Brown Pension Plan Band-Aids Gut Wound
By JOHN SEILER
Due to the pension crisis, the California state budget is bleeding profusely from a gut wound. Yet in his pension-reform proposal announced today, Gov. Jerry Brown applied a Band-Aid.
The 12-point plan does include some worthy components, such as increasing retirement ages; moving new employees into a hybrid retirement plan that includes contributions to 401(k) plans and Social Security; and an end to pension spiking at the end of an employee’s career.
That would have been an adequate reform 12 years ago, but now is too little too late, Carl DeMaio told me; the San Diego councilman is running for mayor of America’s Finest City on a pension-reform platform. A longtime government reform activist, he headed the California Performance Review early in Gov. Arnold Schwarzenegger’s administration, an excellent cluster of reforms which the governor ignored.
“It takes some baby steps forward,” DeMaio said of Brown’s new plan. “But in the end, it’s completely inadequate for protecting taxpayers. It’s deja vu because it’s not reforming existing pensions,” only those of new hires in government. DeMaio was referring to earlier reform efforts, including one Brown himself proposed earlier this year.
Of Brown’s March pension reform proposal, my CalWatchDog.com colleague Steven Greenhut wrote at the time, “So these are good, simple measures that would — if the plan goes forward — halt some of the most corrupt pension practices. But these items will not fix the bulk of the problem, although they will save some money. They do not address oversized pensions or promote anything that will save the kind of money needed to get the system under control. ”
In the intervening seven months, as the pension wound has continued to suppurate, Brown has come with no more substantial cure.
Real Reform — or Insolvency
DeMaio said Brown’s proposal is the same as that which has been offered by local officials and seeming reformers in San Diego for many years, but which is totally inadequate. Opponents always say of substantial reforms for existing workers, DeMaio observed, “that the unions will resist the reform plan, and we don’t know if this can be done legally. But they’re not aware or aren’t willing to see that it is legal and possible. If you don’t reform existing pensions, the state will not be able to function — it will become insolvent.”
California’s pension crisis is so immense that the numbers boggle the mind. Several independent reports indicate that the state’s pension liability could go as high as $500 billion — or even $884 billion. The state pension funds simply have not recovered from the major hits they suffered during the recent recession.
“You can eliminate new pensions entirely and you still couldn’t pay for the pensions of existing workers and those already retired,” DeMaio calculated. So any reform that doesn’t deeply engage existing workers’ pensions — and even the pensions of those already retired — is irrelevant.
DeMaio also charged that it is “patently unfair” for government workers to get pensions that are so much more generous than the pensions earned by the private-sector workers who pay the taxes.
For the sustainability of the pensions, he said, the key is “contribution rates. I was harping on that 12 years ago.” The government employees just aren’t contributing enough to their own pensions to prevent insolvency.
Despite that, the unions have been carping at even Brown’s modest new reforms. “The governor has indicated that labor will not like many of his proposals. He’s right,” said Dave Low, chairman of the union coalition Californians for Retirement Security. “Unions across California have negotiated major retirement concessions, including increased payments by employees and two-tier benefits. These concessions have already saved the state, cities, counties and other entities hundreds of millions of dollars. We are strongly opposed to imposing additional retirement rollbacks without bargaining.”
And of course, in bargaining, they never will agree to any substantial reforms.
DeMaio said that, if California ever gets serious about pension reform, it will follow the model he is advancing in San Diego with his Comprehensive Pension Reform Initiative for his city, which will be on the local ballot next year. Its major features include:
* It shifts new hires from taxpayer-guaranteed defined benefit plans, which have seen costs run up so high, to 401(k) style defined-contribution plans;
* For existing employees, it “imposes a cap for five years on individual pensionable compensation. An individual pensionable compensation cap produces bona-fide savings by reforming pensions for existing employees.”
Brown’s proposal really is “a political strategy to delay reform,” DeMaio said. “It’s fig-leaf reform. We already tried all that in San Diego, and it failed. If the governor only advances his new proposal, it won’t be successful.”
Public Demands Reform
DeMaio observed that “the need for fundamental reform is understood by the public. There’s widespread support not only by Republicans, but by Democrats and independents as well. The governor and his allies in the labor movement don’t understand that.”
DeMaio also said it’s unclear how the governor’s proposal affects public safety workers, whose members belong to the powerful police and prison guards unions. “The original discussion was that it wasn’t going to include them. I doubt he includes them.”
The actual Brown proposal, which of course is just a tentative plan put before the public, says this on public-safety workers: “The hybrid plan will combine those two components with Social Security and envisions payment of an annual retirement benefit that replaces 75 percent of an employee’s salary. That 75 percent target will be based on a full career of 30 years for safety employees, and 35 years for non-safety employees….
“The State Department of Finance will study and design hybrid plans for safety and non-safety employees, and will fashion a cap on the defined benefit portion of the plans to ensure that employers do not bear an unreasonable liability for high-income earners.”
Who knows what the “study” will turn up.
By contrast, DeMaio said of his reform initiative, “In San Diego, our reform treats everyone the same. Public safety, blue collar, white collar — all public-sector employees are treated the same.”
Unless the public safety employees are included in a state reform, “you can’t sustain it,” he said. “Math is math.”
Existing Retirees’ Benefits Cut, Too?
DeMaio even broached a taboo subject that I have covered before: Cutting the benefits not only of new hires and existing employees — but of those already retired and receiving benefits.
“If the governor were bold, he would seek a constitutional amendment applying pension reforms retroactively,” DeMaio said. “The unions never would go along,” but such a reform might be needed if ongoing reforms prove inadequate.
For example, California could cut the pay going to the 9,111 workers belonging to the state’s “$100K Pension Club” — those receiving pensions of more than $100,000 a year. If their pensions were cut, say, to $80,000, they wouldn’t end up using CalFresh EBT cards to buy caviar. They still would enjoy a comfortable retirement, just not a lavish one.
As DeMaio says, major reforms are coming, sooner or later. And the longer Brown and others delay reform, the further the pension amputations will cut.
May 23, 2013