Why Do Public Pension Systems Get Special Treatment?

A few years ago, it was easy to blame the state’s growing public pension crisis on the recession and sluggish economic recovery.

But today, the Dow Jones Industrial Average is regularly above 18,000, the national unemployment rate is down to 5.5 percent, California’s unemployment rate is down to 6.5 percent, and the state’s General Fund tax receipts are even higher than estimated for the fiscal year.

And yet, California’s unfunded pension and health-care liabilities continue to grow. Last year, Mac Taylor of the nonpartisan Legislative Analyst’s Office reported that the California State Teachers Retirement System, CalSTRS, “has not been appropriately funded for most of its 101-year history.” He noted CalSTRS’ unfunded liabilities rose from $23 billion in 2003 to over $73 billion in 2013.

Similarly, the California Public Employees’ Retirement System, CalPERS, reported $57.4 billion in unfunded liabilities for 2013. And according to the state treasurer, the unfunded health care and dental benefits for state workers was $71.8 billion in 2014, up from $64.6 billion in 2013.

“This is a liability that has grown over decades of poor fiscal planning and a callous willingness to pass along debt to our children’s generation,” State Controller John Chiang said last December. “While it can’t be erased overnight, we have to resolve ourselves to meaningful progress. Let that first step be a commitment that liabilities created by one generation of Californians be fully paid by that generation and not passed off to the next.”

A number of elected leaders who have been working to reform the system are being frustrated by adverse rulings by the Public Employment Relations Board and the courts. These rulings have exposed the astounding differences in the way we treat government pension systems compared to the pension systems of private companies.

Federal law, under the Employee Retirement Income Security Act of 1974 and the Pension Protection Act of 2006, requires action when private pension funding levels drop below acceptable levels.

Private pension plans are required to develop rehabilitation plans to get back on solid financial footing.

Federal law requires that employers reduce, or even eliminate, certain benefits and pay temporary surcharges of 5-to-10 percent in addition to annually required pension contributions while they get pension plans back in compliance with the law.

Meanwhile, California’s public agencies are prohibited from taking similar actions to shore up the pension systems for government workers.

In a Reason Foundation paper, Emory Law School Professor Sasha Volokh explained, “California and about a dozen other states hold that there’s a contractual right in pension promises from the very beginning of employment; thus, a state can fire you, lower your salary, or reduce your other benefits, but can’t decrease your rate of pension accrual while you’re employed.”

This so-called “California rule” is restricting the pension reforms that can be implemented in the state. Volokh concludes we will eventually need to treat “pension benefits just like other aspects of compensation: as something earned over time and not guaranteed for the future.

“In addition to being more rational as a public-employee compensation policy, abandoning the California rule would also give governmental units in California, and wherever else the rule has been adopted, flexibility to deal with changing circumstances.”

A large majority of public employees initially chose their line of work for altruistic reasons. They were drawn to the notion of serving the public and bettering their community. As public servants, they ought to be concerned for the financial health of our state.

They should be calling for public pension reform; if not for altruistic reasons, then in an effort to provide a level of sustainability and certainty in their golden years when they will need it most.

The looming black cloud of the pension crisis in California threatens the state’s ability to serve taxpayers and provide retirement security to our public servants.

Public employees, taxpayers and lawmakers must come together to create compromises that maintain the spirit of the promises that have been made to government workers while removing the untenable fiscal burden that those very promises have placed on California taxpayers.

Pete Constant is a pension policy analyst at Reason Foundation. This article originally appeared in the Orange County Register.