A starting point on pensions
Gov. Jerry Brown laid out an ambitious proposal Thursday to curb public-employee pension costs and improve the health of state and local pension funds. The proposal, which would replace the pensions of new state and local workers with a combination of a smaller pension, a savings plan and Social Security benefits, seeks to create a statewide standard for public-employee retirement benefits. Doing so would protect future governments from the sort of mistakes that state and local officials made about a decade ago, when they adopted richer pension-benefit formulas that are now straining their budgets. Brown has sketched a promising outline; whether it can work depends on how the details are filled in.
State and local governments in California, like many around the country, have faced sharply higher personnel costs in recent years because of shortfalls in their pension funds. The problem stems in large part from the Wall Street collapse that obliterated 30% or more of the funds’ value. But a report in February by the Little Hoover Commission argues that many state and local employees were promised benefits that were inherently unaffordable, regardless of Wall Street’s troubles. Governments set the retirement age too low and calculated benefits on too high a base, then increased their costs by significantly raising wages and expanding workforces.
Labor lobbyists argue that the problems are exaggerated, and that the apparent shortfalls in pension funds will be erased over time as the markets return to normal. Workers are also agreeing in contract talks to contribute more to their pensions, reducing pressure on the funds. In the meantime, however, governments have little choice but to contribute more to their pension funds. Without structural changes in pensions, the Little Hoover Commission projected, many of these contributions will have to increase substantially over the next few years, and remain there for decades.
Brown’s approach wouldn’t save the state or most local governments much in the near term. The most significant (and controversial) changes it seeks would apply only to newly hired employees. There won’t be many of those to be found for a few years, given the budget problems facing California governments. According to the governor’s office, though, in 30 years those changes could cut public employers’ costs in half, while still paying longtime workers 75% of their salary in retirement.
The trade-off for new employees is that they won’t be able to collect full benefits until age 67 if they’re non-public-safety employees — up to 12 years later than today’s workers. At that age retirees would qualify for Medicare, rather than receiving medical benefits at their pension fund’s expense. In addition, a smaller percentage of their benefits would be guaranteed. That’s because Brown would provide only 50% of their retirement benefits through a pension, with 25% coming from Social Security and 25% from a 401(k) plan subject to the ups and downs of the market. This hybrid approach is similar to the one used by the federal government, and it would bring public employees’ retirement benefits more in line with those offered by private employers.
Brown also called for several changes to existing workers’ benefits, the most notable being that all public employees contribute enough to their retirement plans each year to cover at least half the expected cost. That’s a reasonable requirement that governments should have insisted on in contract negotiations, but it’s not clear that the state has the legal authority to impose it unilaterally on its current workforce. The courts have held that once workers have accepted a job with government, their employers can’t diminish any aspect of their retirement benefits without offering an equal benefit in return.
This legal wrinkle is the best argument for the state having a standard for public employee retirement benefits. One reason so many cities are struggling to make their required pension contributions today is that they competed for employees — police and firefighters in particular — by offering ever-more-generous pensions. Those mistakes are exceptionally hard to undo.
Brown’s proposal drew praise from several top Republicans in the Legislature but an immediate denunciation from a union coalition and wary responses from leading Democrats. So its prospects are uncertain at best. But the proposal addresses some of the inherent flaws in the current system, and the Legislature should take it seriously.