Friday, Nov. 18, 2011

Our View: Taming the retirement tiger

In a new report, the legislative analyst's office generally gives Gov. Jerry Brown's 12-point pension reform plan decent marks, calling it "a bold starting point for legislative deliberations."

But the "buts" in the LAO's analysis are daunting, a sobering discussion of how difficult it will be to tame the retirement tiger that each year consumes a bigger and bigger chunk of state and local budgets.

Because the state constitution and decades of case law are very protective of public employee pension rights, the LAO says the governor cannot expect to extract any pension savings from current workers or retirees. Even the one proposal that would affect current workers -- that they be required to pay at least 50 percent of their annual defined benefit pension plan costs -- cannot be achieved outside of the bargaining process, the LAO says. Even if they grant concessions at the bargaining table, the report explains, unions typically extract something of equal value, like future pay raises, in return, which would negate any pension savings achieved.

We respect the LAO's cautionary tone. Nonetheless, given the dire fiscal situation facing some cities and counties, local government officials and others may need to challenge the conventional notion that existing benefits -- especially benefits that have not yet been earned -- cannot be modified for current workers. As the Little Hoover Commission noted, public workers may prefer modifications of future pension earnings to mass layoffs, increasingly a real threat.

That said, the LAO analysis offers a good overall picture of the pension challenge the state faces and how the governor's plan stands up to it. The report enthusiastically endorses several of Brown's other major proposals that would apply only to future hires: Raising the retirement age, banning retroactive benefit enhancements, various proposals to limit spiking and even the controversial hybrid pension plan.

Under the governor's hybrid plan, future government workers would receive a smaller guaranteed "defined benefit" pension, along with a 401(k)-type "defined contribution" benefit and Social Security. The hybrid plan would reduce the government's risk from stock market declines, shifting a portion of that risk to workers. Because employees would bear the risk, the LAO believes the hybrid plan would serve as an incentive to public pension board members to make future earnings forecasts more realistic.

The debate around retirement includes a lot of dishonest rhetoric about just how generous public employee pensions are. On this point, the LAO provides useful facts.

"Defined pension benefits offered to California's state, city, county and special district employees," the report states, "have been among the most generous in the country in recent years. While there have been some reductions recently, some California governments still offer among the most generous defined pension benefits available anywhere in the United States public or private labor market today."

Such generous benefits cannot be sustained financially or politically. Given that, the governor's proposed reforms or perhaps something even more far-reaching will be needed.