Maybe We Can Touch Pensions

Steven Greenhut: In most pension discussions here in California, opponents of pension reform — the state’s dominant Democrats and the public sector unions, which basically run the Capitol — argue that no reform can touch existing benefits. But a new column by pension reporter Ed Mendell suggests that it may be possible to touch those benefits. Writes Mendell: “Two charter cities, San Diego and Pacific Grove, are taking action that could shift more of soaring pension costs to employees, and a law firm that specializes in employee benefits says local governments may have ‘more latitude’ than they think to cut costs.”

That’s potentially good news. Something has to be done about existing costs. The thinking so far has been that once a city council, a board of supervisors or the state Legislature grants additional benefits, those benefits must be paid for 30 years or more. This is very convenient. It protects current employees and retirees from any benefit reductions on contribution increases. But it also puts the state in a box. The estimated half-trillion-dollar unfunded pension liability in California is from current employees and retirees. It will take years before reforms for new hires show any real savings.

In fact, legislative Democrats have argued in opposition to a new pension tier for state employees by saying that the new tier won’t make much of a fiscal difference for years any way. Most of us would think that’s an argument for deeper reforms, but in the state Capitol that’s the argument used to oppose any reforms.

Orange County is continuing its lawsuit challenging the retroactive portion of a 2001 pension increase for deputy sheriffs, claiming that retroactive benefits are an unconstitutional gift of public funds. This sort of challenge to the status quo is desperately needed.

Per Mendell, “The conventional view is that the courts have ruled that once an employee is vested in a public pension, the benefits are a contract that cannot be cut. So pension cuts are usually limited to new hires not yet vested in the plan. But a law firm in Folsom that specializes in employee benefits argues, after taking a close look at court rulings, that governments may be able to make reasonable reductions in pension benefits not yet earned, particularly if needed to preserve the pension system.”

This is where things have to be headed. Otherwise the only options are massive cuts in services or financial crisis.

DEC. 7