A
recent report that the Governor is considering borrowing $2 billion from
the giant state pension system may seem incongruous with his earlier statements
advocating full funding of pension obligations – not to mention sound
fiscal management. But if these reports are true, then the Governor may have
found a way to thread the pension reform needle to the long-term benefit of the
state.
I
should know – I was Governor Wilson’s Cabinet Secretary in 1991
during California’s last Great Recession. Then – as now – the
state’s contribution to the CalPERS system was seen as a legitimate
source of temporary revenues to balance the budget. Then – as now –
the Governor sought to make structural reforms to the state’s retirement
system to control spiraling pension costs yet maintain a fair and adequate
benefit to retirees.
The
difference today is we’ve had hard-knocks experience with what happens
when the path to reform is not taken: a $650 million estimated
obligation turns out to cost taxpayers $3.5 billion – and counting.
Central
to the 1991 package was creation of a "second tier" retirement
benefit. New employees would be placed (or existing employees would volunteer)
into this tier, which would provide a smaller overall benefit, but at a lower
overall cost to both the state and to the employee. The savings to employees
could be directed into individual retirement accounts or other deferred
compensation arrangements. At the same time, surpluses that had developed in separate
CalPERS "slush funds" would be used to replace temporarily the
state’s employer contribution.
Thus:
long-term reform in exchange for short-term forbearance. The flaw in the plan
was that what the Legislature may reform, the Legislature may un-reform. In
1999 the Legislature and Governor Davis unwound the second tier retirement
plan, retroactively reinstated second tier members into the first tier, gave
all concerned an ad hoc pension boost, and increased
retirement formulas all around.
The
difference: instead of paying $650 million as estimated at the time by
CalPERS, state taxpayers will pay $3.5 billion this fiscal year. The result:
rather than providing a sustainable and adequate retirement plan for a growing
state workforce, we are facing a crisis of monumental proportions that
threatens vital education, public safety and safety net programs.
That’s
the price of reform promises not kept.
True,
the reforms proposed by the Governor will not provide much savings in the immediate
future, but like compound interest the savings in the future will be enormous.
But there are two lessons to be learned from Governor Wilson’s valiant
attempt at reform:
1. Get CalPERS on board.
The 1991 law was passed by the Legislature over the objections of CalPERS. The
Board and its union allies then qualified and passed
a constitutional amendment to ensure all policy decisions – even
by the Legislature – are ratified by the CalPERS Board. It isn’t
pretty, but that’s the world today.
2. Lock in the reforms.
One Legislature cannot bind a future Legislature. But the Legislature and CalPERS
board together should devise commitments to ensure that future tinkering with
pension reforms is recognized up-front through honest actuarial reporting.
Structural
reform of the state’s pension system is at last within reach of California
policy makers. They should grasp this double-benefit – pension reform and
budget closure – and rescue an otherwise undistinguished legislative
session.