Economy & Budget

What happened to pension reform in California?

What happened to pension reform in California?

To look at California’s ongoing budget stagnation, you’d never know that the state was – just a few years back – at the forefront of the national pension reform movement.

Following successful reform efforts in San Jose and San Diego last June, the reform movement has stalled out at the state level, with Gov. Jerry Brown in September signing a token pension bill that is only expected to save the state a tiny fraction of what it now spends on public sector pay and benefits. Neither Brown, who won voter approval for tax hikes in November, nor the Democratic Party, which controls both chambers of the legislature, is eager to revisit the issue of the state’s half-trillion-dollar long-term pension liability.

Meanwhile, the large cities of Stockton and San Bernardino are undergoing bankruptcy, in large part due to their crushing public-sector compensation costs. Los Angeles, the state’s largest city, is facing a $220 million budget deficit in 2013, despite having instituted new taxes on parking and real estate sales, along with a parcel tax and a hike in the retail sales tax.

Los Angeles is also the location of the most recent defeat for pension reformers. Former Mayor Richard Riordan, whose planned ballot initiative would have converted most government employee guaranteed pensions to 401(k)-style defined contribution plans and changed some benefits for existing workers, gave up the fight in late November after it became clear he would not be able to place the measure on the ballot.

It was not always thus. Before Wisconsin, Michigan and Ohio draw national attention for controversial public benefits struggles, the Golden State was where agitation for pension reform was most fervent. It was the late Keith Richman, a Republican assemblyman from the San Fernando Valley, who originally put pension reform on the map with his California Foundation for Fiscal Responsibility. Gov. Arnold Schwarzenegger, over the course of two terms not otherwise marked by great fiscal prudence, engaged in very public battles with public sector unions over pension reform.

California is also where pension reform first attracted the attention of prominent Democrats. San Francisco Public Defender Jeff Adachi launched a sweeping but unsuccessful pension-reform initiative for the City by the Bay in 2010. Last year, San Jose Mayor Chuck Reed had more luck with a measure that increased the amount employees must contribute to their pension plans and reduced benefits for new hires.

Yet today, pension reform gets little notice in California. The state legislature, dominated by union-backed Democrats, was lukewarm even to Brown’s modest reform efforts. Although there has been more energy for reform at the municipal level, many reforms (including San Jose’s) are now facing stiff court challenges, and there is ample case law making reform legally difficult. Meanwhile, the groundswell of a few years ago seems to have gone flat.

“At the state level there’s nothing going on,” said David Crane, who ran Schwarzenegger’s pension reform effort and now heads the non-profit Govern for California. “Gov. Brown passed what they said was a meaningful reform, but it will only save about 5 percent of the money the state spends on retiree pensions and healthcare. We need to look elsewhere, to more courageous people.”

What went wrong?

“My petition didn’t work for a very simple reason,” Riordan said in an interview. “There was no way we could get the right amount of signatures within two months. I was naïve enough to think we could. But that would take four or five months.”

This, however, raises the question of why a more concerted effort can’t be mounted. Riordan notes the intense opposition unions are able to mount against any reform attempt. (One Service Employees International Union member last year emailed supporters advising, “We need union members hitting the streets signing Riordan’s petition with fake names / addresses.”)

More importantly, Riordan points out that both L.A. and California need a far more extensive audit than has so far been done – and there is little enthusiasm for that among Democrats. “The City Council isn’t about to do it,” he said. “They’re under the control of the unions. The L.A. Times would be the ideal entity to do this kind of audit. But they’ve take a very weird stance. They were very happy that my petition failed. Once in a while they’ll have an editorial in favor of my position. But on the front page they always knock me down.”

One recent attempt to quantify the state’s budgeting challenge was the July 2012 report from the State Budget Crisis Task Force organized by former New York Lieutenant Gov. Richard Ravitch and former Federal Reserve Board Chairman Paul Volcker. That report found California with one of the country’s largest per-capita unfunded pension liabilities (the amount taxpayers will have to cover as the state’s pension plans fail to meet for their own obligations).

The state has the two largest public pension funds in the nation: the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS). The shortfall in pension payouts is a result of both generous benefits increases made in the 1990s and impossibly optimistic projections for fund investments: CalSTRS assumes a 7.5 percent annual return and CalPERS assumes its investments will bring in 7.75 percent per year.

These projections are far above the rosiest expectations of investment professionals. Riordan notes that L.A.’s pension plans only made 1.6 percent last year. Joe Nation, a Stanford-based public policy consultant, notes CalPERS’s 2009 projection of a 1 percent return had to be revised down to zero due to real estate losses. “I wouldn’t get too hung up on one-year returns,” Nation said. “But most investment funds over the last ten years have averaged 4 to 5 percent. When you’re betting on 7 or 8, that three percent difference adds up really quickly.” Ominously, California’s per capita unfunded liability isn’t even the worst in the nation. According to Volcker and Ravitch’s Task Force, New Jersey’s is 33 percent larger than California’s and Illinois’ is twice as large.

For this reason, Crane and others believe the near-term momentum for reform will be coming from other states, and it may be coming from moderate Democrats, who see commitments for public sector benefits eating up their visions of activist government. Crane points to the success of Gina Raimondo, Rhode Island’s Democratic Treasurer, who raised broad public support in the Ocean State for a sweeping pension reform that was adopted in November. Crane’s organization aims to get reformers into office in California. “We only have 120 people in the state legislature,” he said. “You can succeed with a minority of numerate, intelligent, courageous people up there.”

For the time being, Riordan seems to be on the sidelines of that effort. “Right now I’m a little bit radioactive,” he said.

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