The Battle For California: Pension Reform and Paycheck Protection Seek Voter Approval in November
by Kevin Mooney, Green Watch, February 2012 (view as PDF here: LW0212)
Summary: California voters may soon get to decide whether to change the state’s public employee pension system. Supporters of a pension reform ballot initiative reject the half-measures favored by Gov. Jerry Brown and his organized labor allies. They propose instead to amend the state constitution to reduce the state’s unfunded liabilities and make public employee pensions comparable to those in the private sector. If enacted, the measure will apply to all state and local government employees, including special district employees, school districts and California’s higher education system. A second initiative on the November ballot will prohibit payroll deduction of worker earnings for political purposes. Paycheck protection initiatives have been rejected twice before by California voters. Is the third time the charm?
California Pension Reform (CPR) is the name of an ambitious political group that’s promoting an initiative, the “California Government Employee Pension Reform Act Initiative of 2012,” to go on the November 2012 state ballot.
At a public hearing last December, one of the group’s leaders, Duf Sundheim, a former chairman of the state Republican Party, explained that the measure is critical if the state is ever to achieve fiscal solvency.
“Pension reform is not an ideological issue. It is a math issue,” Sundheim told the committee. “As the governor, your own legislative analysis and your own reform commission have pointed out, our unfunded pension liabilities are having a crushing effect on public safety, education and other vital services. For example, during the last four years San Jose’s retiree benefit expenditures have more than doubled, forcing the city to eliminate 23 percent of its workers. The same is happening all over this state – and it is only going to get worse, much worse.”
Sundheim credited Gov. Jerry Brown for raising public awareness of the state’s pension liabilities, but he said the governor’s own proposal would relieve just five percent of the state’s pension debt. By contrast, a CPR initiative would trigger broad systemic changes that could solve the problem of public employee pensions in California and point the way to other states that can no longer afford union-dictated pension benefit systems.
A new poll from the Public Policy Institute of California shows that over 80 percent of state residents agree that government spending on public pensions is a “problem.” And two-thirds think new public employees should have “defined-contribution” pensions similar to 401(k) plans that prevail in the private sector in place of traditional “defined benefit” pensions.
Even though public sentiment is overwhelmingly in favor of sweeping pension reform, there may be voter confusion in November when the pension issue is on the ballot. John Dickerson, who runs the website YourPublicMoney.com, warns that voters may face a “three-player statewide chess game” in November that forces the CPR proposal to compete with two others: Gov. Jerry Brown’s milquetoast 12-point pension reform plan and a sincere-sounding bogus union proposal that would actually block meaningful reform.
Dickerson thinks only a CPR plan will fix the problem of unfunded state pension liabilities:
“Pension debt exists because managers failed to achieve funding requirements. But today only taxpayers and the public pay the cost of eliminating these debts. This provision [the CPR ballot proposal] would force employees to do something they’ve never done, choose between holding managers accountable to properly fund their pensions, or incur the burden of that failure.”
Pension Reform: Supporters and Opponents Face Off
In 1978 California voters approved Proposition 13. It famously limited increases in state property taxes and set the stage for a nationwide tax rebellion that invigorated Ronald Reagan’s presidential campaign. Pension reform supporters believe their initiative could have the same transformative effect today.
A key backer of the pension reform initiative is George Shultz. At age 91, President Reagan’s secretary of state, now a distinguished fellow with Stanford University’s Hoover Institution, remains a force in California politics. Says Shultz:
“For far too long the leaders of this state have failed to address the growing problem of unfunded pension liabilities. According to the legislature’s own watchdog agency, the unfunded liability is a bill in excess of $20,000 owed by every household in California. Unless we act now, the situation only will get worse and will have a devastating impact on public safety, education and critical safety net services. This effort is a full and thoughtful solution that in the short term will stop the fiscal hemorrhaging and in the long term sets an example of how to get this state back on track.”
But to prevail on Election Day, pension reformers will have to overcome the opposition of California’s powerful state public employee unions. Their self-interest is directly tied to an ever-expanding government and rising taxes.
The most powerful unions are the teacher unions—the California Teachers Association (CTA), the state affiliate of the National Education Association (NEA), and the California Federation of Teachers (CFT), a division of the American Federation of Teachers—and the American Federation of State, County and Municipal Employees (AFSCME). To prepare for a brutal campaign this fall, the unions are already on the attack, blaming the state’s troubled finances on shady “Wall Street” moneymen.
The CTA has organized “Pension Truth Squads” of retired teachers who claim teachers benefits are greatly overstated. CTA asks on its web site:
“Why the attack on public employee pensions? Who really benefits by their elimination? Again, the answer is Wall Street and those who seek to undermine the middle class. The elimination of public pension systems would be a huge boon for financial planners and companies that stand to invest that money while making profit off of the fees they can charge each individual. But Wall Street will also gain in an even bigger way.”
CTA argues that the attack on union pension systems is pay-back for curbs on executive pay proposed by the California State Teachers’ Retirement System (CalSTRS). The teacher unions dismiss claims that CalSTRS is careening toward insolvency and bankruptcy:
“Although it is true that CalSTRS has a $56 billion shortfall, this does not have to be paid overnight. Like a mortgage, this is an amount that will need to be closed over a 30-year period. The shortfall has to be addressed, and teachers are committed to partnering with CalSTRS in finding a long-term funding solution, as they have since the system’s inception in 1913.”
CTA also resists proposals to give public employees 401(k)-style retirement plans. Instead, it urges private sector to restore the “defined-benefit” pension plans that so many businesses have abandoned:
“All Californians should have a safe and secure retirement system, just like teachers and other public servants. The real problem is not that teachers, firefighters and other public servants have defined benefit plans, but that many private-sector workers do not. That’s because the private sector systemically eliminated defined benefit pension plans in favor of risky 401(k) plans to reduce costs to corporate America at the expense of the American worker.”
The California Federation of Teachers (CFT) asserts that current state pension plans are “modest, fair and stable.” CFT and then-president Marty Hittelman challenged advocates of pension reform in February, 2011:
“Teachers and other public employees receive relatively low pay, but can at least count on a secure retirement benefit. In line with conservative attacks on retirement security across the country, various proposals to ‘reform’ California public employee defined benefit pension plans are floating around, including replacing them with defined contribution programs…
The rhetoric supporting these initiatives pretends that public employee compensation, including pensions, are an unfair burden to taxpayers; that public employees receive ‘overly generous’ retirement benefits compared to private sector workers; and even that public employee pensions are causing the deficits in the public sector. The deficits are actually caused by declining revenues due to the recession and unfairly low taxes paid by the rich and the corporations.”
CFT’s tired screed lacks credibility, and even the most unionized states seem to understand the problem. Last year Republican governors in New Jersey and Wisconsin were able to curtail public employee benefits and relieve taxpayer burdens, despite intense union opposition.
Even as the New Jersey Education Association (NJEA) bitterly denounced Gov. Chris Christie, the state’s voters by wide margins repudiated bloated school budgets financed through their property taxes. The New Jersey legislature also defied the NJEA and approved changes that require public employees to contribute more to their health and retirement benefits.
In Wisconsin, the birthplace of public sector unionism, Gov. Scott Walker maintains the upper hand in his efforts to cut back on unsustainable collective-bargaining agreements that have drained the state treasury. Walker’s union opponents have collected enough petition signatures to instigate a recall election that is expected to take place in June. The governor has told members of the press that he is “not afraid of losing” and it’s far from certain that he would.
Republican leaders from outside of the state have now entered the fray in response to the rallies staged by union bosses in concert with their media allies. Going forward, Walker told “Fox and Friends” that he will make every effort to reframe the debate around the excessive perks and benefits attached to union benefits and to highlight taxpayer and business costs that are typically omitted from press coverage.
“What I probably should have done was spend more time laying the groundwork, making the case over and over again about how school districts prior to our reforms would have to pay tens of millions of dollars more for things like their health insurance,” he said. “You have examples of people abusing overtime, like the bus driver in Madison who’s making $150,000 or more per year. Those sorts of excesses and abuses are things that we tried to fix but we didn’t lay the groundwork for it. So when we did it, the national big government union bosses came out and spent literally millions of dollars attacking us” (See the “Battle for Wisconsin” by Labor Watch editor Matt Patterson).
Reformers Go On Offense
Only a few years ago, it would have been unthinkable to defeat well-funded politically potent unions in so-called blue states. But reform-minded governors and state legislators are on the offensive in part because organized labor is not what it used to be.
James Sherk, a Heritage Foundation labor policy expert, explains: “While the traditional face of the union movement is workers on the assembly line, this stereotype no longer matches reality. Almost two-and-a-half times as many union members now work in the post office as in the domestic auto industry.”
In 2009, for the first time in American history, more union members worked for government than for the private sector. This was no temporary blip; the trend toward public sector unionization continues to accelerate. In 2010, 7.6 million government workers belonged to a union versus 7.1 million in the private workforce.
Voters, including private sector union members, are increasingly aware that the U.S. has two distinct classes of workers: public employees enjoy taxpayer-funded benefits, even during a recession, while union and non-union workers in the private sector are vulnerable to economic downturns and suffer cutbacks and layoffs.
California public employee union leaders are unaccustomed to playing defense. Forced to divert attention away from the coming fiscal fallout, their rhetoric grows shrill and hysterical. Steven Greenhut, a journalism watchdog at the free market-oriented Pacific Research Institute (PRI), observes that organized labor airily dismisses public concerns and has a “Shut Up and Pay Us” outlook that taxpayers resent:
“Defenders of union pensions argue that pensions comprise a small portion of the state budget but neglect to mention the enormous bite on local government budgets consumed by such benefits. They also conveniently ignore the unfunded liabilities – the fact that the state should be paying much more to cover these retirement promises, but instead is running up an unsustainable level of debt.”
Little Hoover Commission Demonstrates that Even Liberals are Worried
In its February 2011 report, California’s “Little Hoover” government oversight commission issued a series of policy recommendations supporting a more sustainable state worker pension system. The bipartisan but liberal-leaning commission, whose members are currently divided between appointees of the Democratic state legislature and former Governor Schwarzenegger, said state and local governments should be permitted to impose a freeze on existing pension benefits.
“State and local governments cannot solve this problem without addressing the mounting pension obligations of current employees,” said commission chairman Daniel Hancock, a Democratic appointee.
The Commission recommends:
* A cap on the maximum salary amount that can be used to establish pension benefits.
* “Clear definitions” in the law to prevent temporary increases in base pay used to justify higher pension levels. This is called “spiking.”
* A ban on contribution “holidays” that allow employers to avoid paying into their pension funds.
* Realistic eligibility ages that do not induce early retirement.
* Moving toward a “hybrid model” that blends a more modest “defined-benefit” package with a “defined-contribution” 401(k)-style plan that includes an employer match.
The study’s sobering conclusion: “Even with the introduction of two-tiered pension plans, barring a miraculous market advance, few government entities – especially at the local level – will be able to absorb the blow without severe cuts to services.”
The Stanford Institute and Secretary Shultz
In 1982, George Shultz and Stanford economist Michael Boskin helped establish the Stanford Institute for Economic Policy Research. Its new pension study, released in December, looks at CalPers (the principal state employees retirement system), the California State Teachers Retirement Systems (CalSTRS) and the University of California Retirement Plan (UCRP), and it finds that they have an unfunded liability of $290.6 billion, assuming an annual average investment rate of return of 6.2 percent.
Stanford researcher Joe Nation notes that the state’s pension funds have typically understated the cost of their pension payouts and overstated their likely earnings. The funds are kidding themselves if they think they can “invest their way” out of their funding problems. In a summary of the Stanford study he figures that to cover their liabilities the state pension funds would need to earn an average annual rate of return of 12.5 percent for the next 16 years!
Because excessive pension benefits accrue over time, opponents of pension reform dismissively categorize them as future costs, not current liabilities. Nation says the funds’ guiding principle appears to be, “If you can push costs off to the future, do it.”
Pacific Research Institute’s Steven Greenhut points out: “As of 2010, the five largest public pension systems are only between 61 percent and 74 percent funded for benefits earned for past service, based on the actuarial assumptions used by those systems. These measures would be even lower if they instead reflected the assumptions mandated for private-sector plans.”
The Union Response
This cascade of damning facts and figures has not deterred union officials who insist that they are victims of “right-wing” smear tactics. CTA’s “Truth Squads” claim it is “out-of-state billionaires and right-wing extremists with Tea Party ties who are driving the assault on California’s middle class.” A union website called DontScapeGoatUs.com ridicules reformers and dismisses pension data as exaggerated. The unions consider pension reform a “Trojan horse” used by Republican operatives to demoralize government workers and weaken their unions.
“Instead of ballot box proposals that would force public workers into risky 401(k) retirement plans, decisions regarding public pensions should be made at the bargaining table.”
That’s another way of saying taxpayers shouldn’t use the initiative and referendum process because it disrupts the symbiotic relationship between unionized public employees and the lawmakers in Sacramento they help put into office.
No amount of obfuscation can disguise the reality that public sector workers typically retire much sooner than their private sector counterparts. A majority retire at age 55 or younger, government figures show.
In California, it’s also possible for a public sector worker to retire with pension benefits and then be hired at full salary at a new public sector job. In some agencies, workers take positions that temporarily boost their salaries just before retiring in order to maximize their base pay and increase their pension benefits. This is called “spiking.”
Paycheck Protection Makes a Comeback
A separate reform initiative vehemently opposed by labor unions has already received enough signatures to qualify for the November ballot. If the California Paycheck Protection Initiative (CPPI) receives voter approval it will:
1. Prohibit the use of the payroll deduction to collect funds from employees and union members for political purposes
2. Ban corporate and labor union contributions to political candidates
3. Prohibit government contractors from contributing money to government officials who award them contracts
Although it seems obvious and desirable to require that political contributions be strictly voluntary, unions led by the American Federation of State, County and Municipal Employees (AFSCME) are vowing to defeat the ballot initiative. And they have good reasons to be confident, having managed twice before, in 1998 and 2005, to confuse voters sufficiently to defeat California paycheck protection initiatives.
“This initiative would silence the political voice of public employees by banning public employee unions from making direct contributions to political candidates,” AFSCME argues. “It also would eliminate the ability of employees to make contributions through payroll deductions.”
Californians who support the initiative have organized a group called “Stop Special Interest Money Now.” Interestingly, former Secretary of State George Shultz is an outspoken supporter of this initiative too. Said Shultz:
“The grassroots-driven qualification of this measure underscores the fact that Californians are sick and tired of the dysfunction caused by the outsized influence special interests maintain over politicians in our state. In recent years, California voters have started to take back their government by passing redistricting and other fundamental political reforms. This measure is the next step in the process. It minimizes the influence of the well funded few and empowers the nearly-silenced many.”
Big Labor, which spent $54 million in 2005 to defeat paycheck protection (Proposition 75), believes President Obama’s reelection campaign guarantees a high Democratic voter turnout in November, and this will enhance the measure’s prospects for success. (The Democratic state legislature in Sacramento shrewdly passed a law last October forcing all initiative proposals onto the November 2012 ballot.)
Still, a statewide poll shows heavy bipartisan support for genuine pension reform and greater fiscal accountability. The unions may be in for a surprise.
What’s Next for Pension Reform in California?
Cities in California are confronting fiscal collapse. Vallejo, a city of over 100,000 people thirty miles northeast of San Francisco, declared bankruptcy in May 2008 because unionized police and firefighter compensation and benefits consumed 74 percent of the city’s general budget (see “Vallejo Con Dios: Why Public Sector Unionism Is a Bad Deal for Taxpayers and Representative Government,” by Bellante, Denholm and Osorio).
Despite their liberal reputations, city leaders in San Francisco and San Jose are also confronting their public employee unions. Last November voters defeated a San Francisco ballot proposition endorsed by many civic leaders to increase worker pension contributions. A less far-reaching proposition did pass, however, producing some taxpayer savings. A San Jose ballot initiative this November will ask public employees to decide between increasing their pension contributions or reducing their pension benefits.
The leaders of California Pension Reform (CPR) have filed two versions of their pension reform amendment for approval by the California state attorney general’s office. Once the amendments’ ballot language is approved, CPR will decide which version it will circulate for signatures. CPR will need 1.3 million signatures to qualify its pension reform measure for the November 2012 ballot.
One version is tough; the other is tougher. The “tough” version has many features similar to Governor Brown’s proposal: it would raise the retirement age from 55 to 67, and it would convert the state’s current defined-benefit pension into a “hybrid” system that would be applied to new state and local public employees.
The hybrid pension system would be part defined-benefit and part 401(k)-style defined-contribution. The difference: Brown’s proposal would have new workers and the state make equal contributions to both parts of the pension.
By contrast, the CPR proposal would require a larger contribution from worker paychecks until the current unfunded state pension liability is reduced, which could take a very long time. So under the CPR plan government pension payments would go down, and new worker pension payments would go up.
The “tougher” CPR proposal extends the hybrid system to current state and local employees, and it puts stricter limits on unfunded pension liabilities, making it more likely that all employees would have to convert to a defined-contribution/401(k)-style pension.
Both CPR versions prohibit public employees from “spiking” their final working year pay in order to maximize their retirement earnings (Gov. Brown’s proposal applies the prohibition only to new workers), and retroactive benefit increases would be abruptly ended.
Whether CPR decides to circulate the “tough” or the “tougher” version of pension reform is a political calculation. The group will base its decision on the state of public opinion and, importantly, whether the unions decide to support Governor Brown’s relatively tame reform initiative or announce their opposition to it.
In 2005 Gov. Arnold Schwarzenegger ran into insurmountable union opposition when he advanced a series of ballot initiatives. The CTA alone spent $58 million to defeat his “Year of Reform” ballot proposals that included budget reforms and paycheck protection. At the end of Schwarzenegger’s term, the dire condition of the state’s finances and the unreality of Sacramento’s response was apparent to everyone.
One unexpected result of the legislative impasse is that Democratic legislators who hold majorities in both houses of the state legislature are losing their hold over two key groups: private sector union workers and liberal special interest groups. In a Wall Street Journal op-ed, Gov. Schwarzenegger noted that even San Francisco Mayor Willie Brown admitted that public employee benefits were accelerating to the point where they are now unsustainable.
“Government employees must be required to increase their contributions to pensions,” Schwarzenegger wrote in August, 2010. “Public pension funds must make truthful financial disclosures to the public as to the size of their liabilities, and they must use reasonable projected rates of returns on their investments. The legislature could pass those reforms in five minutes, the same amount of time it took them to pass that massive pension boost 11 years ago that adds additional costs every single day they refuse to act.”
Will California enact tough (or tougher) pension reforms? Rhode Island just passed pension reform. It’s a blue state where Democrats hold state legislative majorities even larger than California’s. The reforms convert a defined-benefit pension system into a “hybrid” plan, halt cost-of-living raises, and increase the retirement age.
Unfortunately, California’s liberal state Supreme Court always threatens to undo the voters’ will. It recently ruled that Orange County could not make retroactive cuts to the health benefits of retired workers, a decision that could bolster the union position in other areas.
“Wouldn’t it be nice if California’s legislators, governor and courts rolled up their sleeves and behaved like their counterparts in Rhode Island?” laments Steven Greenhut of Pacific Research Institute’s Calwatchdog. “Then again, that would take a level of political maturity not seen in this state for a long time.”
Kevin Mooney is an investigative journalist and frequent contributor to Labor Watch.