California should copy New Jersey’s union fund takeover, but with one caveat
New Jersey’s police and fire unions have demanded that the state give them control over their own pension destiny, and have convinced the Legislature to transfer management of their pension fund to a union-controlled board of trustees. Some Garden State residents have denounced the plan as the equivalent of giving unions a “blank check,” given that taxpayers have to pay for all of the trustees’ decisions. But the bill, which is now on the governor’s desk, offers a brilliant solution for New Jersey and even California – provided it’s amended in one simple way.
Yes, unions should be free to control their own destiny. Their members are dependent on these defined-benefit pensions, so union officials ought to decide how the money is invested. Union leaders should select the expected rates of return. They should manage the assets, decide on cost-of-living adjustments and control every cent within the fund. They and their members deserve to reap the benefits, of course, but here’s the caveat: taxpayers no longer should have to foot the bill for their miscalculations. They simply need to remove the liability from taxpayers.
New Jersey’s pension fund is so mired in debt and so underfunded that it almost makes California’s system – long viewed as the national poster child for pension dysfunction – seem like a model of fiscal probity. Instead of coming up with a plan to address the root causes of the crisis, New Jersey’s politicians overwhelmingly approved the above-mentioned plan (without my caveat, of course). In all seriousness, it could plunge the state’s pension system into a death spiral. You should never give a special interest unchecked control over the public purse.
Most experts view a 50-percent funding level as the point of no return for pension funds. California Sen. John Moorlach, R-Costa Mesa, compiled per-capita unfunded liability figures for all 50 states and found that California residents are each on the hook for $4,287 in pension debts (using a fairly conservative estimate). That’s bad – 42nd in the nation. But New Jersey’s per-capita pension debt is even worse at $15,208. It gets the 50th spot.
The California Public Employees’ Retirement System (CalPERS), which is the nation’s largest state-based pension system, is funded at 68 percent, which means it only has slightly above two-thirds of the money it needs to fulfill all of its pension promises. The California State Teachers’ Retirement System (CalSTRS) is funded at 64 percent. These are dangerously low numbers, especially coming after a year of fabulous investment returns. But, as they say in Jersey, forgettaboutit. The New Jersey situation is on a different plane altogether. New Jersey’s system is funded at 31 percent.
Instead of dealing with the real source of the pension liabilities (excessive pay and benefit packages for public employees, unrealistically high assumed rates of return, decisions made by politicians rather than actuaries), lawmakers in Trenton chose to shift control of the Police and Firemen’s Retirement System (PFRS) from the state and its investment council to the police and firefighter unions whose members benefit from the fund. Former Republican Gov. Chris Christie had vetoed a similar measure, but it’s unclear whether Democratic Gov. Phil Murphy’s will sign it.
Police and fire union officials understandably are frustrated at the pension fund’s poor performance and note that police and fire pensions are funded at a higher percentage (65 percent) than pensions for other New Jersey public employees. Extricating the police and fire portion would create an obvious fiscal problem by removing a better-funded portion of the pooled resources, and could therefore lower the funding levels even further (is that even possible?) for the remainder of the fund.
“The massive shortfalls in public pension funds are the single biggest financial challenge for American states and cities,” reported Bloomberg News last month. “So allowing government workers to determine their own benefits – as New Jersey may soon do – seems a clear recipe for disaster.” As news reports suggest, the new board of trustees would have a majority of union members and would have the power to adjust contribution rate and increase cost-of-living benefits for retirees.
“We want to control our own destiny,” said one New Jersey union official, quoted in that Bloomberg column. But the legislation doesn’t really do that. Perhaps unions should be free to control their own destiny, but that means that they and their members – not the taxpayers – have to pay the price if they make bad decisions or the economy doesn’t perform as expected. That’s the only real way to have control over one’s destiny.
Sadly, the New Jersey bill echoes the current system there and here, but puts it on steroids. For instance, the CalPERS Board of Directors is dominated by retirees, union members and Democratic state officials who are elected with the support of public-employee unions. However, at some level state officials have to deal with fiscal reality. They are accountable to voters. If the unions gain direct control over pension funds, then there’s nothing to stop their spending sprees.
“What’s wrong with letting the unions manage their own pension funds?” asked Asbury Park Press columnist Randy Bergmann in a rhetorical way. “First most of the money … comes from taxpayers.” And “the unions can reap all the rewards while the taxpayers absorb all the risk.” His critique is exactly right. That’s where my idea comes in. Let unions benefit from their good decisions, but make them pay the price for their bad ones. If they blow it, then union retirees should be the ones to suffer.
This idea shouldn’t even be that controversial. After all, CalPERS officials argue that the pension fund is in solid shape because investment returns, taken over long-enough periods, always cover the payments. That sounds like a tacit admission that they don’t really need the taxpayer backing anyway. Yes, unions in New Jersey, California and everywhere deserve to control their own destiny. Agreed. And we, the taxpayers, deserve to control ours, too.
Steven Greenhut is contributing editor for the California Policy Center. He is Western region director for the R Street Institute. Write to him at sgreenhut@rstreet.org.