Forget pension reform

MAY 17, 2010

“One cannot be both a progressive and be opposed to pension reform,” argued Gov. Arnold Schwarzenegger’s top pension advisor, David Crane, during a hearing Monday.

“The math is irrefutable that the losers from excessive and unfunded pensions are precisely the programs progressive Democrats tend to applaud. Those programs are being driven out of existence by rising pension costs.”

Yet, it’s clear that the progressive Democrats who run California’s Legislature have no intention of doing anything to anger the state’s public employee unions. Union leaders and activists filled the committee room to speak out against Senate Bill 919, which would increase retirement ages and decrease defined pension benefits for newly hired state employees. The new levels would still be far more generous than pension plans in the private sector, but the state’s private-sector workers don’t register on the Democratic radar screen —- except when the party is looking for new targets from which to extract additional taxes.

Reality time: There is no chance California’s Legislature will embrace even modest reforms to its public employee pension system, which has a liability estimated by Stanford University researchers to be as high as $500 billion. The committee didn’t get a quorum to take a vote.

Republican Sen. Dave Cox, R-Fair Oaks, stated the obvious: This bill will never get out of committee and the only hope for reform is in the initiative process. Because unions have the ability to raise political funds from member dues and have armies of foot soldiers to engage in campaign warfare, statewide initiative reform is a tough road as well, but there are few other options.

Union officials insist that unfunded liabilities don’t mean much because of natural market fluctuations. All will be well, they say, when the economy rebounds.

But Crane reminded listeners that the “state pension obligations are no different than state debt obligations, which also are promises to pay amounts in the future.” These are fixed debt obligations —- no different than any other debts incurred by the government, except that they are not capped and not subject to public approval. And, Crane warned, “Pension payments are senior obligations of the state to its employees and accordingly have priority over every other expenditure except Proposition 98 (i.e., K-14) expenditures and arguably even before debt service.”

It’s understandable that unions take the “don’t worry, be happy” approach toward pension obligations. They get theirs no matter what. But any legislator who believes that such obligations don’t harm programs or endanger the state’s budget is not dealing with fiscal reality.

Anyone who trusts the scandal-plagued California Public Employees’ Retirement System as an honest broker on pension matters is delusional. CalPERS testified against SB 919 and made new projections to soothe legislative worries. [EDITOR’S NOTE: CalPERS contacted me today and said that it is neutral on the bill and just provided information. As I recall, CalPERS reps said the bill was not necessary and provided information that assuaged legislators’ concerns about the state’s pension problems.]

In referring to CalPERS’ 1999 plan to retroactively increase pensions, Crane argued, “It’s nothing short of astonishing that the CalPERS proposal, which promoted the largest non-voter approved debt issuance in California history, was not accompanied by disclosures of risks or conflicts of interest. Frankly, I’ve never seen anything like the CalPERS sales document, which makes even Goldman Sachs’ alleged non-disclosure look like child’s play.”

When CalPERS pitched that fiscally disastrous idea in ’99, Crane added, it never revealed that the state would be responsible for any shortfall in investment returns, that its assumed investment returns required “the Dow Jones to reach roughly 25,000 by 2009 and 28 million by 2099,” that the state had no cap on potential taxpayer liabilities, that its own employees would directly benefit from the pension increases, and that CalPERS’ board members “had received campaign contributions from beneficiaries of the legislation.”

But, if Monday’s hearing is an indication, legislators are still listening to CalPERS’ empty promises and ignoring the more reasonable warnings made by Crane and other pension town criers. Committee Democrats also seemed to accept the argument by union representatives, who insisted at the hearing that any pension matters should be handled at the negotiating table, even though such negotiations have resulted in the current fiscal train wreck. Unions are at their strongest at the bargaining table, especially when one considers that the government staff supposedly representing the taxpayers usually also benefit from any gains the unions achieve.

Even SB 919’s attack on dubious pension-spiking schemes and its effort to remove certain categories of workers (i.e., milk inspectors and billboard inspectors) from receiving enhanced “public safety” formulas got no traction. Senate Democrats were looking for excuses to stop the bill. They weren’t engaging serious debate.

For instance, Sen. Denise Ducheny, D-Chula Vista, mocked the bill because it won’t do anything to fix current budget problems (it will take years before the new savings from the new hires are realized) and because it deals only with state workers —- not the many local agencies that pay equally generous packages to public employees. That seems to argue for a tougher bill that took on current employee benefit packages, but Ducheny wasn’t advocating for that approach, but for the do-nothing preferences of her union allies.

The bill’s progressive foes never responded to Crane’s point that “All the consequences of rising pension costs fall on the budgets for programs such as higher education, health and human services, parks and recreation and environmental protection that are junior in priority and therefore have their funding reduced whenever more money is needed to pay for pension costs.” It’s no wonder. There is no serious response to that dead-on argument.

That’s why the loud and surly union crowd did what unions always do —- engage in a show of force rather than forceful argumentation. In the union worldview, the system works fine —- any problems are the result of “Wall Street.” And, of course, if taxpayers would only pay more to the state, all would be well with the world.

As the Retired Public Employees Association argued in a letter to committee Chairman Lou Correa, D-Santa Ana, in opposition to SB 919:

“RPEA disagrees with the assertion that California’s public employee pension system is broken.

“California’s system of providing retirement security and healthcare for our hard working public employees has worked for years —- and is working now. It is a well managed system that allows us to recruit and retain good public employees, while keeping the promise made to them for secure, fair and well earned retirement.”

Well, there’s no question the system does work well for its government retiree beneficiaries. It would be nice, however, if California’s majority legislators occasionally thought about taxpayers or some other constituency.

Unless the economy comes roaring back, pension obligations will continue to sap the budget and create pressure for cuts and business-busting tax hikes.

This sets the stage for an eventual statewide initiative battle, which could rival the importance of 1978’s property-tax-limiting Proposition 13. This could be the beginning of a wild ride.

–Steven Greenhut