With each day that passes, the need for pension reform becomes even clearer. Last fall, I was one of five local elected leaders who proposed a ballot measure that would empower local governments to address their pension problems. While public employee unions and their allies prevented us from placing this measure on the 2014 ballot, the delay has neither discouraged nor dissuaded us. The issue is just too important, and the numbers are growing even more startling.
The state teacher pension fund, CalSTRS, needs an extra $4.5 billion each year for 30 years to pay off its unfunded liabilities. CalPERS’ local government members will see costs increase by 50 percent during the next six years. And the state needs to contribute $1 billion more per year for retiree health care benefits.
These obligations for benefits already earned must be paid, and over the next decade, they will continue to drain funding from essential services such as education, public safety, transportation and health care.
Yet, powerful interests remain all too eager to kick the can down the road and push our pension problems onto future generations. As everyone with a credit card knows, failing to make your monthly payments dramatically raises the cost of paying off the debt and increases the risk of financial ruin.
In the case of CalSTRS, for each year a funding plan is delayed, the Legislative Analyst’s Office has calculated that the annual required contribution rises by another $150 million. And without change, CalSTRS’ actuaries predict that its pension fund will run out of money in 30 years. That’s around the time teachers hired this year will be getting ready to retire.
Moody’s, one of the nation’s leading credit ratings agency, further underscored the need for prompt action when it recently declared that the fact voters will not be able to consider pension reform in 2014 is “credit negative” for California.
To avoid this looming disaster, we must do two things. One, we must pay the annual required pension contribution to ensure our public servants receive the benefits they have earned. And two, we need to reduce the cost of future benefits so that government agencies can provide essential services to the public.
That’s the goal behind the initiative my fellow mayors and I have proposed. Our measure explicitly protects the retirement benefits that employees have earned, while allowing government agencies to negotiate reductions to current employees’ future, unaccrued benefits. This is how it works in the private sector and for government pensions in at least 18 other states. And while the initiative would provide flexibility to adjust benefits to match economic realities, it would be up to each city, county and school district to sit down with their employees at the bargaining table to decide what specific changes are needed.
These reforms match the recommendations of California’s independent government watchdog, the Little Hoover Commission, which concluded that “the state and local governments need the authority to restructure future, unearned retirement benefits for their employees.” Moody’s recent report also warned that local government agencies are facing rapidly growing pension costs “with few tools to address them.”
That’s why we remain committed to enacting significant pension reforms as soon as possible.
We are open to others’ ideas and welcome a dialogue with labor groups on what they believe will solve the problem. But it’s clear that we need to address the legal constraints that prevent employers and employees from negotiating new contracts that will reduce pension debts, increase retirement security and minimize the long-term cost to taxpayers.
The LAO is right. The CalSTRS actuaries are right. Moody’s is right. The Little Hoover Commission is right. California needs substantial pension reform. And the longer it takes to act, the pain will only get worse.
Chuck Reed is the mayor of San Jose.