Ignoring Pension Truth Tellers

MARCH 5, 2011

There’s no getting away from the pension issue these days or from the fact that the state’s pension system is on the brink of disaster unless pensions for state and local workers are pared back dramatically. The only people in denial these days are the Brown administration and the state’s legislative leaders, as their response to a prestigious government report makes clear.

The well-respected and non-partisan Little Hoover Commission drew some conclusions that even many pension reformers have been reluctant to make – namely, that pensions must be reduced for current employees. The state’s unfunded liabilities, or pension debt, is estimated as high as a half-trillion dollars. That is the amount taxpayers will owe to make good on pension for current retirees and employees. Most of the debate has centered on reducing formulas for new hires, but as Little Hoover explained, that won’t put a dent in the problem.

“The state and local governments need the authority to restructure future, unearned retirement benefits for their employees,” according to the report. “The Legislature should pass legislation giving this explicit authority to state and local government agencies. While this legislation may entail the courts having to revisit prior court decisions, failure to seek this authority will prevent the Legislature from having the tools it needs to address the magnitude of the pension shortfall facing state and local governments.”

In the private sector, when companies were forced to honestly account for their pension debt – they don’t have the luxury to hide it the way that governments do – they had to reduce benefits for current employees going forward. A worker is made whole up to today, but must accept a lower benefit starting tomorrow. In the government world, where union-owned politicians rather than businessmen make these deals, once a pension deal is struck there is no changing it for the life of that employee and that employee’s spouse. That’s the key reason taxpayers feel powerless as the pension situation pushes the state toward the cliff.

The report offered a dose of reality for a state government still in denial. Democratic leaders and union officials (is there a difference these days?) insist that the pension mess merely is the fault of a bad economy and they love to blame Wall Street. But Little Hoover explained it more accurately, comparing the situation to the housing boom and bust: “Treated like another speculative house during the boom, the state allowed public agencies and employees to pull equity in the form of increased retirement benefits from the pension funds whose value was inflated by optimistic market retirement estimates.”

The results, according to Little Hoover, are that “pension costs will crush government.” This certainly should get the attention of progressive Democrats who claim to care about public services, although the reality is that these Democrats believe that Californians are woefully under-taxed and that massive tax increases on business and “the wealthy” will fix things. Good luck with that.

This is a battle over the future of California, as communities spend more than a third of their budgets on pensions (plus even more for other retirement costs for public employees, such as health care), which means “an intensifying fight for diminishing resources from which government can pay for schools, police officers, libraries and health services.” And because public employees “appear to have little incentive to push for reforms,” they, too, will suffer, as they look at cutbacks in public services. Per the report, “A pension cannot grow without a job attached to it.” Maybe that reality eventually will get the unions’ attention.

Yet I’m convinced that the state’s public employee unions will take the state over the cliff rather than pare back their generous benefits. What happens when these pension costs push the state toward insolvency and the dominant political players refuse to give in? We might get to watch this unfold, and the result is unlikely to be pretty.

Little Hoover hit on the real problems: Governments are in the position of paying employees for more years in retirement than they worked thanks to the very low retirement ages creating, in essence, a shadow workforce that costs as much as the real workforce but doesn’t do any work! Police, fire and other public safety pensions must be addressed – California politicians cannot make a devil’s bargain and put the biggest part of the problem off the table, as did Wisconsin Gov. Scott Walker, who made a craven political calculation.

The report noted that the system lacks oversight and accountability. Shockingly, “As pension portfolios shrunk and tax revenues plunged, nearly 200 public agencies in CalPERS (California Public Employees’ Retirement System) continued to increase retirement benefits for current workers.” So much for the idea that elected officials will fix this problem at the bargaining table, as Democrats allege. Elected officials continued to run up debt on pension promises despite all the evidence of disaster, and most would do the same thing today if they could.

The report calls for uniformity in determining pensions as a way to stop the pension spiking that has agitated the public. It calls for a cap of $80,000 to $90,000 on the salary used to determine pensions, which is still too high, but a good idea. It calls for honest accounting. It calls for a hybrid model of retirement that combines defined benefits with a 401/k-style plan, and multiple other sensible ideas that reduce the abuses and the size of the pensions.

According to news reports, some Democrats attacked the commission and the governor’s office issued a meaningless statement: “The governor agrees that California faces serious challenges, which is why he rolled out a comprehensive framework to reform pensions during his campaign.” The unions certainly got a good deal when they spent record amounts electing this governor.

The truth is out there. As I’ve argued before, with the current leadership, matters must get far worse before we see serious action.

–Steven Greenhut