From Rhode Island to San Jose, at least a few serious Democrats have embraced pension reform because they understand the math: without reform, a tsunami of unsustainable costs will wipe out their most cherished programs and services. Unfortunately, California governor Jerry Brown and his Democratic allies in the state legislature continue to demonstrate how unserious they are about reform—even as they rhetorically support the idea of a new pension overhaul that trims costs from the state budget by capping pension payments and hiking contribution rates for employees.
On August 31, the legislature approved a pension-reform bill by strong margins and sent it to the governor. But the reform package is mostly about politics and only tangentially about fiscal reform. A Reuters story summed up the political game: “Brown intends to promote those savings to help sell voters on his November measure to raise the state’s sales tax and boost income taxes on wealthy Californians.” Proposition 30, the measure in question, would temporarily raise the sales tax by a quarter-cent and impose additional income taxes on Californians earning $250,000 and up, with the stated goals of closing a $15.7 billion deficit and restoring some spending cut from public education. According to a recent poll, 55 percent of likely voters back the measure. But the support is soft and—two months before the election—the proposition’s “prospects are partly cloudy with a chance of rain,” said Benjamin Tulchin, president of Tulchin Research, which helped conduct the poll.
Looking to sway public opinion, the governor turned to pension reform. AB 340 is fine, as far as it goes; but that’s the trouble. The bill would reduce pension formulas, increase retirement ages, and ban some pension-spiking gimmicks. Most of its reforms, though, apply only to new employees, whose retirements are a long way off. Current and new state workers would be required to boost their retirement-contribution rates to 50 percent; employees hired before January 2013 won’t have to do this until 2018. According to published reports, the legislation also limits some of the most absurd pension abuses, bans pensions for public employees who commit felonies on the job, and stops local governments from taking pension holidays (in which they don’t make their expected contributions to the state system). The law also bans “air time,” a program that allows government employees, in exchange for a fee, to add extra years to their public service and thus inflate their benefits, at steep cost to taxpayers.
The bill’s projected savings are real, if modest: between $40 billion and $60 billion over 30 years. Every serious estimate puts the state’s unfunded liability at far above the proposed savings. A Stanford University study suggests that the real figure is closer to $500 billion, though other forecasters say the number may be “only” $250 billion or so. The new cap on pensionable benefits would be $110,000 for public employees who receive Social Security and $132,000 for those without it. Those numbers still make for incredibly lush pension benefits.
Last year, Governor Brown released a 12-point pension-reform plan, complete with a shift to a hybrid system that marries a defined-benefit pension with a 401(k)-style, defined-contribution plan. But typically, the governor never seriously advanced the proposal. When asked about his pension-reform plan at a press conference last year, he merely directed reporters to his website for details. Democrats gave Brown’s plan even less attention. Public pensions, they argued, weren’t the real issue. As they saw it, the problem—incredibly—was the inadequacy of private-sector pensions. Last week, the assembly even passed a bill that would force private companies to let their workers participate in a state-created, Social Security–like system. The bill has gone to the senate for final approval. Meantime, Brown’s hybrid plan has disappeared into the mists.
Despite its relatively modest contents, AB 340 has been bitterly denounced by public-employee unions. “The pension proposals outlined today represent a retreat from collective bargaining and basic principles of retirement security,” said one firefighter-union official in a press statement. Union officials obviously don’t want the state capping pensions. The unions would prefer to work out “reforms” at the collective-bargaining table, where they exert the most power and often control both sides of the negotiation (union officials and city staffers sometimes belong to the same union, and many city council members get elected with union support).
But just because the plan is angrily opposed by unions doesn’t make it a good one. “Let’s be clear,” said assembly Republican leader Connie Conway, “the Democrat proposal is no substitute for serious reforms to get our public employee pension crisis under control. This is no time for the liberal majority to pat themselves on the back and say the job is done.” Indeed, AB 340, designed mainly as a fig leaf for a big tax increase, won’t fix the state’s massive pension problem. It’s a minor reform at best—and sadly par for the course with this governor and legislature.