THE BLOG
11/09/2011 06:49 pm ET | Updated Jan 09, 2012

Shades of Brown: Cities and the Governor's Pension Reforms (Part 2)

(Read Part 1 here.)

There is not a little bit of irony in the fact that unions are trying to place the blame for the current pension systems' unsustainability on Wall Street. It is, they say, the losses on Wall Street which depleted the PERS endowment and has led to some of the more dire fiscal predictions about what will happen if we don't make systemic changes. Yet nobody was complaining when Wall Street was making unsustainable returns which led to both the superfunding of PERS and to the unions' demands to "share in the largesse." Nobody was complaining when Wall Street's success led to the additional benefits and guaranteed, risk-free enhanced pension formulas which are at the core of the current system's unsustainability. Nobody from PERS or the unions advised caution. They just used Wall Street's gains as an excuse to create a system which would allow certain employees to retire at 50 with some 99% of their highest salary for life (the top rate is 90%, but with what is known as EPMC, employer paid member contributions, the level can reach close to 99%).

Did anybody even ask at the time if it's appropriate for public employees to retire at the age of 50 with the potential to take home 99% of their single highest salaries for life? How come nobody asked the question, "If '70 is the new 50,' then what is 50?" Who retires today at 50? How does any of this make any sense at all?

Yes, Wall Street and the lack of oversight on the part of the federal government clearly played major roles in creating the unprecedented recession which led to the market's losses, but it is completely disingenuous for unions who used the market's go-go days to enhance their defined benefit programs to now point their fingers at Wall Street. While I find the "anything goes" attitude of Wall Street utterly deplorable, I also think that an "it's all about me" attitude is bad wherever it comes from, and when it comes from Big Business (as opposed to Little Guy Business) and Big Labor (as opposed to Little Guy Labor), then my reaction tends to be "a pox on both your houses."

After the cold shower of the recession (or GFC as our Aussie friends call it), the state and local jurisdictions were faced with two problems: the pension funds lost a lot of money and quickly went from superfunded to underfunded, and the state and local governments were left to pay the bills of this magnanimous feast. And secondly, the private sector experienced significant job losses and stagnation.

The paradigm in the past had, of course, been that public sector jobs tend to pay less than those in the private sector, but they offered great job stability and great benefits. While job stability in the public sector has decreased somewhat (though certainly nothing near what's been happening in the private sector), the defined benefit plans offered in the public sector loom even greater than the shrinking private sector plans, and -- importantly -- the salary levels of many public sector jobs have outstripped the private sector. It's become, in many cases, the best of both worlds, and all at the expense of the taxpayers.

While many public employees do amazing work, at least with some of them in the upper echelons there seems to be a bit of self-confident self-delusion at work. I've spoken with management level public employees who seriously believe that with their $200k+ salaries and defined benefit pensions, they're "not making as much as they could in the private sector." Seems some of them think that if it weren't for the public service bug, they'd be earning millions as CEOs of Fortune 500 companies. As noble as this self-sacrifice might be, it just doesn't seem all that realistic to me. In my mind's eye and in another life, I might have been a $25-million-a-year Gold Glove clean-up hitter for the Dodgers. Only problem is I can't hit and I can't field at the major league level.

Give the Governor "Harumph"

But I do know the meaning of the words "fair" and "sustainable", and I was very pleased to note that the Governor used the "fair and sustainable" phrase verbatim in his comments introducing his 12-point plan, which actually mirrored many of the points discussed by the LOCCERPC and included in the League's White Paper:

• Employee sharing of pension costs for current and new employees.
• Hybrid plans for new employees.
• Increased retirement ages for new employees.
• Two specific provisions to avoid salary spiking.
• Limiting post-retirement employment (double-dipping).
• Prohibiting felons from receiving pension benefits.
• Prohibiting retroactive pension increases.
• Prohibiting the purchase of "airtime" or service credits.
• Prohibiting pension holidays.
• Increasing pension board independence.
• Dealing with OPEB.

So far, so good with the governor's 12-point plan, though for some it isn't good because it doesn't go far enough. As journalist and reformer Joe Mathews points out, a number of the reforms are only aimed at new employees and the second tier doesn't go a long ways towards solving the current budgetary problems caused by unsustainable pensions. Mathews also points out that once the good times return, it's possible we'll go back to inflated pensions for everybody. I must say, that as much as I respect Mathews, I disagree with him on this point. I think the lessons learned in this recession are too pronounced and severe. On the other hand, Louis XV politicians never cease to amaze and astound; memories are short and whether they remember the past or not, they all too often seem condemned to repeat it.

Others such as Dan Walters seem to think that the governor's 12-points are nothing more than a ploy. With Brown, perhaps the greatest curveball pitcher in the history of California politics, it's entirely possible. This might simply be, as Walters suggests, Brown's efforts to fulfill a campaign promise with no true danger of rocking the boat with his union benefactors. Brown's 12-point plan may very well be, as Walters writes, "a sacrificial political pawn" for the governor, who evidently identified at least six more pressing issues -- though let's hope he isn't suggesting that California only has six problems and isn't limiting his attention to a mere six problems.

If on one hand Walters may have been implying that Brown's proposal was window dressing, and that the governor might have, behind the scenes, been giving his union supporters a wink and a nod they needn't worry that any of his suggestions have any chance of becoming a reality, the LA Times headline about Brown's plan talked about "political backlash" from the unions. Those would be the unions who supported the governor, but who are unhappy with his proposals, as expressed by David Low. Not sure just what that backlash might be. Are the unions perhaps now no longer going to support Governor Brown when he runs for president in 2016? Maybe a different kind of backlash, then?

But here's the thing.

Without serious and meaningful pension reform on next year's November ballot, expect a backlash not from the unions, but from the voters who understandably would be loath to pass any new taxes. Voters aren't in the mood for tax-and-spend politicians who have shown they can't balance a budget without tricks and gimmickry, but they may have more understanding for tax-and-save solutions as a necessary evil to get our dysfunctional state finances back on track. Without serious pension reform -- of the kind included in the governor's 12-point plan and highlighted in the League's White Paper -- kiss new taxes or tax extensions goodbye, no matter how much money special interest groups or unions spend trying to sell us the latest bill of goods. Expect the justified, seething "pension envy" of private sector workers to erupt at the polls.

Backlash to Backlash

One of the reactions of public employee unions to the governor's plan was a suggestion meant to counteract the current "pension envy" from those in the private sector. SEIU's idea is to allow small businesses to purchase PERS pension plans, which would give private employees the same kind of benefits as public employees. It's certainly an idea worth exploring, but only as long as it's voluntary and realistically affordable and sustainable. There's no reason not to let small businesses gain some benefit from the billions of dollars of taxpayer dollars that have created the PERS endowment, but there's no sense in just creating an even larger unfunded liability. The PERS expected rates of return would need to be realistic and not just the result of political maneuvers which have the effect of kicking the can down into the future, something we've recently seen with the Los Angeles pension fund's politically motivated return rate assumptions. Any notion of the incorporation of private employees into PERS would make meaningful reform all the more vital, so that the system can sustain itself and the current problems aren't simply made bigger.

If the governor's proposals are blocked by the legislature from appearing on next year's ballot, there may yet be a pension reform initiative on the ballot. But if a pension reform initiative is the result of a private group's signature gathering, don't bet it'll be just the governor's 12-points on the ballot. Instead, look for something that will likely be a lot more what the unions would probably describe as "draconian." Again, unions can fight such an initiative with a war chest of epic proportions, but it will not matter, any more than Meg Whitman's hundreds of millions of dollars were able to buy her the key to the governor's mansion. Unions likely would find that the whole concept of defined benefit plans will be gutted by a citizenry who feels that public employees should be subject to the same kinds of conditions for retirement and pension plans that they themselves can expect in the private sector.

And while unions at the legislative hearings expressed a willingness to work with various levels of government on solutions, the possibility of a citizens' initiative now provides them with a true incentive to show they mean business. They can still find a way to retain defined benefits. The governor's plan provides them with an opportunity, and rather than kvetch, the public employee unions would do well to embrace the 12-point plan of our pro-labor, pro-union governor. The governor seems to understand that we are truly coming to the stage where we had better do something or, in the words of the immortal Tom Lehrer, "We will all go together when we go" -- likely a result of OPEB and not ICBM's.

So let's hope that Dan Walters is wrong about the governor's plan being a political chess game. When the politicians play games, we lose. On those few occasions in this state when they choose to lead, we might actually have a chance.

I'd like to think that the governor is actually trying to lead here. I'd like to think that while the governor may have thrown a curveball, it's a hanging curveball. With the support of cities and, hopefully, the public employee unions, the legislature should do its best to step up to the plate for the sake of cities and all the state's taxpayers and public employees.

And in so doing, they should keep their eye on the ball and remember the mantra, "Fair and sustainable." Not fair or sustainable. But both: fair and sustainable. Sustainable and fair.

The legislature is being given a real chance to follow the governor's lead and to show they represent the entire state and not just the special interests. Let's hope they don't strike out. Batter up.