California

Gov. Brown's Pension Reform Plan Won't Defuse the Bomb

Plan for California will help fight fraud and pension spiking, but doesn't deal with the reality of the system's unsustainability.

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You're going to have to cut some of the wires to stop the ticking.

Gov. Jerry Brown flew from Sacramento to Los Angeles today – God knows why—to announce his pension reform plan that everybody has been waiting for. It's a lot of fanfare for something so lackluster. It's not nothing, but the outcome is just slowing the growth of the pension disaster. This plan is a long, long way from getting California's personnel expenses under control. The Sacramento Bee's state worker blog provides the basics:

The salary of future hires that will be considered for pension purposes will be capped. The ceilings: $110,000 for employees who participate in Social Security and $130,000 for those who don't, such as fire fighters, police and teachers.

Brown's proposal to put new hires in hybrid pension plans won't happen. Instead, the pension formulas for new hires—both safety workers such as police and firefighters and miscellaneous employees—will be rolled back.

New employees will pay half of their normal pension costs. Employers would still have to bargain contribution rates for current employees.

Miscellaneous employees—the largest category of workers—would have to wait until their 67th birthday for maximum retirement benefits, compared with age 62 for most current workers. Future safety employees—including police, firefighters and prison officers—would would have to wait until age 57 to qualify for maximum benefits. Depending on their employer and contract, current employees in those jobs can retire as early as 50 years old and receive maximum benefits, although that happens relatively little.

Lawmakers embraced several proposals Brown made earlier this year, including:

Pensions will be figured using a three-year salary average that includes only regular recurring pay.

Retirees can work a maximum 960 hours per year.

Felons will lose their pensions.

No more retroactive pension enhancements.

No more "pension holidays" that allow employers and employees to skip contributions when pension funds are flush.

Additional service credit purchases will be eliminated.

These are not bad ideas, but a lot of what it does is prevent future abuses of the system and reduces the growth of the pension commitment moving forward. It doesn't do anything to deal with the crisis as it stands now. Employees will not be pushed into a 401(k)-type system to reduce the state's liability.

Jon Fleischman at conservative California site FlashReport dismisses the reform, pointing to two major components that must be addressed:

1) Meaningful impact on the one number that matters — the unfunded pension liability.  A study out of Stanford University pegs that number as north of $500 billion dollars.  The word is that this "big reform" that will be announced by Brown may provide about $20 billion in savings.  Needless to say this hardly moves the needle at all.  And without seeing the details of the proposal, one can assume that this plan is very light on requiring current employees to pay more towards their retirement — I suspect it actually has no impact on current employees for remaining years of service.

2) None of the reforms, however insignificant compared to lack of meaningfully bringing down the unfunded liability, are safeguarded from being repealed or ratcheted down by future legislative action.  We already have seen this legislature retroactively increase benefits for public employees.  The only realistic way to ensure that pension reforms are secure is by placing them on the ballot, so that the voters of California can lock them in place.  This has been a key demand of Republicans throughout the legislative process, one that has been ignored by Democrats.  When the deadline passed earlier this summer for the legislature to place a measure before November voters, that effectively closed the door on permanent pension reforms.

The first concern is obvious to anybody who follows pensions – or at least to God I hope so. I expect editorial boards across the state to ding Brown on this, even the Los Angeles Times. The second issue is a bit more subtle, but it's really just as important. There's nothing in these proposals that can't be undone easily. In the event that California recovers from this economic freefall somehow (just don't ask how), there's nothing stopping these numbers from being quietly changed back to ridiculously high amounts the next time California has a boom that will last forever and ever, just like the last one. Changing the system to a 401(k)-style contribution program would be much harder to undo, and no doubt that contributes a hell of a lot to the resistance.