Ignoring Pension Past, California Risks Future Problems

Lawmakers don't want to re-litigate prior bad decisions even as they keep making them.

It's one of the oldest ploys. After officials at a government agency or business are caught in an embarrassing situation, it's typical for them to deny there's anything to the scandal for as long as possible. Eventually, after the facts are obvious to everyone, expect them to declare, "That's old news. Let's focus instead on the future."

In last week's column, I wrote about renewed attention on California's expanding public pension mess. Major newspapers have reported on something we've been covering at the Register for many years: In 1999, the California Legislature rammed through (quickly and with abbreviated hearings), and Gov. Gray Davis signed, a law that began 16 years of retroactive pension expansions in state and local agencies across California.

The end result has been large, unfunded, taxpayer-backed liabilities that are crowding out public services, leading to tax hikes and even insolvency in some locales. It's a huge mess. In fact, The New York Times noted the California Public Employees' Retirement System (CalPERS) has two sets of books—one with rosy predictions and the other that paints a dismal picture for taxpayers.

CalPERS—which in 1999 claimed the pension boost (Senate Bill 400, which had then-Assemblyman Lou Correa of Santa Ana as a principal co-author) would pay for itself through continuing stock-market increases—came back with a rebuttal this past week.

Referring to "the recent back-and-forth debate over pensions," three of its officials warned against falling "into the tired trap of looking back: It's time to put SB 400 [behind us.] Retirement security is too important today to get caught in a debate about the past." How convenient for an agency that has for years been denying major pension-debt problems that it should now want to avoid talking about that history.

Sorry, but the past debate is crucial, and not just because California taxpayers will eventually be forced to clean up the mess caused by years of miscalculation and, yes, greed. Thanks to Gov. Jerry Brown's signature Thursday on Senate Bill 1234, the state is moving forward rapidly on a new "Secure Choice" retirement program for Californians that is designed to be something of a state-run mini-Social Security system for private workers. CalPERS is on the sidelines of this debate, but it could play a key role in investing the dollars deducted from employees' paychecks.

State officials point to the real retirement crisis among 6.3 million California workers who do not have access to retirement accounts. The basics are simple. Employers (with five or more employees) would be required to participate in this state-run program in which employees would have 3 percent of their salaries deducted. Employees would be allowed to opt out. The details are in flux, but the money would be invested in a low-risk investment most likely tied to the Treasury bond.

It's backed by Democratic leaders and unions. As state Treasurer John Chiang wrote (rebutting my criticisms): "Secure Choice statutes do more than 'promise' that taxpayers will not be on the hook. Under no interpretation of the law can the program exist unless it can be operated at no cost to taxpayers. Secure Choice would not be a pension. As an automatic-enrollment IRA plan, Secure Choice would allow California's workers to save for themselves with no contributions from employers and no costs or liability to taxpayers."

Yes, for now. This brings me back to SB 400. Sure, state officials don't want to relive 16-year-old battles. But wouldn't it be wise to review the state's predictions on past retirement deals before we consider any predictions on new ones?

In a statement, the Investment Company Institute, a D.C.-based trade association, argued, "Although legislation authorizing the program limits the state's liability, future state policymakers are likely to feel an obligation to cover any shortfalls or excessive expenses that the program incurs."

Officials are starting a program that will take on a life of its own. If the current predictions go awry and millions depend on the program, what happens then? What will stop future legislators from expanding its scope?

As ICI's president noted last month, "The analysis used to advance this legislation paints an overly optimistic picture of this program's success and dangerously understates the economic risks to the state of California. Implementing Secure Choice as it stands now could damage California's fiscal health and create a new financial liability for state taxpayers."

Even if it works as planned, the program will provide a pittance to private-sector workers—especially compared to the overly generous and unsustainable pensions public employees receive. Indeed, the idea behind "Secure Choice" was floated by union allies to solve a political problem. They saw that taxpayers were having "pension envy," so they came up with this measure as a positive way to tamp down all the criticism.

But once something's started, "Katy, bar the door." You can trust me on that one—or trust the folks who told you a massive, retroactive pension increase for public employees across the state wouldn't cost taxpayers a dime.