Government worker unions are leery of pension reform, but it is an idea whose time has come for cities, counties and states around the nation, including Ventura County.
Ventura County taxpayers are facing $953 million in unfunded liabilities that stem from pension plan underfunding in recent years and overgenerous benefits like former Sheriff Bob Brooks’ $272,000-a-year pension. That debt, combined with rising costs to pay for pension benefits mean that in the future Ventura County will have to start reducing services to county residents to pay promised pensions to public employees.
The good news is that pension reform, no longer a revolutionary idea, can and does remedy pension crises as evidenced by reforms enacted successfully across the nation.
Dozens of states, cities, and counties have adopted substantive pension reform over the past two decades. Close to home, San Jose and San Diego are considered national models for pension reform and even places like Kern County have overhauled their pension plans.
San Diego’s 2012 pension reform is very similar to the reforms in Ventura County’s proposed ballot initiative. It is designed to balance the desire of current public workers to stay in their defined-benefit system, while reducing the city’s $2.1 billion pension shortfall.
The reform makes the San Diego system more sustainable by providing future workers a 401(k)-style system – similar to what most private-sector employees have.
It also generates savings by putting temporary limits on pay for city employees. The city’s actuarial analysis estimates that if the pension reform had been adopted this year it would have reduced taxpayer costs in the coming fiscal year by $25 million.
Once implemented, the immediate savings generated from the reform will allow San Diego to put some money toward improving city services such as park improvements and road maintenance, and pay down its pension debt faster.
The same approach could be taken by Ventura County to eliminate nearly $1 billion in pension debt.
To be sure, Ventura County costs could go up in the short run to pay for the debt. If pension reform doesn’t result in immediate cash flow savings because funds are needed to pay down debt, there could be higher near-term costs.
But just like making early principal payments saves money on a home by paying down a mortgage faster and reducing the interest paid over the life of the loan, so too can debt payments save taxpayers in the long-run.
For example, Alaska will be pulling $3 billion from its savings fund in the coming year to pay down debt that remains after its 2006 pension reform. In the short-term this means annual pension costs look like they have increased. However, in the long-term, Alaska taxpayers are reducing the overall amount they will pay for public pensions thanks to reduced pension debts.
Ventura County residents should also be aware that even after pension reform has been adopted, county leaders would still have to pay down the debt consistently and responsibly.
In 1997, Michigan adopted pension reform for one of two pension systems, and in the first few years this helped lower some long-term liabilities.
Over the past decade, though, state leaders have skipped part of their annual pension contributions. This has caused the costs of both the reformed and unreformed pension systems to go up in the same way that underpaying mortgage principal increases the total cost of a house.
Shifting new employees into 401(k)-style retirement funds is a proven reform that brings into balance the style of savings for private- and public-sector workers, saves money for taxpayers, and ensures that retirees get the pension benefits they have been promised.
It is the responsible way to eliminate the debt of unfunded pension liabilities and guarantee that the pension system remains sustainable into the future.
Anthony Randazzo is director of economic research and Adrian Moore is vice president at Reason Foundation. This article originally appeared in the Ventura County Star.