Hoover conference reaches consensus on some areas of pension reform

Hoover conference reaches consensus on some areas of pension reform

Hoover 1Today the Hoover Institution released a crucial document in California’s debate over pensions, “California Public Pension Solutions: Post-Conference Report.” The conference itself took place last October. But its debates and findings now have been compiled for everyone to read and analyze.

The document comes as Gov. Jerry Brown has called for reforming teachers’ pensions — which need $4.5 billion more a year from the general fund to remain solvent — but only after the 2014 election.

The conference was co-hosted by Hoover Senior Fellow Josh Rauh; David Crane, who advised former Republican Gov. Arnold Schwarzenegger on pensions; and Joe Nation, a former Democratic assemblyman who has been a leader on pension issues. The latter two are scholars at the Stanford Institute for Economic Poilcy Research.

With the hosts, the bi-partisan conference included 39 attendees from across the political spectrum. Others were Democratic Mayor Chuck Reed of San Jose, who is working to put a pension reform initiative on the ballot; and Michael Genest, who served as the director of the state Department of Finance under Schwarzenegger.

The report mainly comes in the form of discussion responses. The first topic concerned the “California Rule” on pensions. Pension legal scholar Amy Monahan, who attended the conference, wrote a paper in 2011 which described the “California Rule”:

“[P]ension benefits for current employees cannot be detrimentally changed, even if the changes are purely prospective….  This Article illustrates that in holding that benefits not yet earned are contractually protected, California courts have improperly infringed on legislative power and have fashioned a rule inconsistent with both contract and economic theory.”

At the conference, three-fourths of the attendees agreed with the statement: “Amending the ‘California Rule’ to allow the state and/or localities to adjust pension benefits going forward would make meaningful reform more likely.” (See chart above.)

If such a change is not made, the only reform possible is what we have seen so far: changing pensions for new hires, which creates a two-tiered system in which old employees enjoy much better pension benefits than newer employees.

Hoover 2Value vs. promises

The attendees were evenly divided on whether emphasis on reform should be put on a) the value (generosity) of the pensions — that is, making sure retirees adequately were taken care of; or b) keeping the promises made to the employees.

On the generosity factor, it noted:

“The generosity of benefits has become problematic. For instance, in 2012, over 31,000 state retirees received pensions of $100,000 (71% higher than California’s 2012 real median household income).”

But if promises are examined, generosity also actually would be a part of the discussion:

“For example, if California legislators or local officials had to fully fund pension plans, the true cost of such plans would immediately be apparent. This would either result in cuts to other services or re-negotiated benefits. Therefore, requiring that promises are fully honored could also lead to more reasonable benefit generosity.”

The split in the attendees’ positions indicates that this will be a difficult issue to address. But another deep recession, with former taxpayers thrown out of work, could highlight again the high pension amounts.

Risk-free

Hoover 3Consensus also was strong for ensuring that pension funds and boards use a “risk-free” rate of return in their projections. Three-fourths of attendees agreed with the statement:

“Requiring state and local pension boards to use a risk-free rate of return, contribute 100% of ARC (actuarially required contributions), and publicly post user-friendly financial statements is a prudent step toward the financial health of pension benefits.”

Even pension funds have been moving in that direction. Just Tuesday, reported the Sacramento Bee:

“The state’s annual contribution to its massive pension fund is about to go up substantially, and much sooner than expected.

“In a victory for Gov. Jerry Brown and his get-tough approach, the CalPERS board on Tuesday set the stage for a rate increase that will cost the state treasury around $400 million beginning July 1. The increase will be phased in over three years and will ultimately cost the state an extra $1.2 billion a year. That will bring the state’s annual payout to CalPERS to around $5 billion.”

That money now will not be available for other general-fund purposes, such as schools. And it’s a mark for those who contended that at least some of the $7 billion from the Proposition 30 tax increase voters approved in 2012 would go toward pensions, not to schools, as was promised.

Unions

The major stumbling block to pension reform remains the powerful public employee unions.
But the consensus for reform among the 39 Hoover conference attendees presents, if not a unified front, at least a strong tendency of where reform will have to go once the state’s finances get bad enough that reform becomes mandatory.

8 comments

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  1. SkippingDog
    SkippingDog 20 February, 2014, 17:00

    Even though the conference attendees were heavily weighted toward the shills of the anti-public pension movement, such as Nation, Pellisier, Reed, etc., you still seem to have ignored the findings numbered 5 through 9.

    Why was that?

    Reply this comment
  2. Donkey
    Donkey 21 February, 2014, 14:55

    The RAGWUS system is unsustainable under the current conditions imposed by the Unions and their political pets. In the end the math will solve this fraud placed upon the have-not private sector taxpayers. 🙂

    Reply this comment
  3. Queeg
    Queeg 22 February, 2014, 09:18

    Donkey poor chap.

    The Ragwus in Sacramento has a 15 billion budget shortfall per financial rating agencies.

    Chaw on that.

    Reply this comment
  4. James Pate
    James Pate 23 February, 2014, 07:53

    The current pension problems are a result, most proximately, of three issues: 1. Large scale socio/economic trends. 2. Official corruption. 3. Mismanagement on a staggering scale.
    The proposed changes in the pension “system” will have no effect at all on the basic issues. Indeed, they would be another iteration of the problems.
    The participants in this conference, looking at their various position papers and statements, reflect amazingly ignorant academic gobbledygook, and the opinions of the purveyors of the corrupt, incompetent political/managerial class that created the problems.

    Reply this comment
  5. SeeSaw
    SeeSaw 23 February, 2014, 09:21

    Bi-partisan?

    Reply this comment
  6. john M. Moore
    john M. Moore 24 February, 2014, 12:43

    The “scholars” simply do not understand the extent of the pension mess for public agencies that issued pension bonds prior to the 2007-9 financial fall.About 1/3 of the proceeds were lost by CaLPERS, creating, in general, a new deficit of about 2 1/2 times the principal on the pension bonds. So now those entities pay large annual sums for the bonds and have a new deficit that grows at the actuarial investment rate(7.5% per year). Here in Pacific Grove, where services have been cut by 2/3, and new taxes and fees are a regular event, that combination still does not begin to off-set the growth of the new unfunded deficit. And it never will. It is mathematically impossible. The situation is unsustainable by every measure.

    Reply this comment
  7. Tough Love
    Tough Love 25 February, 2014, 10:38

    Quoting …”At the conference, three-fourths of the attendees agreed with the statement: “Amending the ‘California Rule’ to allow the state and/or localities to adjust pension benefits going forward would make meaningful reform more likely.”

    What’s astounding is that ANYONE (let alone 1/4 of the attendees) would NOT find that such a change would …”…would make meaningful reform more likely”

    Clearly ALL of those 1/4 of the attendees have a vested interest in maintaining this CLEAR Taxpayer ripoff, likely because either they or a family member are riding the Public Sector pension gravy train.

    Reply this comment
    • Tough Love
      Tough Love 25 February, 2014, 11:02

      From the attendee list, it looks like that 1/4 of the attendees included the CalPERS rep and likely the “In-The-Union’s-pocket” Assembly members.

      Reply this comment

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