Public pension reform, not public-worker bashing
Here’s what we know for certain about the public pension crisis facing California: The obligations owed or promised to public workers are growing, and unsustainable.
Almost everything else said about public employees and their retirement packages is open to question, misleadingly simplified, or infected with ideology, partisanship or emotion.
One might ask if that matters, given the overwhelming weight of fact No. 1. The answer is yes, because we’ll never achieve an equitable and effective fix until we dispel the miasma of non-facts enveloping this highly fraught topic.
For example, are public employees better paid than their private-sector fellows? Some are and some aren’t. A study done for the California Foundation for Fiscal Responsibility, which is pushing pension reforms, found that public workers at the low end of the income scale were better paid than private-sector workers in similar jobs. But it was the opposite for those in management and specialized occupations, such as computer science.
That suggests that finding a one-size-fits-all pension solution will be difficult.
Are California public retirement plans better than those for federal or private-sector workers? Yes in some ways, no in others.
Generally they allow earlier retirement than their counterparts. Typically, public-safety employees such as police officers and firefighters have the best deals, schoolteachers the worst. Unlike the typical private-sector defined-benefit plan, state pensions often require a contribution by the employee, though this is covered by some public employers.
On the other side of the ledger, the formulas for calculating the retirement payouts are much more advantageous for state employees than in the private sector.
In a crucial way, public-employee pensions are a throwback. Such defined-benefit plans barely exist anymore for new employees in the private sector. These are classic pensions — they accumulate value slowly at first and rapidly toward the end of a worker’s career and they can’t be transferred to other employers, so they’re geared to encouraging long-term employer-employee relationships.
In return for employee loyalty, the employer bears the risk of bad investments or market reversals — the benefits have to be paid regardless. Today’s private employers don’t care as much about worker loyalty and don’t like investment risk; hence the rise of the 401(k), which requires larger contributions from the workers and transfers market risks to them but can be ported from job to job.
In part because the state pensions don’t include a 401(k)-style plan, they’re less generous than many private-sector plans for short-term workers. A schoolteacher who leaves his or her job before 10 years leaves with nothing; a federal or private-sector worker might have money in a defined-contribution account and be on track to qualifying for Social Security, which doesn’t now cover California schoolteachers or public-safety employees.
These distinctions aside, the overall costs of public pensions are poised to crush state and local services. The problem is bad nationwide, but especially severe in California, in part because state courts have blocked efforts to roll back pension benefits that haven’t yet accrued, such as credits for future service.
Things are different in the private sector, where federal law prohibits reductions in retirement benefits owed for years already worked but allows employers to terminate or reduce benefits for future service. (Depending on applicable union agreements.)
Because 1978’s Proposition 13 and other laws also make it very hard to increase taxes in California, the most practical way of covering the increasing costs of employee pensions is to cut back other programs — leading to closed libraries, fired teachers, less road repair, etc., etc. Public employees, whose jobs and public standing are on the line, have as much at stake in corralling pension costs as anyone.
Unquestionably, state and local political leaders have been profligate with pensions, awarding workers improved benefits and post-employment health coverage — the value of the latter being perhaps the largest single difference between California retirement plans and those of federal and private workers. Some enhancements were awarded retroactively, which is an absolute sin in the pension biz.
Typically they were extracted by public-employee unions from Democratic administrations and legislatures, especially when the dot-com boom made the state budget look flush and the enhancements look free. Everyone pretended that the boom would last forever, including, shockingly, CalPERS actuaries — public bodies even were permitted to forgo contributions to the system during the fat years, which only made things worse when the market crashed. The pols perceived that public employees were a potent voting bloc, but of course one thing that makes them so is that so many other Californians sit on their duffs on election day. If you’re one of the nonvoting masses, you’re to blame for the pension fiasco too.
For years political leaders, union representatives and voters ignored the gathering clouds. No more. “You’re seeing signs of movement,” says Marilyn C. Brewer, a former Republican assemblywoman from Irvine who as a member of the Little Hoover Commission spearheaded that independent government watchdog group’s remarkably clearheaded analysis of the issue, published in February. “The state’s dire financial situation will push it forward.” Recent changes have reduced the benefits for new employees, but in many ways they’re still superior to what’s available on the outside.
Finding a path through these brambles isn’t made easier by today’s craze for public-worker bashing, which is partially an artifact of the outrageous trend toward more income inequality in California and the U.S. alike. According to Franchise Tax Board figures, more than 70% of the $300-billion increase in total adjusted gross income of California taxpayers between 1987 and 2008 went to the wealthiest 10% of Californians. The middle 20%, our valiant middle class? They got 3%.
This is connected to such phenomena as the decline of collective bargaining in the private sector, increased job insecurity and the explosion of household debt. Government workers are seen by the average strapped taxpayer as insulated from these pressures (public employees don’t help themselves by engaging in scams like “spiking” their final years’ pay to pump up their pensions), but the resulting resentment is the ultimate class-war victory of the haves over the have-nots. Middle-class taxpayers grouse about the retirement deals of teachers and DMV clerks, while bankers and CEOs, whose compensation and tax breaks really deserve public obloquy, slink away scot-free.
One can mourn the decline of traditional pensions in the private economy but still acknowledge that California public pensions are out of line by customary standards. It won’t be easy to reverse the trend, but it’s not impossible. The right place to start is with the Little Hoover Commission’s recommendations. These include giving state and local governments the authority to change unaccrued future benefits for current workers, by a constitutional amendment if necessary; capping the maximum salary factored into the pension formula or capping pensions; shifting a portion of the pension to defined-contribution plans, which are less risky and expensive for the employer; and partially offsetting teacher and public-safety pensions with Social Security.
The mistakes of the past should be red-tagged: No pension contribution “holidays,” ever again. No retroactive enhancements. Increases in the retirement age for most workers from 55 to 60 or 65. Voter approval of all pension increases.
The Little Hoover Commission’s guiding principle is that public pensions should be restored to the original role of providing for an adequate and humane lifestyle after retirement, not for creating wealth for a few at the expense of all Californians. It’s the right course. Turning the state into a hollowed-out shell is bad for everyone.
Michael Hiltzik’s column appears Sundays and Wednesdays. Reach him at email@example.com, read past columns at latimes.com/hiltzik, check out facebook.com/hiltzik and follow @latimeshiltzik on Twitter.
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