California Pension Reform

California’s pension problems are well-documented. According to a report by the Stanford Institute for Economic Policy Research, the state’s public employee pension system is underfunded by $535 billion.  $360 billion would have to be injected into pension and health care benefit systems immediately just to give California an 80 percent chance of meeting 80 percent of the obligations in 16 years.

The report also predicts there is a 44 percent chance the California Public Employees Retirement System (CalPERS) alone will have a shortfall of more than $250 billion over the next 16 years. Moreover, California’s independent local pension systems – in over 20 counties, cities, and special districts – are over $130 billion underfunded. Local pension costs have doubled in the last decade. California’s pension woes thus have enormous implications for the state’s debt and deficit and its ability to sustain the government services it currently provides. California’s elected officials, however, have been unable to agree on a solution.

In last summer’s budget negotiations, Gov. Brown and Republican leaders failed to reach an agreement on changes to the state’s pension system. This February, efforts to reform California’s pension system through an initiative on the November 2012 ballot also failed. California Pension Reform, a group that included former state GOP Chairman Duf Sundheim, proposed an initiative that would have gone beyond what Gov. Jerry Brown has proposed to reduce pension costs, affecting pension benefits for current workers as well as future hires and placing caps on how much an employer can pay toward a worker’s retirement. The initiative, like past pension reform efforts, failed to garner the funding necessary to sustain an effective campaign.

On February 2, Gov. Brown submitted his own 12-point pension plan to the legislature, in the form of aconstitutional amendment and additional statutory language. One union spokesman called the plan a “bomb,” while Republicans applauded Brown’s efforts. The Governor’s plan would raise the retirement age for future state and local government workers, place them in “hybrid” plans less secure than traditional pensions, and force them to pay more toward retirement. Pensions for many new hires would also be calculated differently to reduce “spiking” – the practice of driving up compensation in the years immediately preceding retirement to inflate the size of the pensions.  The Brown administration estimates its proposal, which would apply to all state, local, school, and other public employees, would save California some $900 million annually.

On February 22, almost all Republican state legislators endorsed Brown’s 12-point pension plan. Assembly Minority leader Connie Conway argued that Republicans were “stepping up to the plate” to address California’s pension liabilities, and it was now time for Democratic lawmakers to do the same. Democrats, however, responded that they cannot accept the bill without vetting it first.

Republican lawmakers’ decision to essentially co-opt the Governor’s proposal puts Democrats in a difficult political position: reject a plan offered by their own Democratic Governor, or adopt it and unleash the ire of the public-employee unions on whom they rely for political support. Tom Del Beccaro, Chairman of the CA Republican Party, told reporters that failure to enact pension reform would be a “black eye” for Democrats in November. Voting against the bill despite bipartisan support, Beccaro contended, would be a signal to the voters that Democrats are not serious about fiscal reform. The governor’s office dismissed the move as a political stunt, meant to embarrass Democrats who do not support the proposal. Brown was not notified of the endorsement, and his staff said there have been no pension negotiations with Republicans since talks broke down last year.

On February 23, one day after the Republicans got behind Gov. Brown’s proposal, Democrats introducedSenate Bill 1234 to establish guaranteed retirement benefits for private sector workers. Senate Bill 1234, sponsored by Sen. Kevin de Leon (D-L.A.) and Senate President Pro Tempore Darrell Steinberg (D-Sacramento), would require businesses with five or more employees to enroll in a new “Personal Pension” defined benefit program – or offer an alternative employer-sponsored plan. In a press conference with Democratic and labor leaders, De Leon argued that the plan would be a supplement to social security. Steinberg rejected suggestions that Democrats are pushing the bill to avoid considering the substantial public pension changes included in Gov. Brown’s proposal.

That pension reform enjoys popular support amplifies the political pressure on Democrats. A December 2011 Field Poll found that 51 percent of Californians think Brown’s pension proposal “strikes about the right balance” and a plurality think that state and local government retirements are “too generous.” The slim majority of voters polled agreed with Brown’s proposals included 55 percent of registered Democrats and 43 percent of Republicans. Moreover, 64 percent said legislative pension cutbacks should apply to current and newly hired employees, while only 22 percent thought changes should apply only to new workers.

In an Op-Ed on February 27, Dan Walters argued that if reform happens, it most likely will be a bottom-up process from local governments – not from the state. While state government doesn’t yet face a pension crisis, he explained, many local governments, especially cities, already do. Major pension reform plans have emerged in San Jose and San Diego – two of California’s largest cities – and the political fault lines have already been drawn.

On March 6, the San Jose City Council voted to put a pension reform measure on the June ballot. The measure, if passed by voters, would require city workers to contribute slightly more to their retirement plans and provide limited benefits for new hires. San Jose Mayor Chuck Reed supports the measure, but union leaders have said they will challenge the constitutionality of the measure in court if the voters approve it.

In San Diego, a pension reform initiative backed by the San Diego County Taxpayers Association, Mayor Jerry Sanders, and Councilman and mayoral candidate Carl DeMaio survived a legal challenge that would have removed it from the June ballot. If passed, the ballot measure would replace San Diego’s defined-benefit pension plan with a 401(k)-style defined-contribution plan for all new city employees except police officers. It also freezes base pay for current city workers for up to five years, removes special pay from counting toward pension calculations, and forces the city to post each year’s pension payouts online.

The outcome of the San Diego and San Jose initiatives may affect the statewide pension debate. If local voters approve large pension cutbacks, pressure on Democrats to agree to substantial changes in state pensions would intensify. If unions succeed in softening the reform proposals in San Diego and San Jose, however, the momentum for dramatic reform at the state level may dissipate. In either case, pension reform will be a prominent policy issue in California at both the state and local level this year – and a key political issue in November.