When it comes to the California public pension system, one thing is crystal clear: it absolutely must and will change. The question is when and how. Practically every expert who has analyzed the state’s pension figures uses the word “unsustainable” to describe the system.
Like many other state and local governments, California suffers from significant funding shortfalls. Part of the problem was caused by the Wall Street collapse, which led to heavy losses in the funds’ value, part of it by elected officials committing to richer pension/benefit formulas.
Last February, a state watchdog agency estimated 10 of the state’s largest pension funds have a combined $240 billion in future unfunded obligations. This arrives at a time when the state doesn’t have the money to fund even the most necessary services. Gov. Jerry Brown recently announced nearly $1 billion in new state budget cuts as a result of declining state revenues. These cuts will hit public education and health and social services hardest.
Next year doesn’t look much better: the Legislative Analyst’s Office forecasts another $13 billion shortfall in fiscal 2012-2013, with more cuts and/or tax increases needed to balance that budget.
We simply must tackle bloated pension payouts, politically charged though it may be. In late October, Brown followed through on promises to introduce pension reform with a 12-point plan estimated to save about $900 million a year. It is not everything I’d like to see, but it represents a critical first step in getting our fiscal house in order.
Central to the plan — and probably the easiest starting point — is raising the retirement age for most new public workers from 55 to 67 years (the Social Security standard) and giving these workers a hybrid retirement plan combining a smaller pension, a savings plan and Social Security benefits. Both current and new employees would be required to contribute at least 50 percent of their total pension costs.
The common practice of pension spiking would be stopped by requiring the calculation of retirement benefits to be based on the final three years of employment, not on just the last year. Other methods for boosting retirement, including retroactive pension increases and pension holidays, would also be eliminated.
Getting these changes won’t be easy. Not surprisingly, most Democrats and the public employee unions supporting them are reluctant to curb benefits.
Some helpful pressure should come from Californians for Pension Reform, led by two former officials from Gov. Arnold Schwarzenegger’s administration. The group is working to place an initiative on the November 2012 ballot that would go further than Brown’s plan by asking workers with underfunded pension plans to help pay off liabilities.
All of us — both individuals and business organizations — need to add to that pressure. Push our elected officials to support a fair pension plan that state and local governments can afford, a plan with an honest calculation of benefits without gimmicks and loopholes.
One way or another, California must solve its massive public pension problem. If the Legislature doesn’t do it, the voters may have their chance through the initiative process. And, if all else fails, the bankruptcy courts may have to do the job.
We simply can’t allow public pension costs to continue draining public coffers, taking much-needed funding from education, social services and other important state functions. I urge you to work with your elected officials and other public leaders to make it very clear that we want legislation that reforms public pensions — and we want it now.
While much of the local and national talk around pension reform is directed at public employees, the biggest current changes are occurring in the private sector.
Hedge funds are back. Worries about European debt crisis, war in the Middle East and the potential for rating agencies to downgrade America’s treasuries have rattled shareholders. But those fears haven’t held back investors from pouring record amounts of capital into the cowboy country of largely unregulated, nontransparent funds.