Gov. Jerry Brown’s plan to stem pension costs is no panacea
SACRAMENTO -- Even by the most ambitious forecasts, the plan Gov. Jerry Brown and fellow Democrats are championing to contain government worker pensions in California could leave state taxpayers awash in debt to public employees.
The governor’s plan, announced Tuesday, is unlikely to save cities on the brink of bankruptcy. The relief his proposal would provide to the strained state budget is modest.
Analysts who study the issue say far more aggressive action — including reduction of benefits for hundreds of thousands of current employees left untouched by Brown’s proposal — will be needed to get runaway retirement costs under control.
Taxpayers still face the prospect of major bailouts to cover retirement promises made to public employees whether lawmakers pass the plan as expected Friday or not.
Pension officials predict that Brown’s plan, which has yet to be thoroughly vetted by actuaries, would save state and local governments $40 billion to $60 billion over the next three decades — much more than the governor projected. But the shortfall faced by the big state pension funds is much larger than that.
Officials at California’s retirement systems, which are counting on investment returns that many experts say are wildly optimistic, acknowledge that workers have been guaranteed about $164 billion more in retirement payouts than there will be cash available to pay.
Some of the country’s most respected investment gurus, including Berkshire Hathaway Chairman Warren Buffet and Vanguard founder John Bogle, say the burden on taxpayers will be much larger.
Their forecasts would leave Californians saddled with at least a $270-billion gap, and the Wall Street credit rating agency Moody’s suggests the gap could be at least $100 billion more than that.
Put another way, every California household may be on the hook for roughly $23,000 for public retirements over the coming decades. Brown’s plan might whittle that tab to $18,000.
“It doesn’t solve the problem,” said Joe Nation, a former Democratic assemblyman and professor of the practice of public policy at Stanford University. “We still have many, many miles to go.”
Brown had pushed for more. His initial proposal would have housed a sizable chunk of retirement money for new hires in 401(k)-style funds, shifting considerable financial risk away from taxpayers to employees. He also had taken aim at tens of billions of dollars in lifetime healthcare expenses awarded to hundreds of thousands of state and local government workers.
Brown’s negotiations with lawmakers resulted in a more modest plan focused on raising the public retirement age, limiting the annual sums collected by retirees whose jobs paid them six-figure salaries and tinkering with the formulas on which pensions are based.
The leaders’ decision not to take any benefits away from workers already on the payroll, however, limited their ability to confront the soaring debt.
“You can’t address these problems unless you address the existing liability,” said David Crane, who advised former Gov. Arnold Schwarzenegger on pension issues.
“The only way to do that is to go after benefits for existing employees.”
An exhaustive study last year by the Little Hoover Commission, an independent oversight agency that reports to the Legislature, warned that pension debt will continue to overwhelm government budgets if benefits for existing workers are not scaled back.
Making changes that affect only new employees, the commission’s report said, “will not deliver savings for a generation, while pension costs are swelling now as baby boomers retire.... The promised benefits are unaffordable and leave taxpayers facing all the risk as the bill becomes due.”
The report was met with a public relations onslaught from organized labor, which charged that it was misleading and alarmist. Jack Ehnes, chief executive of the state retirement fund for teachers, drafted a blistering response, noting the commission did not cite a single case in which a court allowed officials in California to cut promised benefits without giving workers something equally valuable in return.
Little Hoover’s recommendation was dead on arrival at the Capitol, where the governor and leading Democrats said they could not support a breaking of employment contracts.
As Sacramento proceeds cautiously, some cities, finding their budgets bowed by crushing pension obligations, are taking a different route.
In San Jose, voters in June overwhelmingly approved a measure that targets workers on the payroll now; the employees will have to pay up to 16% more for their current pensions or switch to a less generous plan.
San Diego passed a similar measure. Both are being challenged in court.
And unions sued Stockton after officials in that bankrupt city peeled back the benefits they pay retired employees. A federal judge recently sided with the city, ruling that a promise made to pay specific benefits “crumbles in the bankruptcy arena.”
Brown said at a news conference this week that he is watching those cases closely and, if the cities prevail, would consider proposing changes for current employees.
“Pension law is not static,” the governor said. “There will be cases coming out of San Jose, San Diego and Stockton that may reshape pension law over the next several years, and if so, that will open new avenues for future changes.”
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