By Steven Greenhut | Public-sector unions and their allies often turn back efforts at reforming their pension plans by simply denying that there’s any sort of problem. In California, the Legislature and governor claim that they have fixed the problem when they passed a modest pension-reform act applying to the state’s biggest retirement system (the California Public Employees’ Retirement System, or CalPERS). Yet even when everyone agrees that pension liabilities are at a crisis level, there are few ways of addressing it.
For instance, the governor and top legislators have pointed to massive, annual shortfalls at the California State Teachers’ Retirement System (CalSTRS). CalSTRS officials and the Legislative Analyst’s Office have called for annual infusions of as much as $4.5 billion to keep the system solvent. There’s no debate here about the size of the problem and what it will mean for teachers’ pensions. But there’s virtually nothing to be done.
Part of the problem is political. The powerful California Teachers’ Association has even fought a modest bill that would divert an extra couple billion dollars in surpluses this year only to the system. A common suspicion: Union supporters are more interested in having extra cash available to fund a brand-new universal preschool program pushed by the Senate president than in fixing the creaking teachers’ retirement system. That new program would create many union jobs.
CalPERS has been handling its underfunding problem in part by increasing the fees that local agencies must pay. That has been stressing city budgets in particular, as they must come up with more money to pay for their employees’ pensions.
CalSTRS is set up differently. It must go to the Legislature to get an OK to increase contribution rates. And the union-dominated Legislature isn’t about to approve such a thing. So, desperate to find ways to backfill its emptying coffers, CalSTRS’ leaders came up with a complex but clever plan to increase contributions.
Individual teachers would contribute an extra 2 percent to the CalSTRS system. In exchange, the Legislature would turn an annual salary adjustment (similar to a COLA, but without compounding) into a vested benefit, meaning that it could never be taken away. Teachers have been getting that benefit every year for many years and there’s no sign that the Legislature is going to stop giving it to them. But they could possibly stop if finances get too tight, so CalSTRS sees the guarantee as something of value. Here is my column on it for U-T San Diego.
Because of various California court decisions, agencies cannot take away vested pension benefits — even going forward — unless they give back something of equal value. So CalSTRS can’t simply ask employees to pay more each year, but the system desperately needs more cash.
The problem, though, is that this “California Rule” is at the heart of the state’s pension problems, and explains why some cities face bankruptcy. Reforming pensions for new hires only doesn’t solve the problem. In San Jose, for instance, pension costs have soared 350 percent in 10 years and have led to cutbacks in the police force. That city approved wide-ranging pension reform that would have given employees a choice of lower benefits or higher contributions going forward. The courts rebuked that part of the measure, even though San Jose officials argued that their charter-city status allowed them to do this.
So this definition of vesting leaves fewer options for officials. The CalSTRS plan brings in a little more cash in the short term, but it could create more of a problem in the long term by further expanding an area of benefits that are off limits from tinkering.
Localities are facing a declining number of options. The San Jose mayor’s plan for a statewide ballot measure to specifically allow changes to benefits for current employees was derailed by a union-friendly attorney general who gave the initiative a biased summary that would have made it nearly impossible to pass. And the courts have shown no willingness to chisel away at the vesting protection. And even after cities have gone bankrupt (Vallejo and Stockton, for instance) council members who are allied with or fearful of unions have chosen not to confront CalPERS and have cut programs and raised taxes while leaving pensions whole.
Even after bankruptcy, Vallejo is in trouble again and an analysis suggests that Stockton might have budget problems again in four years.
San Diego officials have been implementing a pension-reform plan that mainly tinkers with pensionable pay and isn’t dependent on new court interpretations — and Ventura County is attempting to follow that approach. Even that reform model is being challenged by a state agency that is behaving like an arm of the public-sector unions. (It has claimed that a ballot measure is in essence an unfair labor practice.)
Something has to give somewhere. But as of now, the only ones who will have to give more are taxpayers. It’s a sad story about how powerful interest groups can halt reasonable solutions for purely selfish reasons.
Cross-posted from Public Sector Inc. with permission.