A Pension "Pledge" for State Politicians

Edward Ring

Director, Water and Energy Policy

Edward Ring
December 22, 2015

A Pension "Pledge" for State Politicians

Earlier this week, noted pension reformer John Moore published “The Mechanics of Pension Reform,” listing specific principles of pension reform. Moore’s article focuses on state policy; he intends to focus on local pension reform policies in a later article. The list he has produced for state legislators is quite detailed; here’s is a partial summary of highlights:

1 – Change control of public employee pension boards to politically neutral private institutions. Currently, government union operatives exert nearly absolute control over California’s 81 state and local government employee pension systems.

2 – Limit the total annual pension contribution by any government entity to a fixed percentage of pension eligible salary.

3 – Differentiate between annual salary and pension eligible salary to lower overall contributions. Stop counting annual wage increases as pension eligible.

4 – Eliminate collective bargaining for government workers.

5 – Prohibit legislative bodies from granting vested contract rights to pensions.

6 – Require agency in-house counsel to advocate exclusively for the broader public interests of the legislative body, rather than for the staff and unions.

7 – Prohibit any agency to link their salary increases to that of other agencies.

8 – Require the chief financial officer of any agency to report directly to the legislative body, autonomous of the agency manager.

9 – Start practicing accrual based accounting in conformity with virtually all other economic entities.

10 – Investigate post-employment disability claims with a goal of eliminating abuses.

11 – Lower the exit fees required for agencies to leave pension systems. The liability calculations employed typically assume rates-of-return less than half rate used for official actuarial calculations.

12 – Remove automatic indemnification of agency officers from gross financial negligence, so they are subject to the same rules that apply to private sector executives.

How many politicians in California would pledge to fight for these pension reform policies?

Moore’s experiences as a bankruptcy attorney, and now as a retiree living in Pacific Grove, have made him an expert eyewitness to what pension abuse is doing to California. Read Moore’s two earlier series of articles on the topic, one published in 2014 “The Fall of Pacific Grove,” and a more recent update published this year “The Final Chapter – The Fall of Pacific Grove,” for an account of how that city faces financial calamity because of out-of-control pension promises.

California’s government unions, along with their partners in the financial community, have spent millions to defend the pension system as it is. The uncertainty inherent in any financial projections that attempt to frame the issue make it hard for reformers effectively communicate the urgency of their position, even if they did have sufficient financial backing to mount a serious campaign for reform. Moore understands this, and has based his prescriptions for reform on a fundamental assumption: Change will come when elected politicians – who have the courage to play hardball with government unions – hold governing majorities in California’s cities and counties. Wherever that occurs, Moore’s prescriptions are viable.

For example, Moore, along with many other legal experts, does not believe that pension reform efforts in court have been exhausted. In particular, he repeatedly cites cases where cities and counties violated due process when approving pension benefit enhancements. All of these improperly adopted enhancements can be challenged in court. Moore also points out – more of this will appear in his next article – that cities and counties may not have the authority to revise “vested” pension benefits, but they can cut current benefits and cut staffing. If necessary, Moore recommends cities and counties engage in draconian cuts in the areas of personnel management where they have latitude, because if they have the courage to do this, in response the unions will be forced to accept reasonable modifications to their pension benefits.

How many politicians in California would be willing to be this tough?

One of the biggest misconceptions spread by government unions is that all pension reformers want to eliminate the defined benefit. This is false. The problem with government pensions is that they are not financially sustainable or fair to taxpayers. In California that began with Prop. 21, passed in 1984, which greatly loosened restrictions on investing in stocks, enabling much higher and much riskier rate-of-return projections, followed by SB 400, passed in 1999, that started the process of retroactively increasing pension benefit formulas for what eventually became nearly all of California’s state and local government workers.

If Prop. 21 and SB 400 had not passed, or, for that matter, if California’s government worker pension systems merely had to conform to ERISA, which sets responsible limits on the financial behavior of private sector pension funds, California’s government pension systems would be financially sustainable.

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Ed Ring is the executive director of the California Policy Center.

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