California and Pension Reform: The Problem...The Solution

Thursday, August 23, 2012

To understand California’s experience with pension reform, think of the Golden State’s legislature as a child – a child with a tricycle.

Sometimes the little tyke likes to pedal around the neighborhood at a leisurely pace (that would be Sacramento's annual, ritualistic budget dance). Other times, there’s a mad dash after the political ice-cream truck (i.e., a special session on health care reform for later this fall, now that Obamacare’s survived its legal challenge).

Then there are those times when the tricycle sits in the front yard, alone and neglected.

Which leads us to the current status of pension reform in the Golden State.

Last October, Gov. Jerry Brown introduced a 12-point reform plan (details here). Among its highlights: raising the retirement age for future state employees, possibly shifting them into a “hybrid” pension that’s part employer-guaranteed and part 401(k).

And the Legislature’s response?

Though California’s governor publicly encouraged lawmakers to act on pension reform pdq (Brown’s thinking: a tough-on-government accomplishment like pension reform would make his tax initiative an easier sell come November), the State Senate and Assembly purposely kept its distance. Democratic lawmakers, who dominate both legislative chambers, didn’t take kindly to pressure from the Democratic governor. Nor did they feel pressure from the right, what with a Republican-led initiative not going on the ballot in 2012.

Nonetheless, as the calendar turned to August California’s legislative leadership promised pension reform by the month’s end (“broad-based reform”, according to Assembly Speaker John Perez).

Will they deliver the goods? “I hope to do as much as I can . . .,” Brown told reporters while kicking off his initiative campaign last week, “. . . and you’ll find out probably in the next week or so, how far we got. The bottom line is, whatever we can get, we’ll get.”

Not exactly a vote of confidence.

What, then, to expect in Sacramento between now and Labor Day? Lawmakers could do something bold. They could just as easily take the Illinois rout – legislators in that state last week narrowing pension reform to state lawmakers.

Meanwhile, the pressure builds in California – specifically, at the municipal level. In June, voters approved reform measures in San Diego and San Jose.  In Los Angeles, former mayor Richard Riordan and business leaders are calling for charter amendments on the ballot to change the city’s pension system. Another flash point: Long Beach, a city with $1.2 billion in unfunded pension liabilities – and the city’s largest employee union last week rejecting a reform proposal.

As the clock winds down on this year’s legislative session, the Golden State is the unproud owner of a pension liability estimated as high as $500 billion (or, about $30,500 for every California household).

In this Eureka session, we’ll explore the intricacies of California and pension obligations – the enormity of the problem, changes that could and should be made.

It begins with David Crane, a special advisor to Gov. Arnold Schwarzenegger and a leading voice when it comes to pension reform, explaining the effect on California’s state finances.

Autumn Carter, executive director of the nonpartisan California Common Sense, will walk us through pension reform’s dancing numbers – including CalPERS’ poor returns in recent years.

Chuck Reed, San Jose’s mayor and a leader in his city’s fight to redefine retirement benefits, will walk us through possible policy and legal avenues for future reform.

Finally, Joshua Rauh, a recently appointed Hoover senior fellow and professor of finance at the Stanford Graduate School of Business, will offer a look at what true cost-containing would involve.

We hope you enjoy this discussion. It’s a conversation (and a responsibility) that Sacramento’s ruling class hopefully will not shirk.