Gov. Jerry Brown’s attempt at pension reform has failed.
Since 2012 passage of his much-heralded changes to state retirement laws for public employee, the pension debt foisted on California taxpayers has only grown larger.
The shortfall for California’s three statewide retirement systems has increased about 36 percent. Add in local pension systems and the total debt has reached at least $374 billion. That works out to about $29,000 per household.
It’s actually much worse than that. Those numbers are calculated using the pension systems’ overly optimistic assumptions about future investment earnings.
Using more conservative assumptions, the debt could be more than $1 trillion, says pension expert Joe Nation, a former Democratic state assemblyman who currently teaches public policy at Stanford.
Whatever the assumptions used, the trend is clear. California’s pension problem is getting worse — much worse. The system remains unaffordable.
Yet the governor claims success. “Our pension reform, despite a few uninformed critics, was a major, major reform,” Brown said recently. “It wasn’t as far as I wanted to go, it’s not as far as we need to go. But it was very significant.”
No, it wasn’t. The governor has burnished an image as the guy who led California out of debt. On some fronts he deserves credit. But when it comes to fixing public employee pensions, he has failed to deliver meaningful change.
His 2012 pension package was merely a tweak of the current system. It relied mainly on slightly reducing benefits for new employees, which won’t produce significant savings for decades.
Meanwhile, he failed to address the ongoing underfunding of the state’s public employee retirement systems. The pension plans continue to collect insufficient funds from workers and employers.
Consequently, the debt, which must be paid by raising taxes or cutting other public services, has continued to grow — as have calls to do away with traditional pensions for public employees.
That’s unfortunate. Defined benefit plans, unlike 401(k)-style savings accounts, provide retirement security that all Californians should be able to enjoy. The solution is not to do away with the system, but to fix it — shore it up with honest accounting and affordable benefit levels.
For Brown, that means spending political capital. For far too long, the governor has tip-toed around public employee union leaders, who continue to deny the seriousness of California’s pension shortfall.
Most pension systems in the state have less than 70 percent of the funds they should, even using their own optimistic accounting. The largest, CalPERS, has only about 64 percent.
Our children and grandchildren will be making up the shortfall for decades to come. Yet, the unions continue to claim that a bull market will save the day — it won’t — and that the shortfall is not really a debt.
That’s absurd. Sure, the amount of the shortfall, known as an unfunded liability, fluctuates up and down with the markets and with changes in actuarial assumptions. But those variables will not close the gap. Ultimately, taxpayers are on the hook for the difference. It’s a debt.
If Brown were serious about pension reform, he would advocate for pension benefit reductions for existing employees. Not for the benefits they’ve already earned, but for those they will earn in the future.
As the Little Hoover Commission said in 2011, the only way to make the state’s pension systems affordable is to adjust benefits for current workers.
No one is suggesting taking away benefits workers and retirees have already earned. Rather, the idea would be to reduce, not eliminate, the rate at which current workers accrue pension benefits for their future labor.
Brown has avoided that confrontation in part because past state Supreme Court rulings have suggested workers’ future pension accrual rates can never be reduced once they start working.
However, two appellate courts recently ruled that state lawmakers may alter pension benefits for current employees. They said workers’ pension rules may be changed during their careers so long as they still receive “reasonable” benefits.
The state Supreme Court is expected to review those cases. If Brown is serious about reform, he should be calling on the high court to allow changes to future pension accrual rates.
What he’s done so far hasn’t significantly moved the needle.
