Economics

Big Trouble in Little Hoover

Why does the nonpartisan, good-government consensus sound so radical?

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Who's got a solution to the government employee pension crisis that's bolder than Wisconsin Gov. Scott Walker's, more extreme than New Jersey Gov. Chris Christie's? What rabid extremists want to renege on existing contracts and squeeze the hard-working teachers, cops, and firefighters of America's most populous state?

Would you believe…the Little Hoover Commission?

If you are part of the growing percentage of Americans who choose to live outside the state of California, you probably haven't heard of Little Hoover. But this oversight agency is the closest the Golden State comes to gray eminence. Created in 1962, the commission makes measured and judicious suggestions on the governance of the state. The panel's 13 members are chosen by a scrupulous process, described over four pages of the California code, that limits overt partisanship and emphasizes separation of powers. The commission's judgments are generally considered as reliable as a Moffat & Company gold coin.

So Little Hoover's February report, Public Pensions for Retirement Security, came as a shock. Even the most far-reaching state governors have focused their plans for reduced pension benefits mostly on new hires. While a few (such as New Jersey's Christie) have imposed later retirement dates, all have stayed within currently accepted legal practice for the ways existing government employees accrue retirement benefits. Broadly speaking, this means the reform proposals are confined to asking current workers to contribute more to their plans, not tampering with final payouts or accrual rates.

Little Hoover, by contrast, concludes that another two-tiered system—in which new hires come in with a less generous retirement package—will be inadequate. The report argues repeatedly that the state must find a way to pare back existing contracts. "The state and local governments need…to restructure future, unearned retirement benefits for their employees," it states. "The Legislature must pass legislation giving this explicit authority to state and local government agencies." The commission acknowledges that any such law "may entail the courts having to revisit prior court decisions."

And where many Republicans—including Wisconsin's Walker and California 2010 gubernatorial nominee Meg Whitman—have made a point of excluding cops and firefighters from their pension reform plans, Little Hoover states: "Public safety pensions cannot be exempted from the discussion because of political inconvenience."

The things Little Hoover suggests are not just too extreme for conservative Republicans. They're unacceptable even to some libertarians. In a post on the Wisconsin union standoff at the Bleeding Heart Libertarians blog, Georgia State philosopher Andrew Jason Cohen warns against making it "permissible to unilaterally change the contracts of state employees."

The professor may be speaking too abstractly (key phrase: "To be honest, I've not read the actual legislation under consideration"), but he raises a real point. Sanctity of contract may seem like a quaint notion in the age of the GM bailout and government-mandated mortgage cramdowns. But it's central to consensual exchange. Believers in limited government can't just ignore contract—though some have tried. When I interviewed the California Libertarian Party's gubernatorial candidate, Dale F. Ogden, last year, he suggested tearing up public worker contracts. "The state of California under our constitution is a sovereign entity," Ogden said, "and like any other banana republic, which is how it's been run, we can repudiate our debt." That argument won't persuade judges any more than it will win voters.

There is an interesting legal question about whether public-sector pension promises are truly binding. In private-sector work, you are entitled to retirement benefits that have already been accrued but not to future benefits that you may get if you stay in your job. A series of California court decisions has supported—without specifically protecting—future benefit gains for public employees. There actually is not a body of precedent for locking in future accrual rates. The 1978 California Supreme Court decision Betts v. Board of Administration suggests the opposite view, saying, "An employee's vested contractual pension rights may be modified prior to retirement for the purpose of keeping a pension system flexible."

There has, however, been a long history of politically motivated presumption that government employee benefits can only be ratcheted up, never down. In 2006, for example, then-Attorney General Bill Lockyer drew on the language of Betts to rule that the California Public Employee Retirement System (CalPERS) could grant retroactive, unfunded benefits to state and local workers. It's telling that nobody has tested the legal environment for rolling benefits in the other direction. 

How telling? Little Hoover reports are generally accorded the type of respect given to lifetime achievement award winners or the Guardians of Oa in the Green Lantern universe: Everybody praises the commission, then ignores its findings. In the case of the pension report, however, Little Hoover generated a firestorm. While the Los Angeles Times editorial board endorsed the report, the heads of CalPERS and the pension fund for California teachers both dismissed the findings and—gliding over the legal complexities described above—declared the rolling back of future accrual rates to be prima facie illegal. State Sen. Alex Padilla (D–Los Angeles) sniffed, "We're not interested in spinning our wheels." And Bill Lockyer, who thanks to term-limit musical chairs is now filling the office of treasurer, issued a passionate, six-page attack on the report, accusing it of everything from intemperate language to "distorting" and taking "liberties" with the testimony of one expert witness. I contacted the witness in question, an actuary, who said he had no complaints with the commission's use of his words or his meaning. 

Maybe the truth hurts worst when it comes from one of your own. For all its highly praised independence, the Little Hoover Commission is a product of California's political establishment, not a think tank full of anti-government ideologues. That its recommendations are in fact more radical than the plans proposed by avowed small-government types suggests how large the government employee pension problem is—and how unserious are most proposals to fix it. 

Senior Editor Tim Cavanaugh (tim.cavanaugh@reason.com) writes from Los Angeles.

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  1. It must be Rape A Maid month in NYC. They just bused an Egyptian banking head.
    http://af.reuters.com/article/…..1920110531

    1. It’s a long day. Try to focus.

        1. Hard weekend gentlemen?

          1. No, easy. I just enjoy provoking the narcissist.

            1. Ya, do you scream n a r c i s s i s t before, or after you cum?

              1. It really should be during shouldn’t it?

                1. That’s true they usually yell ‘JESUS RATHER’ after

                  1. Do you kiss your Daddy with that mouth?

  2. Good Morning Reason!

    1. Good Morning PermaLurker!

  3. To get around the contract problem, Ireland increased the tax rates on public pensions.

    Either way, the sweetheart deal is over everywhere

    1. Clever, that! The Democrats & state employees (which are the same thing for the most part) are the ones who like the concept of taxes. So taxing their pensions to balance the state budget should be an idea that could win bipartisan support that the media tell us that Americans really want.

    2. Since the socialist left hates the rich it should be a no brainer to pass a 100% tax on public pensions over 100,000/yr.

  4. Couldn’t the prospect of continued employment be contingent on acceptance of the new pension plans?

    1. Not a bad point, isn’t it true that usually contracts can be modified if both parties agree? If the employer goes to the employee and says “you could hold me to this promise, yes, but if you do we will go broke and you will then get a bad deal, but if you agree to a modification then we will all do better in the long run” and the employee agrees, why not?

      I guess one issue might be this could be a green light for employers to play fast and loose with pensions knowing they can always use this ploy to back out, but I guess few employers want to play chicken with bankruptcy.

      1. Yes, that happens all of the time. If the union is not insane, they don’t want the employer to go broke. So negotiations should be about how to split up the revenue, including cutting pay if the revenue goes down. Lots of private sector unions have agreed to benefit cuts to keep their employers solvent.

      2. Yeah but that requires the employee be smart enough to understand that his high salary/low productivity might actually be hurting the group.

      3. I don’t see what the big deal is – I’ve been put on two successively poorer pensions since I’ve started my current job. Life isn’t fair.

        All employment should be treated as at-will. i.e. the boss can fire you tomorrow for any reason at all, unless he boss has for some reason signed away his right to do this. In that case, it should be that management can fire you at the end of the current contract.

  5. I don’t understand why the employer, private or public, should not be held to pension promises. The employer likely relies on such promises and has a ‘reliance interest.’

    1. Still, they could at a minimum roll back any increases in benefits that were granted after the fact and in excess of the contract signed.

    2. Perhaps we can hold politicians to campaign promises, too?

    3. Such reliance has to be “reasonable.” It would hardly be reasonable to expect such continued payments from a functionally bankrupt entity.

      One of the biggest benefits of defined-contribution plans is that the money in your account is yours, not some vague promise of future payment. BTW, I believe most private-sector pension plans come with plenty of weasel words, so the actual promise involved may be less than you think.

      Ultimately, the state constitution could probably be amended to get around the contractual issues, if there truly are any. Moreover, we may soon see the creation of some form of “public entity bankruptcy”, which will be necessary to deal with unpayable benefits.

    4. Because you cannot hold someone to a promise if the promise cripples them. They should not have made a crippling promise, but if they cannot fulfill it in reality, no amount of whining can change that.

    5. future accruals or past accruals?

  6. Can anyone tell me why there is this massive hoopla about government workers salaries and benefits but no matching one about government contractors? Don’t both of them get pretty sweet deals of taxpayer loot?

    Is it because one is a traditional Democratic political base and the other is not?

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      1. How is it a red herring, unless that is the main course for your usual dinner?

        1. Because it is a distraction from the issue of pensions growing at an unsustainable rate as a percentage of government expenditures.

          I wasn’t aware that contracting was growing as a percentage of the budget. I thought it was pretty stable.

          Being that contracts have end dates with an option not to renew, while pensions only grow as the pool of retirees grows, I fail to see how government contracts can be anything other than a distraction.

    2. Do government contractors have a “contractual right” to every larger contracts until their death?

      Or do they bid on a contract by contract basis?

      1. Rhetorical, right?

        In theory, it’s the latter.

      2. It’s contract by contract.
        What’s really fun is when a contract runs out and you get laid off while the contractor tries to get it renewed or get the work done under a different contract.
        Then you get your job back for a few months or a few years until the contract runs out again.
        Hopefully you get your insurance through your spouse’s job because COBRA is ridiculously expensive.
        Raises are hard to come by since the contract is for a fixed amount and doesn’t include pay increases.
        What’s really cool is when your contract means you bill by the hour. You can’t charge the government time and a half, but if you are going to be paid for over forty you must get paid time and a half. The solution: work over forty and you don’t get paid (but your employer still bills the government).

        Contracting isn’t all it’s cracked up to be.

        1. I know plenty of service contractors who work twice as hard as their government counterparts for similar compensation. Add to that the lack of job security and contracting certainly isn’t all it’s cracked up to be.

          Many service contractors I know mainly took the job in hopes of being converted to a cushy full-government position.

          1. All the time I see folks leave for government jobs, but I have never once seen a government guy leave to go be a contractor.

            1. No, they usually just leave if they have a gig as an executive or lobbyist for a contractor.

          2. I was a contractor at an Army facility for six years. My fellow contractors and I were only brought in to complete tasks that the civil disservants hadn’t accomplished. After a few years my supervisor wanted to try to get me on as a government employee. I refused. I was afraid I’d become just like them, i.e. useless and filing grievances for things like a too-small tv in the breakroom. I’m not kidding. That was a grievance.

        2. contractor says: “COBRA is ridiculously expensive.”

          By law, COBRA rates are limited to no more than 110% of what your employer had been paying for your insurance. I submit that you think the rates for COBRA are ridiculous solely because you aren’t regularly exposed to the amount your employer had been paying on your behalf.

    3. Every government contract is subject to termination for government convenience. Can you explain to me why the same people who would applaud canceling a multi-billion dollar defense contract in an effort to save money would think canceling a government employee contract is some kind of crime?

      1. Because government employees are noble creatures interested only in serving the public, while defense contractors are profit seeking monsters who rob from the poor and give to the rich.

        1. you forgot “and love dropping bombs on brown people and seeing their limbs torn off.”

          1. that’s understood

      2. “Every government contract is subject to termination for government convenience.”

        I’ve heard you say this many times, do you have a citation for this? It’s a pretty hard to believe claim.

        1. OK, I sse you are right here:

          http://library.findlaw.com/1999/Jan/1/241470.html

          I do see there are protections for contractor though:

          In return for the Government’s right to unilaterally terminate, the contractor is entitled by the regulations and clauses to recover certain costs. See , e.g. , FAR Subpart 49.2. More specifically, the contractor may recover (a) its performance costs incurred up to the date of termination; (b) certain costs that continue after the date of termination ( e.g., idle facilities or idle capacity costs); (c) so-called “termination settlement expenses” (i.e. , the costs to terminate the contract and submit a termination claim to the Government); and (d) profit or fee for work performed.

          Still, it certainly is a blow to one’s reliance interest.

          1. Good catch. We don’t totally screw them. But it is called a “T for C” in the government parlance. In the end since the Constitution says no money can be drawn from the Treasury without Congress’ authorization, any contractor is at the mercy of the Congressional budget process.

            1. But your point still stands, they can recoup their expenses but what they cannot recoup is this ‘reliance interest.’ I don’t think anyone is proposing that government workers who have already started collecting their pensions have those terms altered, just future pensions, so they would indeed be in the same boat.

        2. This clause applies to ‘procurement’ contracts, which are a particular class of government contracts and don’t include employment contracts. It’s a general rule for all federal procurement contracts, although I’m sure some states have adopted the practice as well. It also provides that the contractor gets paid for all its costs up to the date of termination. So if the contractor ordered a bunch of steel to build a bridge, and then the government cancels the projects, the contractor gets paid for his costs of that steel (but he still has to deliver the steel to the government).

    4. I’m not sure what government contracting you’re talking about. Most mundane government contracting is done at rates that are favorable to the costs of having government employees do the same work.

      There’s also the control of contractors having contracts that run out. So if a deal turns out to be bad, the contractor can be fired by not renewing the contract, or even overtly firing the contractor.

      Generally the people doing government contracting know how much something should cost, and compare that to how much the contractor is proposing it cost. If there are overruns, they need to be justified. If a bid looks bad (low), there is a lot of warning of the contractor. And on top of that, there’s the competitive aspect of government contracting, where generally firms must compete against other firms for the work, which keeps costs lower.

      Maybe there are some high-dollar contracts (like defense) where this isn’t the case, but that’s far more likely due to the involvement of high-ranking elected officials and their corruption than the overall corruption of government.

      1. What I’m getting at is the government is notorious for giving cushy contracts just like they are for giving cushy employment terms. But only the latter is the center of the current shit storm. If it is all about protecting taxpayers and cutting government then why not go after both?

        1. Look at me!

          Look at me!

        2. Yes, government gives cushy contracts to its political friends, which is usually pretty obviously corruption and quid pro quo. And that’s already the focus of a lot of scrutiny. But the majority of government contracting isn’t that type of stuff. The majority is “Hey, we need something done, let’s see who wants to do it for us for what price.”

          1. At least with contracting the government presumably gets something in return.

            Pensions are checks to people thanking them for their “service”, often in excess of what they earned while employed let alone what they paid into the plan.

            Thinking about it I suppose if I were a liberal I would too be up in arms about attacking pensions, because isn’t the purpose of government to take from the productive and give to the unproductive?

            Contracts take from the productive and give to the productive.
            That’s evil.

            Taking from the productive to checks to people who have retired and who do nothing is much more honorable.

        3. While the public may generally believe that government contracting is some highly lucrative business, it’s actually quite low margin and fraught with all kinds of legal and political perils.

    5. Can anyone tell me why there is this massive hoopla about government workers salaries and benefits but no matching one about government contractors? Don’t both of them get pretty sweet deals of taxpayer loot?

      Yes. The left generally refer to these contractors as “Privatization!!1!!1one!” and suggest firing them. Replacing them with “competitively paid”, high quality public employees with guaranteed pensions.

    6. because I work for a gov’t contractor and I’ve had my pension ratcheted down twice in the last 3 years.

    7. I’m a govt contractor and no, I do not have the lush bennies (particularly retirement) that govt employees do. Nice try though.

  7. I never quite understood why actions private industry are forced to take are considered inappropriate — even illegal — for government?

    That’s a rhetorical statement, by the way.

  8. Here’s a list of the people in power anywhere that are going to listen to anything the report has to say:

    1)_______ ________________________________________________——————— *tumbleweed*))))))000e23456756ghngfg

    There, that’s the list. So much for stagnation.

  9. New pension monthly payment = minimum amount + x%*(old – minimum). Adjust “minimum” and “x” until solvent.

    1. Speaking of the bizarre, in Taiwan there are apparently Chinese NAZI party members. In China, if one shops around one can find shops that sell t-shirts with either Hitler, Osama or Mao on them.

  10. Shorter MNG = I support govt unions electing the people they negotiate ‘against’ and committing everyone to a lifetime of unrepealable taxes.

    1. Only unions can vote? And contractors and their employees cannot?

      When did that law pass?

      1. You only have to win a single off year election to decide taxation policy basically forever, if your theory of contract > constitution holds.

        1. So you think government should not be held to contracts the way private actors are and should be?

          I thought you were an anti-government guy?

          1. Private actors can go out of business and cease to exist, unless they’re GM and govt bails them out.

            1. Govt should be forced to honor contracts w/ its own money, not mine.

        2. MNG = third world democracy

          one man, one vote, one time

      2. [Only unions can vote? And contractors and their employees cannot?]

        If contractors pool their assets and efforts to drive prices up they are guilty of price fixing. If unions collaborate on bargaining (union strikes in support of some other union) to drive wages up they are not guilty of price fixing.

  11. I am not aware of any need for a government to enter into “contracts”
    with their employees, or if they do, to assume that those contracts have anything to do with what is covered by subsequent contracts. Each contract is a new beginning.

  12. The federal government of the United States spends 26 percent of our gross domestic product. We should all just move to Antarctica.

  13. On the other hand, California’s pensions aren’t really a problem if you just do the math correctly.

  14. So let’s cut to the chase ?….

    Private sector employers typically contribute 3%-8% of an employee’s cash pay towards retirement, yet the total cost (expressed as a level annual % of cash pay throughout one’s career) of Public Sector Defined Benefit pensions (for a 30-year employee retiring at age 55) ranges from 29% to 58% depending on the richness of the benefit formula (with safety workers generally at the highest end).

    More specifically, for the noted formulas, the level annual %s of cash pay are as follows:
    2% per year of service w/o COLA ? 29%
    2% per year of service with COLA ? 39%
    3% per year of service w/o COLA ? 44%
    3% per year of service with COLA ? 58%

    Even after deducting the typical employee contribution of about 5% of pay, that still leaves the employer (meaning TAXPAYERS) contributing 24% to 53% of pay. The middle of these %s is 38.5% vs 5.5% (the middle of the range of what Private Sector employers contribute) or SEVEN (yes SEVEN) times greater.

    This is completely absurd, and the very modest “tweaking” at the edges by practically begging employees for a few more percent of pay contributions will NOT even begin solve the HUGE financial problem.

    TOTAL COMPENSATION (Cash Pay plus Pensions plus Benefits) should be comparable in the Public and Private Sectors for similar jobs, and with Cash Pay in the Public Sector now AT LEAST equal to (if not greater) than that in the Private Sector, there is ZERO justification for greater Public Sector Pensions and Benefits .

    Not for PAST service, but for FUTURE service, Public Sector pension accruals must immediately be brought FULLY down to the level of their Private Sector counterparts. Due to the huge reduction needed, the ONLY way to do this is to freeze the current defined benefit plans for CURRENT (yes CURRENT) workers, and switch everyone into a 401K-style Defined Contribution Plan with an employer contribution in the same 3%-8% range granted Private Sector workers.

    Additionally, since Private Sector retirees rarely get any retiree healthcare subsidy before eligibility for Medicare at age 65, similar restrictions should apply to Public Sector retirees.

    It’s TAXPAYERS’ money and Civil Servants are NOT more worthy of bigger pensions and better benefits.

  15. the simplest solution is no pensions at all going forward. honor earned pension time, but only 401k contributions from now on. no more deferring costs. in today’s labor market it would be easy to replace any who feel the new system is too unfair to continue in.

  16. I have no probelm with scaling back some of the Pensions,,, many of them were overly generous,,, people getting 80% of thier pay. There should be a cap,,,, a retired public servent should not be pulling in over $100,000 a year in pension benifits. If they invested in a regular retirement fund then fine but they should not get more money in “pension” benifits than the average working person takes home.

    1. $100K – are you kidding? There are UC employees howling that they won’t be able to get by on less $250K a year.

  17. Harvard|5.31.11 @ 11:43AM|#
    “[MNG: Only unions can vote? And contractors and their employees cannot?]
    If contractors pool their assets and efforts to drive prices up they are guilty of price fixing. If unions collaborate on bargaining (union strikes in support of some other union) to drive wages up they are not guilty of price fixing.”

    And not only are unions exempt from price-fixing laws, other (union-sponsored) laws *require* the government to negotiate only with the price-fixers.
    MNG presumes his Socratic evasions aren’t transparent.

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  19. My solution, which I believe to be legally valid but I’m not a lawyer:

    Add a new retirement system that is entirely defined contribution. Create a conversion rate that transfers the current value of future benefits into that plan for employees that switch (something less than 100%, but still reasonable.) Those who do not switch will no longer get raises.

    This would still be a long-term process of unwinding, but at least it would be faster than the new hires only plan.

  20. Why not just go bankrupt and let the judge decide the equitable way to settle all these issues?

  21. ty rights, etc. seem like a more accurate measure of freedom than democracy.

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