As many Californians fill up gyms, bike trails and jogging paths to act on their New Year’s resolutions to improve their personal health and fitness, this year California voters will fill voting booths to kick the $240 billion pension debt habit that is overwhelming our budgets and damaging our fiscal health.
Over the years, CalPERS and other pension fund administrators have worked hard to minimize the impact of the stock market losses that make it much more difficult to service this huge pension debt, yet repayment periods can only be extended so far and rosy market return assumptions are looking more ludicrous each quarter.
CalPERS and other government pension plans assume they will earn at least 7.75 percent return on their investments, while the world’s most successful investor, Warren Buffet, assumes his pension funds will earn just 6.2 percent over the next decades. If Buffet is right, California’s true pension debts approach $500 billion. In 2009, former CalPERS head actuary Ron Seeling called the state’s pension systems “unsustainable” and said we have to “find some other solutions.”
Indeed, voters must protect the next two generations of California taxpayers from the moral hazard of today’s weak politicians giving their government employee union contributors generous benefits on the easy payment plan. The expensive lifetime government employee pensions being offered today cost from 10 to 50 percent of an employee’s salary, while the private sector average retirement benefit cost after Social Security is just 5 percent.
Such a huge disparity in the value of retirement benefits is also unsustainable. While the average state retiree’s benefits package costs more than $1 million to replace, the average American of retirement age has less than $150,000 in their retirement account. As a result, taxpayers are working longer to pay higher taxes for government employee benefits far more generous than their own.
The Legislative Analyst’s Office recognized this structural imbalance last year when it said, “A key question that we think needs to be asked is this: Can the substantial disparity between public and private sector retirement benefits be sustained much longer? We think that it probably cannot. But we do think that there are reasonable options to improve California’s public employee retirement systems.”
The statewide citizens group California Pension Reform has developed two reasonable options that will reduce by 30 to 60 percent the cost of benefits for new government employees and require current government employees to pay more for the generous benefits they are already earning. Although state and federal constitutional law make it difficult to change current government employee benefits, there is a clear legal path to temporarily charge current government employees more for their same benefits when their pension funds are funded below the “at-risk” standard established by the federal government for private sector pension plans.
Pension reform opponents, most of whom have their own government pension to defend, are trying to obscure this simple math solution. They bet on unrealistic investment returns that assume these unsustainable benefits levels will continue indefinitely. They worry government employees no longer earning million-dollar benefits packages will want a raise or that less generous pensions will leave governments begging for workers to fill jobs.
Sadly, California Attorney General Kamala Harris failed her statutory obligation to be fair and impartial by issuing false and misleading titles and summaries that support pension reform opponents. Out of thousands of government employee classifications, she needlessly highlighted popular “teachers, nurses and peace officers” when the measures apply to all government employees except constitutionally protected judges. She also wrote that the initiatives reduce pension benefits for current employees when the measures simply charge current employees more for their same benefits. And she falsely implies that death and disability benefits are “prohibited,” ignoring Section 12 (d) which states these benefits must be provided by the employer outside the pension system.
The good news is California voters will see through all of this self-serving status quo rationalization. Common sense says the first thing you do when you find yourself in a hole is to stop digging. As California faces a $240 billion gap between its expensive government pension promises and the funds needed to keep them, we must stop making those expensive lifetime pension promises to new employees and give them retirement benefits similar in cost and form to what is available in the private sector.
Gov. Brown used his inaugural address to call for a new system of pension benefits that is fair to workers and fair to taxpayers. He also recently called for an end to what he calls the “Ponzi scheme” way in which we fund pensions. California Pension Reform agrees. Late last year he followed up with a hybrid pension reform plan that adopts the same approach as one of our initiative options.
While the governor’s pension reform plan must pass a Legislature that long ago gave veto rights to the government employee unions that fill their campaign coffers, a reform measure will be placed on the ballot by the taxpayers who must bail out these pension funds. Californians must resolve to make 2012 the year of reckoning for California’s public pension systems, the year when we make tough decisions to get our government budgets back on track.