Many states, counties, and cities are in a budget vise caused by funds they are required to set aside to pay pensions for retired public employees. California may be in the worst shape.
Ever since Jerry Brown—in his first incarnation as Governor (1975-79) —approved collective bargaining by public employee unions they have used the union dues the state deducts from public employee paychecks to fund legislators’ election campaigns.
Over the last 40 years the legislature has been dominated by Democrats in all but a few years. It is not much of a stretch to say it is more-or-less owned by the public employee unions, on the one hand, and the environmental lobby, on the other.
In most cases, public employee pensions are “defined benefit” plans. That is, once the benefit is calculated, the government entity promises to pay that amount monthly for the life of the retired employee. With these plans it is government administrators who decide where to invest the money. The retiree receives the promised pension amount whether the state’s finances are in the black or the red or whether the invested pension funds make money or lose it.
The California Public Employees’ Retirement System (CalPERS) handles pension investments for state employees and most of the state’s municipalities. To illustrate how efficient the “defined benefit” system is, and how profitable its investment strategy, California’s unfunded pension liabilities now exceed $1 trillion.
Now and then the state does have a budget surplus. Recently, the state finance office reported that this year’s tax collections are running ahead of projections. The Democratic legislators immediately began talking about all the good works on which they would like to spend this money. At present in Sacramento there are a dozen proposals to increase both taxes and spending. Never mind the unfunded pension liabilities.
Now come two men, one a Democrat, the other a Republican, who are convinced there is a better way. Chuck Reed, former mayor of San Jose, the state’s fourth largest city, led the overhaul of that city’s own pension system. He has teamed up with Carl DeMaio, a former San Diego City Councilman, who was active in a city pension reform movement there.
They are leading a group that will circulate petitions for a 2016 ballot initiative that would give governments the right to replace the current system with a “defined contribution” program. Most businesses and industries moved to this system in recent years. It would be similar to 401(k) plans in which the employee sets his/her payroll deduction amount. The public body, like a private employer, may increase this by making a lump sum contribution, say, annually. Once established, the public contribution could be increased only by popular vote.
As in private pension programs, the employee would own his/her fund and would have investment choices to be made, within a determined range. The new system would go into effect beginning in 2019 with new hires. Current retirees and workers already under the old plan would not be affected.
Opposition to this reform will come from CalPERS, which sees its power threatened. It is easily the largest public pension program in the nation. For the same reason, the chiefs of public employee unions will fight it because under the present system their workforce continues to grow, which means more dues in their treasuries with which to buy support in the state legislature.
Inescapable, however, is the fact that growing pension liabilities are strangling many cities, which are forced to cut services in order to meet payments to retirees. It is estimated that, as a group, they will pay $5.1 billion in pension contributions in this fiscal year.
The current system plays roulette with the taxpayers’ money. This initiative could be the way for them to leave the gaming table.