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Will Appeals Ruling Sober Up State’s Pension Abusers?

Sacramento

California’s hardy band of pension reformers show many of the symptoms of “battered spouse syndrome.” No matter how often they are beaten and ridiculed, they cling to hope. Maybe this time, the state will get its act together and reform a system of profiteering that’s threatening our fiscal future. I’ve heard them say as much after any tiny new shred of encouraging news.

Reformers are getting their hopes up again following a favorable state appeals court decision last week in a Marin County pension-spiking case. It’s a great ruling. Several reform-minded commentators have referred to it as a “game changer.” But I wouldn’t expect fundamental change any more than I’d expect your drunken husband Bob to come to his senses after his last violent bout.

Here’s the sober reality: Public employees control the Capitol, run the major pension funds, are the main forces electing the governor and most statewide officials, and are treated deferentially in the legal system. Every effort to roll back future pension benefits, or at least put them on a sustainable course, has been beaten back. Even voter-approved initiatives ultimately are gutted by government agencies or the courts.

Unfunded pension liabilities — the future debt to pay all the current promises made to government employees — are the perfect “kick the can down the road” scam. The dreadful debt numbers are obvious. But they don’t cause enough current problems to warrant taking on powerful union lobbies. It’s easier for legislators to let future officials deal with the mess.

The core reform obstacle is the “California Rule.” It doesn’t refer to a law or even truly a “rule,” but to a series of court rulings since the 1950s. In the private sector, the courts allow those few employers who still offer defined-benefit pensions to reduce benefit levels going forward. Everything earned until today is protected, but starting tomorrow, the employee receives a lower benefit. Nothing’s been taken away. If you don’t like it, you’re free to take a job somewhere else.

Under the California Rule, however, once an agency grants a government employee a pension benefit, it can never be reduced unless employees are given another benefit of equal or greater value. Pension debt for all California governments has soared to, by some estimates, $1 trillion. The modest reforms the state has passed apply mostly to new hires. There aren’t enough new employees to make a huge dent in the problem. That leaves debt, tax hikes, and service cutbacks as the only options.

But Judge James Richman of the 1st District Court of Appeal not only rejected efforts by the Marin County Employees’ Retirement Association to stop a state law that reined in some pension-spiking efforts, but took direct aim at the California Rule. “(W)hile a public employee does have a ‘vested right’ to a pension, that right is only to a ‘reasonable’ pension — not an immutable entitlement to the most optimal formula of calculating that pension.”

Pension promises, it seems, can be tempered by the health of the state budget and the pension system. The judge pointed to a 2011 report from the state’s watchdog agency, the Little Hoover Commission: “California’s pension plans are dangerously underfunded, the result of overly generous benefit promises, wishful thinking and an unwillingness to plan prudently.… To provide immediate savings of the scope needed, state and local governments must have the flexibility to alter future, unaccrued retirement benefits for current workers.”

This is sensible stuff. The case itself is a poster child for the entire public-employee mess. The Marin union essentially argues that its members have a constitutional right to spike their already generous pensions at the end of a career. The judge described “pension spiking” as a system “by which public employees use various stratagems and ploys to inflate their income and retirement benefits.”

Gov. Jerry Brown in 2012 signed into law a modest reform measure designed more for public relations (We’re fixing the pension mess, so you can agree to a massive tax increase on the ballot!) than fiscal prudence. Its most significant reform was a limitation on spiking, yet the California Public Employees’ Retirement System (CalPERS) later came up with a list of 99 approved spiking gimmicks. Brown complained a little, but didn’t do much about it.

For example, a firefighter in a management role could get extra pensionable pay for having management responsibilities. Groundskeepers would get a special pension bump for repairing sprinkler heads, according to news reports. Clerical workers qualified for a pension increase for taking dictation and typing, just as maintenance workers got extra pension dollars for trimming trees. In ruling that a legislative limit on pension spiking was legal, the judge gave pension reformers the best news they’ve had in a while.

“We’ve been beaten down so much in the courts, where the presumption is to always side with the employees,” said Dan Pellissier, president of California Pension Reform in Sacramento. Despite being disappointed after initial enthusiasm in other cases, Pellissier has “tempered enthusiasm” about this ruling. “It seems to be a rational, well-reasoned view of the California Rule.… A torturous (legal) argument finally cut in our direction.”

He’s not the only one expressing optimism. “A Marin County lawsuit may be a game-changer for pension reform,” wrote a Santa Rosa Press-Democrat editorial this week. “The big question for pension reformers is whether or not the California Supreme Court will agree,” said former San Jose Mayor Chuck Reed, who authored a pension-reform initiative in his city in 2012. “If it does, the legal door will be open for Californians to begin to take reasonable actions to save pension systems and local governments from fiscal disaster.”

It’s almost enough to make me excited, just as I was when a federal judge ruled that pensions can be abrogated in the Stockton bankruptcy case. But then Stockton officials came up with an exit plan that protected the pensions of wealthy employees while cutting services and raising taxes on residents of that poor city.

I was excited, too, when 69 percent of San Jose voters approved Reed’s reform. But the courts ruled that it violated the California Rule, and then they gutted the main reforms. And then there was that excitement when reformers were going to qualify statewide reform initiatives, only to be undermined by unfair title summaries (“The Kill the Cute Puppies Act,” or something like that) by a union-friendly attorney general.

The state’s compensation system for its public employees is unbelievably generous. Firefighters receive average compensation packages in the $175,000 range. Some Newport Beach lifeguards receive pay packages topping $200,000. Four Los Angeles police and firefighters retired with checks above $1 million last year, according to a recent analysis. “In an effort to convince a top employee to delay retirement,” a Newport-Mesa deputy school superintendent was paid “at least an extra $274,000 into a tax-sheltered retirement account,” according to an Orange County Register report. Hundred-thousand dollar guaranteed lifelong pensions are common (for those retiring in recent years) and $200,000-plus ones are not unusual.

The state’s pension-hiking spree was triggered by a 1998 law rammed through the Legislature with promises from the state’s union-run pension fund that it wouldn’t cost taxpayers a dime, thanks to a booming economy. But since then, unfunded pension liabilities been mounting, some municipalities went belly up and myriad responsible voices began pointing to resulting service cutbacks, tax hikes and debt. As one city manager told a newspaper, cities have become pension providers that offer a few services on the side.

It’s an abusive situation, at least for the taxpayer. The whole system is designed to enable the most parasitic union workers whose unions have a grip on the levers of state power. The latest ruling is nice, but the beneficiaries of this bad relationship are going to fight even the most reasonable change in the nastiest manner possible.

Steven Greenhut
Steven Greenhut
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Steven Greenhut is a senior fellow and Western region director for the R Street Institute. Write to him at sgreenhut@rstreet.org.
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