Count the bad ideas in California pension overhaul proposal

Along with taxation and immigration, one political issue that never seems to go away is the cost of public employees, especially their pensions.

Public retirement plans are consistently blamed for local and state budget woes. Any time a community runs into fiscal trouble, its workers are among the first to be demonized, and often bear the brunt of the remedies. After all, pension obligations are typically among the largest liabilities any government entity must bear, so why not hack away?

In California, pension overhaul proposals have become a perennial feature of state and local ballot campaigns. Failed proposals were aimed at the statewide ballot twice in the last four years, and the proponents of the last effort, in 2014, have started the ball rolling for a new measure.

Like so many voter initiatives, the “Voter Empowerment Act of 2016” has a few reasonable-sounding nuggets buried within a landscape of bad ideas. Atty. Gen. Kamala D. Harris gave the measure its formal title and summary last week. So its proponents, former San Jose Mayor Chuck Reed, a Democrat, and former San Diego Councilman Carl DeMaio, a Republican, can shortly start collecting signatures to place it on the November 2016 ballot. As one can tell from their name for it, the measure will be pitched merely as a way to give taxpayers a direct vote on the pension plans of their public servants.

But there’s much more to it than that. The Wall Street Journal described the measure as one that would “end defined-benefit pensions and save taxpayers billions of dollars.” The measure would end defined benefit plans for new public employees as of Jan. 1, 2019, unless voters affirmatively continue them. But the second part of the phrase is arguable, as the cost of terminating plans could be high.

The Legislative Analyst’s Office observes that cutting worker pensions also could mean that government bodies would have to raise wages to attract and keep qualified employees. Depending on the ultimate retirement packages, government employers could end up on the hook for Social Security, costing them as much as 6.2% of payroll.

The legislative analyst and Harris say the measure could undermine or even nullify the “California Rule,” a collection of court rulings guaranteeing that pension benefits can’t be reduced after an employee is hired.

That’s a major change that could deprive the measure lots of public support. Reed says it’s untrue. The measure “doesn’t affect the benefits of current employees at all,” he told me. Yet as is pointed out by critics representing public employees, the measure gives voters the right to determine “the amount of and manner in which compensation and retirement benefits are provided.” It explicitly protects only benefits earned for “work performed,” implying that benefits based on future work of current government employees, starting as soon as the day after a vote, could be cut.

The giant California Public Employees’ Retirement System and California State Teachers Retirement System, CalPERS and CalSTRS, both say the initiative would create immense administrative and financial uncertainties associated with closing standardized defined benefit plans to new workers and replacing them with — in CalSTRS’ case — as many as 1,700 individual school district retirement plans with differing terms and benefits.

Who would gain from a shift of public pensions toward defined contribution plans? Wall Street, which could collect those fees from individual worker accounts rather than facing down increasingly cost-conscious pension funds. One of those sounding the alarm about the public pension “crisis” is billionaire investment impresario John Arnold, who backed Reed’s 2014 initiative with $200,000. Asked whether Arnold would be involved this time around, Reed said, “I hope so.” He estimates that an initiative campaign might cost $25 million.

Who would lose? Government employees. When the Central Valley city of Stockton filed for bankruptcy in 2012, city workers were quickly blamed. One of Stockton’s creditors, the investment firm Franklin Templeton, asserted that its employees had routinely “spiked” their salaries to make their “lavish benefits” even richer. The truth was that the average retiree received $24,000 a year and that the workers had sustained waves of furloughs, given up years of cost-of-living increases, and lost virtually all their retiree health benefits during the struggle to keep the city afloat.

One reliable rule of thumb about municipal fiscal crises is that wherever you find a large retirement liability, you can be sure that the rot originates much deeper. In Stockton, it encompassed ill-advised investments in downtown amenities, as well as a costly pension debt refinancing into which the city was snookered by the ill-starred investment firm Lehman Bros. Similarly, the 2012 bankruptcy of the city of San Bernardino reflected the housing bubble and crash, along with fiscal mismanagement that included years of allegedly faked books.

The statewide pension shortfall likewise flowed from the top down. When state pension funds fattened up on rich stock market returns in the 1990s, lawmakers bestowed retroactive pension increases on state workers, while CalPERS and the other major public pension funds gifted government employers with contribution “holidays.” CalPERS told the Legislature that these arrangements would be almost cost-free, thanks to “the booming stock market.” But when the markets crashed, the pension funds landed deeper in the hole than anyone had anticipated.

Some critics undoubtedly will blame state public worker unions and their stranglehold on Democratic office holders, but, alas, these were bipartisan blunders; 22 Republicans in the Assembly and all 15 GOP senators voted for the retroactive sweeteners. Reed, to his credit, isn’t among those suffering political amnesia. “Employees didn’t cause these problems,” he told me. “Elected officials drove us off the cliff.”

The burden of making up for their mistakes is borne by employees — especially newly hired workers, who are relegated in almost every pension “reform” to a lower-cost second-tier retirement system with skimpier benefits than their seniors. That’s the remedy embodied in a 2013 statute that instituted less-generous pensions for new employees and raised their contributions to at least half the costs of their pensions. The Legislature also barred retroactive benefit hikes and set CalSTRS on course to eliminate its entire unfunded liability over the next 30 years.

The initiative from Reed and DiMaio allows voters to enact even more stringent pension plans. Reed says he’s confident that the “public isn’t interested in punishing employees,” so voters will be judicious about making pensions too cheap. We’ll see.

If the initiative makes it to next year’s ballot, expect the airwaves to fill up with images of retired cops, firefighters and teachers enjoying round-the-world vacations while you, the taxpayer, struggle to make ends meet. Initiative campaigns are extremely vulnerable to exaggeration and demagoguery. So is the topic of public employee pensions. Put them together, and the result might be ugly indeed.

Michael Hiltzik’s column appears every Sunday. Read his blog, the Economy Hub, every day at latimes.com/business/hiltzik, reach him at [email protected], check out facebook.com/hiltzik and follow @hiltzikm on Twitter.

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