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Posted at 1:15 PM ET, 03/ 3/2011

California: How to fix what public employee unions have wrought?

By Jennifer Rubin

Virtually unnoticed by the national media, a bipartisan commission in California last week put out an earthshaking (even for the tremor-plagued state) report on the extent of California's unfunded benefit liabilities. On Feb. 24, 2011, this commission made news:

A respected California government watchdog commission issued a scathing report today on the state's pension system, calling for cuts in benefits for current and future employees, caps on pensions, an end to "pension spiking" and other reforms.

The Commission on California State Government Organization and Economy, known as the Little Hoover Commission, calls the current system "unsustainable" and says it has morphed from a program that provided retirement security into one that seeks "wealth accumulation" for public employees.

The report is available online.

Contrary to the low-ball estimates of union bosses and cheerleaders, the problem is enormous:

Using the most recent data available, the state's 10 largest defined-benefit plans for public employees reported an actuarial shortfall in 2010 of $240 billion, based on the pension plan methodologies and the market value of assets as provided to the Commission.

The bottom line:

Government budgets are being cut while pension costs continue to rise and squeeze other government priorities. As the Commission heard during its hearings, the tension between rising pension costs and lean government budgets is often presented today in a political context, with stakeholders debating the severity of the problem and how long it will last. In another five years, when pension contributions from government are expected to jump and remain at higher levels for decades in order to keep retirement systems solvent, there will be no debate about the magnitude of the problem. Even with the introduction of two-tiered pension plans, barring a miraculous market advance, few government entities -- especially at the local level -- will be able to absorb the blow without severe cuts to services ...

The situation is dire, and the menu of proposed changes that include increasing contributions and introducing a second tier of benefits for new employees will not be enough to reduce unfunded liabilities to manageable levels, particularly for county and city pension plans. The only way to manage the growing size of California governments' growing liabilities is to address the cost of future, unearned benefits to current employees, which at current levels is unsustainable. Employers in the private sector have the ability and the authority to change future, unaccrued benefits for current employees. California public employers require the ability to do the same, to both protect the integrity of California's public pension systems as well as the broader public good.

The only option, if California is to get off its fiscal deathbed is to freeze current, accrued benefits and then begin "re-setting pension formulas at a more realistic level going forward for current employees." That's right -- current employees will see benefits reduced and redesigned. New Jersey Gov. Chris Christie (R) is taking this very approach.

The commission recommends tough medicine, which include giving "state and local governments the authority to alter the future, unaccrued retirement benefits for current public employees. State and local governments must slow down pension costs by
controlling payroll growth and staffing levels."

The commission recommends a "hybrid" system that would maintain a defined-benefit plan for only a small portion of public employees' compensation, with the balance of pension benefits to be provided through a 401(k)-type plan. ("Cap the salary that can be used to determine pension allowances, or cap the pension, at a level that is reasonable and fair. Once the employee exceeds the threshold, employees and employers could make additional retirement contributions into a risk-managed, 401(k)-type defined-contribution plan.")

California has always been a trend-setter. It has become a model of fiscal ruin, the result in large part of the domination of the political system by public employee unions, which have gamed the system at the expense of taxpayers and recipients of government services. Perhaps California could now lead the way out of the fiscal quagmire. I have my doubts that California Gov. Jerry Brown (D) is up to the job, but the commission's report sure could come in handy in Washington, D.C., not to mention in Madison, Wisconsin and other state capitals.


By Jennifer Rubin  | March 3, 2011; 1:15 PM ET
Categories:  Budget  
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Next: Rep. Paul Ryan: Our fiscal future and our moral health

Comments

It's too bad that the politicians who created this Ponzi scheme in exchange for union political contributions and votes won't be joining Bernie Madoff in federal prison. Their accounting fraud makes his look like a small-time scam.

Posted by: eoniii | March 3, 2011 12:46 PM | Report abuse

The only way to be absolutely sure of pension costs is to go to defined contribution plans for new employees. West Virginia did it for new teachers about ten years ago. Utah is making the change over. And Florida has a bill pending. The chances of California doing it anytime soon are slim to none.

Posted by: Inagua1 | March 3, 2011 1:35 PM | Report abuse

Unions are to blame, Unions are to blame!!!

California is in such a mess for a variety of reasons, not just because of Unions. There is their straight-jacket they put themselves in via super-majorities to raise revenue, very short term limits for politicians that reduce the experience of people actually working in the legislature, horribly gerrymandered districts that send hard left and hard right legislatures, and unions who can take advantage of all of the above.

This allows uinons to get their hard left reps elected and to be seen to be avoiding current budget issues, but getting future compensation.

BUT California, or other states fiscal issues are not one-dimensional. Also before the financial crisis many of the employee benefit plans were close to fully funded. Never mind though - let's just take one final swing at the Unions and see if we can get them out of business for good.

Posted by: ChicagoIndependant | March 3, 2011 3:33 PM | Report abuse

Given the political structure of California: weak governor (the office not necessarily the person); supermajority requirements for various things in the legislative bodies; and extensive use of the referendum system (and finally a current Supreme Court that seems lawless) the State is "dead man walking".

There is no hope for it. Whether or not the State goes bankrupt, these union criminals will be off with their lucrative, ill-gotten pensions, and anyone who doesn't flee the state will be required to pay them off. It would be exceedingly strange to see California as one great big wilderness area, entirely vacated in order to vacate these pension burdens. The first to leave, of course, will be the new pensioners. They flee to Texas in order, well, you know what.

Posted by: jafco | March 3, 2011 3:39 PM | Report abuse

Time to phase out all retirement benefits for local, state, and federal employees other than 401k plans.

That's all anyone in the private sector can expect.

It's a cash and carry economy, and public employees need to get used to it the same way private sector employees have.

Posted by: Mannie_Davis | March 3, 2011 3:43 PM | Report abuse

Fine. Raise taxes on those that make $200,000 or more to 39%. Raise them for those making $400,000 to 40% and on up to 50% for those making $1 million or more per year.

Everyone needs to give something up, especially those who can afford to do so more easily.

Posted by: danw1 | March 3, 2011 4:41 PM | Report abuse

As a tax refugee from California - I love the state but won't allow it back in to my life until its sober - I think the problems it has are vast and complicated, and primarily a combination of Prop13, whereby multimillionaires who bought homes in 1970 for 40 grand pay property taxes as if it were still back then, when their houses are worth millions, and obscene public pensions for some. There are 20,000 retirees getting over 100 grand a year from the state, some getting over 400 grand a year.

And they expect me to run on a treadmill as fast as I can to keep some pensioner in 400 grand a year? Sorry Charlie.

That said, the fix isn't busting unions. It's reining in excessive pensions, perhaps with caps and revised formulas.

Posted by: member8 | March 4, 2011 10:32 AM | Report abuse

I am neither republican nor democrat, never have been either and no plans to register in either party. The USA today has some very serious financial problems, close to being bankrupt, and employees who are fortunate enough to have a job (unlike myself, laid off through no fault of my own) had better take a serious look at the economic travesty that now prevails in the USA.

As a Californian out of work for 14 months now, I took a hard look at BOTH sides of the issue currently going on in WI.
I have sent out thousands of good quality resumes seeking employment. I was in maritime transportation for 30 plus years, and had to deal with the likes of the International Longshoremen and Warehouse Union.
In 1971, the ILWU went on strike, shutting down 29 ports on the Pacific Coast for 134 days. The ILWU didn't care, they wanted what they wanted, and they wanted it right then and there. Transportation costs increased significantly, but somehow we survived because jobs were plentiful, but not now
I don't agree with corporate America farming out jobs overseas, but people that fund your paycheck (remember that please) are fed up with outrageous demands placed on both private sector employers and government entities. Unions had better realize, and realize it now, that the USA is close to being broke. No longer can business be done as usual, concessions have to be made. Having your wage frozen, benefits reduced are better than being out of work like myself.
Unions in general, whether private or public must do the following:
a. Get rid of your uppity attitudes
b. know your place
c. be grateful that you have a job
d. Remember, that you can be replaced
e. You can be unemployed and rather quickly
f. Your not "owed" a living
g. Don't forget what our esteemed president, Ronald Regan told the air traffic controllers union in two simple words for trying to cause anarchy "Your fired" and he did. Our skies are safer now!

I paid for and collected my unemployment but that has since expired. Minimum wage jobs in California cannot be found, people with masters degrees are applying for work at McDonalds, and they cant get a job either.
If you like unions, go for it, but if your employer tells you that a wage compromise is in order, you had at least better listen!!!. Look at Harley Davidson for starters, take a cut or we will move jobs out of the state. At least THAT union woke up to reality.
Unions in general don't want to be told compromise or loose your job. Unions think employers whether public or private OWE them a living........guess what..........they DON'T!!!

For Governor Walker, your taking a stand that should have been taken years ago, and I truly wish you success in your great leadership!!! less

Posted by: awbplgafrika | March 4, 2011 2:51 PM | Report abuse

NJ's Governor Christie may become trapped by his own lack of research. He may want to reduce retirement benefits for NJ's Public Workers but he might not be allowed.\

In 2006 a joint Legislative Committees were created to look into the rising property taxes one area was Public Employee retirement benefits.

Both the Attorney General's office and the non partisan Office of Legislative Services looked into the legal ramifications of modifying the retirement plans with the hope of reducing their payments to the Public Worker Retirees.

Both OLS and Attorney General agreed if NJ modified the public retirement program in any way reducing the payments to the retirees past present or future (workers must have 5 years in the system to be covered)it would be in violation of both state and federal laws.

These are the websites with the reports and questions by the Senators and Assembly and answers by the lawyers from OLS.

http://www.njleg.state.nj.us/legislativepub/pubhear/JCPE082306.pdf

and

http://www.njleg.state.nj.us/PropertyTaxSession/OPI/jcpe_resources_AG08242006.pdf

Based on the above the Governor of NJ could be very embarrassed because he did not do his homework.

Posted by: Misticonus | March 4, 2011 8:08 PM | Report abuse

California problem is more complex. It is interesting how the give away programs have not been discussed welfare and education to illegal aliens is costing tax payers billions . This and the and the fact that California has driven business by the thousands through bogus frees and regulations. The new gasby law for government agency to declare potential future debt is the next big scam that being used by politician to attempt break unions and rob pension plans the unfunded liability argument is a Trojan horse.

Posted by: dony | March 5, 2011 12:41 PM | Report abuse

I am a born and raised Californian and I applaud people like Gov Walker trying to get ahead of the problem in their states.

All you residents who live in other states, look at CA as your fiscal future if you don't get your public unions under control.

We have $500 billion in unfunded pension liabilities squeezing out other priorities like schools and public safety.

Posted by: louisp3 | March 5, 2011 3:31 PM | Report abuse

I was born and raised in California. Working in the health care industry for K***** P******* (you fill in the blanks) made me realize why unions promote no accountability or ability to move ahead for hard work. I was always told to stop working too fast as the other workers would be asked to work just as fast. I was told that if I typed and worked harder then others other employees would not be hired as well. In school we are told that if you work hard you will go places but unfortuately the union saw it the other way. They created so much chaos and frustration for my intellect that I had to leave the job where my abilities were appreciated. I know that if your disabled and in a wheelchair, you would like to walk and run but why in the world were these people making able body people disabled! It is uncalled for and waste. I don't agree that people, because they can afford it, should pay more then someone else that chooses to be lazy. If unions saw me just as a head count then what worth is it if it is me or some other person. Either way, the seat is filled from their standpoint and the quality (comparable) but not at a pace that would allow a company or even this state to recoup the cost of the product sold.
If we can talk about Pensions, ouch! Give me more space to write as I can't even afford to remain in this state much less walk down the street as we are taxed to hell as my union neighbors that are making more in retirement then they ever did while employed just blows me away. My tax dollars are paying for my fellow union members pension while a private employee suffers. Please someone tell me where I can move because this state, though beautiful needs to file bankruptcy and renegotiate these long terms committments. I can't stand the fact that we are cutting health care for the poor and elderly yet pensions are raised even higher for public employees. Please somebody stop the madness in California!
It is just not fair!!! Enough is enough!
IN CLOSING:
I am hoping my union pension are brought down to earth instead of cutting contracts for providers for vital services such as pharmacist and medical doctors. I hate it that we keep cutting the budget wherein no provider in their right mind would treat a patient. It is happening today and people are dying and becoming ill for lack of adequate care. Providers deserve to be paid for their services and cots. To penny pinch them into "take it or leave it contracts" would just put more preassure on the remainder system that finances the programs. Instead of cutting the provider reimbursements and tailoring up what should be done with costs associated with health care, the state of California should focus on how to eliminate Unions influence and ability of raising pensions, continue to raise pensions, creating programs that tax are fellow (non-union) citizens for their life. Yes, all deserve to retire w/a pension, but I would like to support my family as well.

Posted by: formpp | March 9, 2011 4:46 PM | Report abuse

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