A Clue To Gov. Brown's Pension Plan

JAN. 31, 2011

By LAER PEARCE

Shuffled in with Arnold Schwarzenegger’s last-minute appointments was one – a very good one – that almost slipped by largely unnoticed, until The Buzz blog at the Sacramento Bee outed it:

Among other actions on his way out the door, then-Gov. Arnold Schwarzenegger appointed Cameron Percy to the California State Teachers’ Retirement System board in December.

Percy, 26, has a graduate degree from Stanford. While he was a student, he helped write “Going For Broke: Reforming California’s Public Employee Pension Systems.”

That’s the report that Schwarzenegger and Co. used as a source for the oft-cited and highly disputed calculation that California’s Big Three pension systems faced a collective $500 billion in unfunded liabilities.

If there’s one thing California’s public employee unions hate, it’s the Stanford report – so they are decidedly unhappy with Percy’s appointment.  When Percy et. al. released their study (which you can download here), CalPERS immediately fired off a page chock full of stats that lacked one critical piece of information:  Its own calculation of the unfunded liability.  I’ve spent over 30 years in the communications business where we have a word for that sort of thing:  stupid.

The unions’ pension unfunded liability calculation, it turns out, is about one-tenth that of Stanford’s: a measly, insignificant $55 billion.  Why worry? That’s only $1,500 out of the pockets of every man, woman and child in the state and, heck, it’s not going to get any bigger, right?

The difference between the two numbers, as has been reported on CalWatchdog, is that Stanford used a 4.14 percent “risk-free” discount rate, the rate private companies must use when calculating their pension liabilities.  California’s public employee pensions use between 7.5 percent and 8 percent – a performance they’re not achieving, and most experts agree they have no hope of achieving on a sustained basis, and certainly not now.

Public support for Brown’s special election tax increase proposal barely breaking 50 percent in the early polling, and it remains unclear whether he’ll be able to cobble together two-thirds of the Legislature to place the measure on the ballot in the first place.  Given these challenges, he knows passing the tax increases may force him to bite the union hand that fed his election campaign, and submit a companion pension reform proposal with real teeth.  So far, Brown, who left Oakland with its own $310 million in unfunded pension liabilities, has only talked about minor tweaks to public pensions – just enough to not tick off the unions, but hardly enough to show voters he’s really serious about fixing California. If he can’t bring himself to stand up to the unions and push for meaningful limitations on public pensions and a comprehensive plan for addressing the huge unfunded liability, look for support of Brown’s tax increase measures to drop dramatically.

Percy’s nomination will give us a clear insight into Brown’s thoughts as he grapples with this dilemma.  The appointment must be confirmed by the Dem-dominated Senate, but Percy may not even get that far, since Brown has the power to boot him and name his own appointee. How Brown acts on the appointment will tell California voters and public employee union bosses what they can expect from the new administration. It’s routine for incoming governors to replace the nominees of out-going governors, but there’s nothing at all routine about the Percy nomination.

Laer Pearce, a veteran of three decades of California public affairs, is currently working on a book that shows how everything wrong with America comes from California.