Significant Reform Needed to Address California’s Public Pension Burden

In the waning days of his administration, Gov. Arnold Schwarzenegger negotiated a pension reform in the October budget deal that reforms California state employee pensions by trimming benefit levels back to 1999 levels (before the infamous SB 400 legislation increased pension benefits by as much as 50% for state workers) for new hires. (The California Constitution protects the benefits of state employees already in the system, so these cannot be cut back.)

Yet, while this is a welcome step in the right direction—the administration estimates that it will save about $100 billion “over the decades to come”—as I note in an Orange County Register column, this will only make a minor dent in the state’s unfunded pension liabilities. California’s significant public pension problem requires significant solutions. Below is an excerpt from that article.

The nonpartisan state Legislative Analyst’s Office recently confirmed that California’s budget is built around billions of dollars in accounting gimmicks, overly optimistic assumptions and improbable handouts from the federal government. It projects a $25.4 billion deficit over the next 19 months and deficits of $20 billion for each of the next five years.

What’s even scarier is that those figures do not include the state’s enormous unfunded pension promises to state workers, recently pegged at up to roughly $500 billion — roughly $36,000 for every household in California. Throw in the $50 billion or so in unfunded retiree health care liabilities, a $10 billion unemployment insurance fund debt, and the state’s $152 billion in general obligation bond debt, and you start to get a fuller sense of the state’s true financial problems.

[. . .]

The state budget passed in October takes state pension benefits back to 1999 levels — for future/new state employees — and the Schwarzenegger administration estimates the tweak will save up to $100 billion over time. That’s a minor fix at best.

The state has tried this before. In 1991, California created a second tier of lower benefits in an effort to stem rising public pension costs. Less than a decade later, the Legislature passed, with virtually no opposition, the infamous Senate Bill 400, which not only massively increased state employees’ pension benefits but also made those increases retroactive. It would simply be too easy for legislators, with the support and pressure of government workers’ unions, to do it again.

California needs to switch to a defined-contribution system for all new employees, as the private sector has been doing for decades. This would work just like 401(k) retirement plans do for so many nongovernment workers. The state would contribute a certain percentage of the employee’s pay, and possibly match up to an additional portion, to that employee’s individual retirement account.

Since contributions are essentially a fixed percentage of payroll, they do not vary widely from year to year based on pension fund performance. Contributions must be paid in full every year so there is no such thing as an unfunded pension liability in a defined-contribution plan.

See here for the full article.

Related Research and Commentary:

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

“Comparing Private Sector and Government Worker Salaries”

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

“Fixing the state’s pension mess” (Orange County Register)

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