pension formulas for new hires and an increase in employee contributions. Through his scorched-earth campaign on operational spending and a threat to leave office without a 2010 budget signed, Schwarzenegger eventually won the war of wills with Democratic legislators as well. The budget that was signed in October contained concessions on pension payouts and a legislative fix that effectively brought an end to S.B. 400 largesse for future hires.