The Queen of Hearts probably wouldn't sign the same pension reform bill that Gov. Jerry Brown recently signed, but Wonderland doesn't have courts to protect employee contractual rights, a legislature representing widely divergent views and public employee unions with bigger treasuries than the monarchy.
The more complex the issue, the more compromise is necessary. Pension reform is no different.
Without question, the most significant of the governor's reforms is the requirement that state employees pay half the cost of their pension benefits. Wall Street agrees. Moody's Investment Services said the reforms improve the credit outlook for the state and local governments that participate in state pension plans. The two largest, CalPERS and CalSTRS, will save $77 billion over 30 years a fraction of the state's enormous pension debt, but nothing to sniff at.
A more difficult prediction for the wizards at Moody's and CalPERS is the sticker shock that public employees will experience when they get the bill for half their pension costs. Many will demand choices that take a smaller bite from their paychecks. If pension managers and union leaders are smart, they'll educate their members about retirement planning and offer lower-cost alternatives, including the hybrid plan the governor and many experts believe is key to long-term stability. California's pension debt will shrink as more employees enroll in 401(k)-type plans that share the risk of investment losses with taxpayers.
One of the unpopular compromises gives cities five years to work out a deal to split pension costs equally between the city and its employees. Public employee unions complain that pension reform legislation circumvents the collective bargaining process; this is their chance to show that collective bargaining can work. Let's hope they do it sooner rather than later, because pension costs are increasing faster than spending on health, public safety, education or any other government service. The city of Los Angeles will spend 14 percent of its budget on pensions this year.
Stockton is an example of a city ransacked by pension costs. With a budget of $155 million, Stockton sends $33 million to CalPERS for employee pensions and spends another $7.7 million on debt service for pension obligation bonds. Now in bankruptcy, the city has made deep cuts in services and reduced its police force by a quarter. While Stockton's murder rate has grown to three times the national average, the City Council has done nothing to curb pension abuses or increase employee contributions, which cover only 15 percent of their retirement costs.
With a larger financial stake in the efficient administration of their retirement plans, employees will have more incentive to control costs. In some public agencies, more than half of all retirees claim and collect disability benefits, increasing their monthly checks by as much as half. As more of that money comes from employee paychecks, their tolerance for cheating will be tested and those claims will receive greater scrutiny. Similarly, employees might want to take another look at limiting extra-duty pay for those near retirement and eliminating incentives to retire early.
Over time, pension boards will reflect the new reality of employees paying half the cost of their pensions. Pension systems will be more diligent in performing experience and economic studies on a timely basis to keep costs on track with actual trends, particularly with respect to investment return assumptions.
Public employees aren't responsible for this mess. Blame the politicians and pension fund managers who made irresponsible promises with no resources to back them up. But public employees must be part of the solution: If collective bargaining doesn't work, look for a constitutional amendment on a future statewide ballot to settle the issue.