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We All Have a Stake in Pension Reform

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CALIFORNIA - Whether you’re a Democrat or a Republican, a liberal or a conservative, a student or a senior, a union member or a business owner, all Californians have a stake in fixing our state’s enormous pension problems. 

The State of California currently spends about $4 billion per year on its generous public employee pension benefits and the costs are even more troubling for local government. For example, a recent report by California Common Sense found that the City of Los Angeles’ annual pension costs grew from $157 million in FY 2002-03 to $1.3 billion in FY 2012-13, and now represent about 18% of city expenditures. 

Even as the economy recovers, pension costs continue to grow faster than government revenues. In fact, CalPERS (the state’s main retirement system) has projected that the State and local governments will see their annual contributions rise by another 50% over the next seven years. 

This is simply unsustainable. It is draining money away from core services, like education and public safety. It is preventing much-needed investments in our aging infrastructure. It is increasing pressure for new taxes and risky borrowing. It is creating an enormous debt that will be passed on to our children and our grandchildren. And it is gradually pushing more cities, counties and government agencies closer to insolvency. 

Government employees will also face tragic consequences if we continue down this unsustainable path. Because in bankruptcy, our public servants – including those who have already retired – could see their hard-earned benefits disappear. That’s what happened in Stockton, which had to eliminate healthcare coverage for all of its retirees, and in Central Falls, RI, which was forced to slash retirees’ pensions by up to 50%. 

Our residents and our public servants deserve better. We have a responsibility to provide our citizens with vital services that protect and enhance the quality of life enjoyed here in California. And we owe it to our dedicated government employees to maintain a fiscally-sound and sustainable pension system that will be able to pay out the benefits that they earn over their careers. 

Unfortunately, the statewide reforms enacted last year did not come close to solving our pension problems. These reforms only amounted to a 5% to 10% solution, and like many local pension reforms, focused primarily on new employees. As a result, most of these savings won’t be realized for many years. 

We need reforms that will provide immediate savings to help cope with the huge cost increases that are coming now. The only way to do that is to include current workers in pension reform. 

That’s why I believe that California’s constitution should be amended to grant the State and local governments clear authority to modify pension formulas for an existing employee’s future years of service. 

Such an amendment would not allow the government to reduce or take away benefits that employees have earned for years they’ve already worked. Those benefits would continue to be protected by law and could not be touched. 

However, it would allow government agencies to prospectively adjust benefit formulas, employee contributions, retirement ages and cost-of-living increases – either through the collective bargaining process or by voter approval. 

This would settle the ongoing dispute over the “vested rights” doctrine, which has been used to blockany changes to the way in which an existing employee earns pension benefits in the future – even if he or she has only been on the job for a single day. Some public employee unions have even claimed that they have a “vested right” to spike their pensions with vacation and sick leave payouts.

Just as importantly, this would provide elected leaders with an additional option for controlling pension costs. The vested rights debate has left many government agencies in the fall-back position of making their employees pay more into their pensions. But the truth is that neither taxpayers nor employees can afford to pay the true cost of these generous benefits. Prospectively modifying pension benefits makes it possible to reduce costs without forcing our hard-working employees to pay more. 

For far too long, leaders on both sides of the aisle have ducked this critical issue and relied on overly-optimistic investment return assumptions, complex accounting maneuvers and risky financing schemes, like pension obligation bonds, to mask the true extent of the problem. Even to this day, opponents of pension reform keep saying: “Don’t worry, everything is just fine.” 

Yet, we are continually pouring more money into retirement benefits, leaving us with less funding to pay for basic public services and the government employees who provide them. Services keep deteriorating, more hard-working public servants lose their jobs, and our problems become that much harder to solve. 

Can California really afford to go on like this? 

It is time to fix this mess. We need to put our pension systems back on a sustainable path so that we can provide essential services to the public and ensure that our government employees will have a pension that they can count on during retirement. And to do that, it’s critical that we give cities, counties and other government agencies the ability to bring down the cost of these generous pension benefits for all public employees.

 

(Chuck Reed is the mayor of San Jose and a sometime CityWatch contributor.)

-cw

 

 

CityWatch

Vol 11 Issue 67

Pub: Aug 20, 2013