California: How to fix what public employee unions have wrought?
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.
| March 3, 2011; 1:15 PM ET
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