California and the Thorny Business of Cutting Current Public Workers' Pensions

There are a number of things that states and municipal governments can do to help get their retirement costs under control without dialing back their current employees' benefits.

With state and local governments staggering under massive unfunded pension liabilities, political leaders are forced to weigh taxpayer interests against those of public employees. That tension is currently on display in a big way in California, where San Jose Mayor Chuck Reed is leading the charge for a ballot measure that would change the state constitution to allow state and local governments to reduce pension benefits for current public employees.

Numerous state and local governments have reduced the pension benefits offered to newly hired employees, and some have moved to cut their retirees' health-care costs. But in most places the idea of cutting current workers' prospective benefits has been off-limits. To say that cutting the pensions of current employees is a thorny issue would be a study in understatement.

This column appears in our monthly Better, Faster, Cheaper email newsletter. Click to subscribe.

It's true that some jurisdictions offer unsustainable pension benefits, and nearly every public retirement fund's investment performance was hit hard by the Great Recession, but it isn't fair to solve those problems simply by slashing current public employees' pensions.

There are a number of things that states and municipal governments can do to help get pension costs under control. Moving to a defined-contribution and/or cash-balance plan shifts some of the risk and makes pension costs much more predictable. So do adjustable pension plans, under which benefits are guaranteed but the size of the benefit is linked to pension-fund investment performance during the previous year.

Limiting cost-of-living adjustments for retirees to a reasonable level also can help get pension costs under control. And while dialing back overly optimistic assumptions about pension-fund investment returns doesn't cut costs, it does strip away the facade that the funds are in better shape than they really are.

Want more management news and commentary? Click here.

Governments should look at all these options before cutting the pensions of current employees. But like most tough calls, this one is ultimately about balance. It's not unreasonable to challenge the wisdom of state policies that prevent the pension of any current employee from being reduced under any circumstances.

It can certainly be argued that a 30-year-old who has worked in state or local government for five years doesn't have a property right to his or her pension. And governments should avoid pension systems that all but force longer-term employees who would rather move on to stay for fear of forfeiting their retirement security. But there can be little doubt that the long-term employee in his or her 50s does indeed have a right to the pension he or she has earned.

A ballot initiative to allow California's state and local governments to alter pensions for current public employees could end up being a good thing if it provides governments with reasonable flexibility, but Mayor Reed and other proponents should exercise great caution as they craft their measure's wording.

Principal of Chieppo Strategies and former policy director for Massachusetts’s Executive Office for Administration and Finance