State-Sponsored Pension System is California’s Titanic

Do California Legislators know the way to a San Jose styled Pension Reform?

California’s public pension system is a complete disaster. Not only does the state have the highest pension deficit in America, three California cities recently filed bankruptcy.  The California legislature did nothing to avoid the escalating fiscal catastrophe and returns now after a month-long vacation to tackle public employee pensions.

Among the proposals frequently heard around Sacramento is the truly awful idea of launching a state-sponsored pension system for the more than six million private sector California workers.  This idea is akin to providing the captain of the Titanic another boat to sink.

A state-sponsored pension system would wipe out many small businesses that simply cannot  afford to pay the employer’s share of these pensions, especially when coupled with the increasingly heavy state, federal and health care taxes.

There is also the near certainty that funds allocated for a state-sponsored pension system will be funneled toward the current public employees unfunded liability.  Thus, California will continue kicking the problem to future generations.

The California legislature needs look no further than San Jose for a model on how to meet the problem.

San Jose’s Mayor Chuck Reed and his allies negotiated with employee unions last year to craft a pension reform measure for voter approval.. “Measure B” created a new, low cost, hybrid retirement plan that includes Social Security and possibilities for either a defined benefit or defined contribution component.

No matter the shape of their specific plan, all new employees will contribute 50% of the total cost. Current employees can either pay an additional 4% to their current plan, with the possibility that this contribution will increase, or opt into the new hybrid plan. Measure B also gives the City Council the ability to suspend cost of living adjustments during fiscal emergencies, and requires voter approval for any future benefit enhancements. On June 6th, voters approved Measure B with 70% of the vote.

San Jose’s plan works because it stabilizes the pension system while also paying down the debt.

California legislators should implement a state version of the San Jose plan, putting an end to the defined benefit pension system for all employees and switching to a defined contribution system with employees increasing their contributions.

The new plan offered in San Jose is similar to the 401(k) plans offered by the private sector. Defined benefit plans like the ones the state has now guarantee specific benefits regardless of cost to taxpayers. Defined contribution plans establish a fixed payment toward benefits. Instituting defined contribution plans would prevent the endless cost escalations and abuse of pension funds as secret loans by politicians.  Moving to defined contribution plans reduces the risk to taxpayers, provides lawmakers with a reliable cost estimate for budgeting and gives state workers control over their retirement funding.

The new California plan should guarantee that no government employer may pick up employees’ required contributions to pensions and that lawmakers fully fund the required contribution each year. In addition, until significant pension reform is enacted, pay raises for all public employees should be frozen, including step and cost-of-living increases.

California urgently needs pension reform for existing and retired public employees.

Without action, all of California, including each county, city, town and school district, will go bankrupt. That means essential public services must be cut, government workers laid off, disrupting or eliminating public health, safety and education. There is no option for status quo or incremental adjustments. Drastic reforms, innovations and political courage are needed to save California.  The Day of Reckoning is NOW for California lawmakers.

(Bob Williams is the President of State Budget Solutions. Originally posted on Fox & Hounds.)