Pension reformers have the momentum

Former San Jose Mayor Chuck Reed is again leading an effort to put a public pension reform measure on the statewide ballot.
Former San Jose Mayor Chuck Reed is again leading an effort to put a public pension reform measure on the statewide ballot. Sacramento Bee file

With Wednesday’s announcement that a proposed initiative has been cleared for circulation, the cause of pension reform in California took an important step forward.

Even as they objected to the title and summary from Attorney General Kamala Harris, the ballot measure’s sponsors – former San Jose Mayor Chuck Reed and former San Diego City Councilman Carl de Maio – predicted that it will “overwhelmingly pass” if the initiative is put before voters in November 2016. Their confidence is well-founded. Since announcing the initiative in March, many things have been breaking in their favor.

Last month, CalPERS and CalSTRS announced underwhelming investment earnings for the prior year. Between June 2014 and June 2015, when the California economy added 462,000 jobs, CalPERS gained 2.4 percent and CalSTRS 4.8 percent, both short of their 7.5 percent assumed rates of return. The differences will almost surely have to be made up with increased taxpayer contributions, even though Californians are already spending billions per year to pay down pension debt.

This episode illustrated two lessons. One: to pay for overly generous benefits, public pension funds can’t just have a good year, they have to have a great year. Two: pensions’ full cost to taxpayers is never certain.

But defenders of the status quo still don’t seem to grasp the deep fiscal volatility in the current system. CalPERS’ investment portfolio is 72 percent allocated in stocks and real estate, yet its champions say that pension reformers are the reckless ones.

CalPERS recently chastised the proposed initiative for its “imprecise language” and the “complex legal and administrative issues” that it would raise. CalSTRS has suggested that pension reform would threaten the state and school districts’ borrowing costs. Others have seized on language in a recent report by the Legislative Analyst’s Office about “significant uncertainty as to the magnitude, timing and direction of the fiscal effects of the measure,” conveniently overlooking what the same analysis said about “likely large savings related to retirement benefits.”

Reformers should leap at the opportunity to debate risk and public pensions. For a government employer, the essential difference between a defined benefit and a 401(k)-style defined contribution system lies in who bears the investment risk – taxpayers or workers. The Reed-de Maio proposal would stabilize state and local budgets by requiring that California government employers, should they desire to continue offering defined-benefit plans for new employees, obtain voter approval as of 2019.

Statewide, the debate over the proposed initiative is just getting started. But at the local level, the pension debate never ended. In April, a Marin County grand jury issued a report charging that the 38 pension enhancements that county agencies passed between 2001 and 2006 illegally “violated disclosure requirements and fiscal responsibility requirements of the California Government Code.” In Sonoma County, voters rejected a sales tax increase in June partly over fears that the revenues would go to backfill pension debt, and not to the stated purpose of repairing roads.

These growing concerns in affluent communities show that residents recognize that it’s neither fair nor practical to expect to grow their way out of pension debt problems.

We can expect the debate over pension reform in California to get dirtier before it gets classier. CalSTRS has already claimed that pension reform is anti-women given that nearly 70 percent of CalSTRS members are women.

Reformers should continue to take the high road and trust that the facts are on their side. If framing this as a debate over the “uncertainty” of public retirement benefits is the best that defenders can do, there may yet be hope for the cause of fiscal stability in California.

Stephen Eide is a senior fellow at the Manhattan Institute.