There is no question that California is spiraling deeper into debt every year. Unfunded pension liabilities owed to public employees as negotiated by their unions and the state account for almost $500 billion of it. A few weeks ago, Gov. Jerry Brown unveiled his proposal to inject some amount of financial sanity into the state's pension system. While his plan doesn't go far enough, it's a start, and many Republicans crossed party lines to endorse it early.
At the center of California's pension problem are statewide retirement plans that provide guaranteed lifetime benefits based on an employee's final salary and years of service. The contribution rates for public employees have been set too low - in some instances, employees don't contribute anything to their own retirement funds - and the benefits are not tied directly to the amount the employee has contributed over the years, so retired public employees receive benefits regardless of how much of their own money they've put in.
According to a recent study by the Stanford Institute for Economic Policy Research, the combined unfunded liability of all those pensions guaranteed to retired public employees is nearly $24,000 per California household. California's retirement system does not have enough money to pay all that it owes its retirees, and taxpayers are footing the bill.
In the private sector, most employers offer 401(k)-type retirement savings plans funded by employee contributions. Employers often provide matching funds. Even if they don't, anyone can start a retirement fund through a private investment firm. It is absurd to expect Californians working in the private sector to pay into their own retirement plans as well as cover all of the retirement costs of their public sector neighbors.
Brown's pension proposal, while modest, moves in the right direction in attempting to address these issues. But there are a few points I'd like to see clarified.
Brown's plan would require all employees to contribute at least 50 percent of the annual costs of pension benefits. I applaud his move to encompass both current and future employees, because real reform has to start with existing state workers. But according to the Legislative Analyst's Office, it is unclear if the requirement will apply to unfunded liability contributions. The LAO urged the legislature to require that future public employees bear a portion of not only their normal pension costs, but also the unfunded liabilities that have accrued.
Brown's proposal needs to be clear on what constitutes equal sharing of pension costs, because the distinction will mean millions of dollars in taxpayer money.
The governor also proposes to limit post-retirement employment for current and future employees. This is a good starting point, but it doesn't go far enough.
A few states prohibit public employees who retire and then go back to work for the state from receiving their pension until they stop working again. This is the ideal scenario: Why should public employees get paid twice for doing the same job? Brown's proposal would limit this practice by putting a cap on the number of working hours or days a retired public employee can return to work for a public employer, but it doesn't fix the problem completely.
Californians deserve real reform before one more dime of taxpayer money is shelled out on unfunded pension liabilities. The pension problem is threatening to strangle funding for vital services like education and public safety, and I hope to see thoughtful solutions made be the legislature's priority this year. Taxpayers cannot afford to wait.