California Public Employees Unions Not Serious About Pension Reform

In a San Jose Mercury News column on public pensions, Dave Low, chairman of Californians for Retirement Security, a union coalition, and executive director of the California School Employees Association, argues that there is no public pension crisis, and offers some minor reforms the unions support that won’t do much to help.

“The condition of public pensions in California is not a crisis despite the best efforts of pension slashers to portray it as such,” says Low. “Pension costs make up just three percent of the state budget, a percentage that has actually fallen $600 million over the past two years as collective bargaining has increased the share public workers contribute to their pensions and as funds have taken tougher lines on pension spiking.”

The truth is that the public employees unions have been dragged kicking and screaming toward even modest pension reforms. Moreover, while the billions the state currently spends on employee pension and retiree health-care benefits is hardly chump change, the real concern is for the future. California’s public pension and retiree health and dental care expenditures have quintupled since fiscal year 1998-99, from about $1 billion to $5 billion last year. Retirement spending is expected to triple again—to $15 billion—within the next decade. Several academic studies in recent years have pegged the state’s unfunded pension liability in the neighborhood of $400 billion to $500+ billion (see, for example, here, here, and here—see pp. 197-199), which translates to roughly $36,000 for every household in the state. And those figures do not even include $60 billion in unfunded retiree health-care liabilities.

Low’s article then goes on to list some bullet points summarizing Californians for Retirement Security positions. They begin with a couple of non-controversial points about curbing pension spiking, curbing some of the most egregious pension benefits for “the small number of public workers—mostly senior officials—who have outsize retirement benefits,” creating a form of pension rainy-day fund, and reducing double-dipping by imposing a waiting period before retirees could return to take part-time jobs with the state.

But, as a report from the state’s bipartisan Little Hoover Commission noted earlier this year, California’s public pension situation truly is dire, and will require much more significant reforms:

In its study of public pensions, the Commission found that the state’s 10 largest pension funds — encompassing 90 percent of all public employees — are overextended in their promises to current workers and retirees. The ability and willingness of leaders to contain growing pension obligations should concern not only taxpayers who are seeing vital services and programs cut to balance budgets, but the public employees who have the most to lose. A pension is worthless without a job to back it.

The Legislature has the tools to put state and local public employee pensions back on a path that can restore stability and public confidence to state and local pension systems. Marginal changes, however, will fall short of the need for serious action. Adding a “second tier” of lower pension benefits for new hires, for example, will not deliver savings for a generation, while pension costs are swelling now as Baby Boomers retire.

In this report, the Commission confronts the elephant in the room: The legal obstacles that limit the options of state and local pension plans to reduce future, as-yet-unearned pension benefits promised to current workers. These promises, protected by decades of court decisions, were made under the illusion that the stock market returns of the dot-com boom were the new normal. After years of benefit enhancements, pay raises and government hiring sprees, the drop in stock and home values made it clear that the promised benefits are unaffordable and leave taxpayers facing all the risk as the bill becomes due.

While recognizing the legal challenges, this is a path that the state has no choice but to pursue. Public agencies must have the flexibility and authority to freeze accrued pension benefits for current workers, and make changes to pension formulas going forward to protect state and local public employees and the public good.

Low then offers some support for 401(k)-style, defined contribution retirement plans, but only as a voluntary option and only as a supplement to defined-benefit plans:

“We support expansion of voluntary worker and employer contributions into 401(k) type funds as a valuable way to supplement secure, defined benefit pensions. But we must ensure that retirement for public workers is secure and retirement systems are healthy. . . . We adamantly oppose erosion of the present system’s central pillars:

• “Defined benefit pensions must remain the core of the system. Those opposing the current public pension structure claim that the only acceptable option is a wholesale shift to insecure 401(k)-type pensions now prevalent in the private sector. Anyone with their pension savings locked into a 401(k) knows how precarious such a retirement plan is.
• “Collective bargaining must remain central to the process. Pensions are part and parcel of a larger wage and compensation structure. Public employers and the unions that represent their workers must maintain the authority to negotiate over pensions.”

There is a reason that the private sector has shifted away from defined-benefit pension plans for the last 30 years and hardly any private-sector DB plans have been created in the past decade or more: they are simply too volatile and too expensive. Just look at the “legacy” industries characterized by strong labor unions where DB plans persisted, for a time, at least. First the steel companies went bankrupt, then the airlines, and, more recently, the domestic auto companies. All were largely strangled by unsustainable pension obligations.

Now we are facing the same thing in state and local governments across the nation. The difference is that the steel and airline and auto companies could not use the government to force people to pay more for their products so they could offer more and more generous pension benefits. (I should qualify this by noting that some of the airline and auto companies were successful in doing just this, in effect, by obtaining bailouts from the federal government.)

As for the collective bargaining argument, of course they want to preserve collective bargaining. The public employees unions own the legislature and have close ties with the governor. The collusion between unions and legislators is what has gotten us in to this mess, and naturally they do not want to lose the ability to make sweetheart deals.

The article then concludes by deteriorating further with a couple of silly arguments. First is the ludicrous claim that the $12 billion CalPERS paid out to pensioners in 2010 “[stimulated] $26 billion in total economic activity and [supported] 93,000 California jobs.” But the money paid out by CalPERS was the result of contributions paid by state workers and the government (i.e., taxpayers), as well as the investment gains earned on those contributions. Clearly, if the contributions paid by employees and taxpayers had not been made for pensions, they would have been devoted to some other “stimulative” use. In other words, if there is a stimulative effect from CalPERS payouts, there is also a de-stimulative effect from making those contributions in the first place. Thus, the entire notion of CalPERS as some sort of economic stimulus programs is fallacious.

Finally, Low argues “The retirement crisis in America stems not from mostly modest public workers’ pensions but from the alarming deterioration of private-sector pensions.” Notwithstanding that the “retirement crisis,” and, indeed, the economic crisis in general, was caused primarily by government interventions in the housing market and other fiscal and monetary policies, this appears to be a form of argument I have heard many times from union members that goes something like this: “You in the private sector should strive to increase your pensions to our (public-sector) level, not bring our pensions down to the private-sector level.” Unfortunately, this “logic” does not pass muster for two reasons: (1) money does not grow on trees and (2) there is no pension fairy.

In the private sector, people must produce something of value (revealed through the prices of goods and services in a competitive market) in order to earn their benefits and salaries, a portion of which they may devote to their own savings and retirement plans. In the public sector, there is no real pricing mechanism so decisions such as which government programs should be funded (and how much), how many employees to hire, and how much to pay employees in wages and benefits are made arbitrarily based on political considerations like special interest group power or the whims of legislators and bureaucrats. As noted previously, taxpayers can be forced to pay for these things through the imposition of taxes, whether they want them or not. Therefore, it is all well and good to say “Why don’t you just increase your own pensions to match ours?” but the answer is because, unlike the public labor unions, those in the private sector cannot force other people to pay more for their retirement plans, and, since their wealth is not unlimited, any attempt to do so would leave less money for salaries and reinvesting in businesses to allow for even more innovation and job creation (not to mention the fact that any forced wealth transfer would violate individuals’ rights).

See the full Low article here. Then, for a more realistic analysis of the public pension problem and the differences in public-sector and private-sector compensation, see the following:

” How California’s Public Pension System Broke (and How to Fix It)

” The Gathering Pension Storm: How Government Pension Plans Are Breaking the Bank and Strategies for Reform

” “Comparing Private Sector and Government Worker Salaries”.