California’s Governor Jerry Brown floated to victory on Election Day. This will be his fourth term (his second as the state’s oldest Governor; his first two were as its youngest). “Floated” is the right word. He gave no campaign speeches, barely any comments about the campaign, and ran no ads. In four years he had seemingly given voters no reason to deny him re-election.
This, despite the earnest efforts of Neel Kashkari, an articulate and energetic rival. but with a limited budget.
Brown had steadily cautioned his legislature to pass up grand plans and instead focus instead on modest legislation and careful budgets. Beginning last year he referred frequently to a budget “surplus.” Cash receipts to the state’s treasury were coming in above estimates. To him, this was a… surplus. California’s grinding days of deficits were over, he said.
Are they? While Brown & Co. may have gotten a particular fiscal year’s state budget in balance, that event ignores the huge unfunded liability represented by pension funds committed to retired state, county, and city employees, such as bureaucrats, police, and fire personnel and teachers. Overall, this amounts to $198 billion. Just 11 years ago, in 2003, the unfunded liability was $6.3 billion, three percent of the current amount.
We know this from a program from State Controller (just elected Treasurer) John Chiang. In a statement released on his new website, he said, “I hope to empower greater participation in how government handles a policy matter which is central to California’s long-term prosperity.” Good for him (and good luck to his successor).
What caused the gigantic jump in unfunded liabilities? For on thing, several years of state budget deficits (disguised because the state constitution requires annual budgets to be balanced). For another, overly generous pensions for public employees (negotiated by unions who give generous campaign contributions to pliant legislators). For yet another, failure by many county and municipal entities to put aside enough money to fund their pensions.
Controller Chiang reported that 17 pension plans were at least 40 percent underfunded. Another 45 were underfunded between 20 and 39 percent. Only 22 were funded above the 80 percent level. CALPERS, the California Public Employees Retirement System (in which many county and city governments participate), reported $57.4 billion as being unfunded.
The problem has been growing in part because the number of public employees has grown steadily. In 2003 there were 816,208 retired public employees.
By 2013 it had grown to 1.22 million.
The Governor Brown of today and the next four years is not the Governor “Moonbeam” of yore. If not philosophically conservative, he is temperamentally so. Caution marks everything he does and says these days.
There are limits to what he can do about the unfunded liability in pension commitments. He can create a forward-looking legacy for himself by reforming the way pensions are created for new, incoming public employees.
With his fat election margin, he has it within his persuasive power to get the legislature to convert future pensions from a “defined benefit” basis to a “defined contribution” one. Under the former (once widely used, now declining), the employer promised the retiring worker a fixed amount as long as he/she lived. Under the “defined contribution” format, the worker sets aside a certain amount of his pay each time and it goes into his fund. He/she owns it. If the person leaves the organization he/she can cash it out or transfer it to a plank at the new job. The funds are invested in one of a group of approved plans, administered by a third party. Private corporations decide each year how much of their profits to contribute to their profit-sharing program. Typically, it is 50 or 75 cents for every dollar the employee puts in. Public entities don’t have profits, so the annual contribution would have to be negotiated.
Jerry Brown can float through four positive years and leave California a better place. Let’s hope he chooses to do so.
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