California Pension Reform Crosswinds

California's pension-limitation ballot initiative hits a wall with Governor Arnold Schwarzenegger and prominent gubernatorial candidate Meg Whitman.
March 4, 2010 AT 3:00 AM
Girard Miller
By Girard Miller  |  Finance Columnist
The finance columnist for Governing.

Sponsors of a proposed California ballot initiative to tame the high cost of public employee pensions came up short in February. Two key Republicans, Governor Arnold Schwarzenegger and prominent gubernatorial candidate Meg Whitman, both shied away from endorsing the proposal, which would have reduced benefits and made other pension reforms. Whitman, who has received the endorsement of the Jarvis-Gann taxpayer alliance as a defender of taxpayer interests, has instead proposed a defined contribution system for new hires coupled with increased employee contributions and higher retirement ages within the pension system.

The California Foundation for Fiscal Responsibility (CFFR), the sponsors of the ballot initiative, has suspended its efforts to obtain signatures to qualify for the November 2010 ballot. The CFFR may come back another time with a 401(k)-like defined contribution proposal, according to the group's president Marcia Fritz. But that approach may suffer the same fate as Schwarzenegger's earlier proposal along those lines -- pushback from the police and fire unions. Meanwhile, mainstream Republicans are nervous that a pension ballot issue would draw fierce union turnouts in the general election, impairing their chances to elect the next governor and additional legislators.

This is more than a California issue. Political analysts, state officials and benefits geeks have been following this initiative closely to see whether it might become a bellwether for other statewide ballot proposals to reform pensions. Judging from the hurdles encountered in California, it seems that citizen anger over pension abuses doesn't easily translate into a viable ballot measure. Without a political endorsement or substantial private funding to secure the necessary signatures to qualify for the ballot, the costs of collecting signatures in California is sufficiently high to quash a voluntary effort. Moreover, without an activist leader with big name recognition to challenge the status quo, a grassroots effort to reform pensions tends to succumb to organized interests, such as public employee unions and retiree organizations.

A difficult path forward. Unlike the taxpayer revolts of the 1970s, where fed-up voters could reap immediate pocketbook savings from a tax limitation, the pension issue is much more ideological and conceptual. And that creates problems in engaging the public. For those unfamiliar with classic writings in political science, there is a wonderfully insightful book written four decades ago by Murray Edelman entitled The Symbolic Uses of Politics . A political sociologist, Edelman observed that average citizens and unorganized voters seek symbolic reassurance in the bewildering world of politics and remain quiescent in comparison with the focused efforts that organized interests make to obtain tangible resources. California's stumbling ballot initiative followed Edelman's playbook exactly. The organized interests won -- at least this round -- without even having to put on their heaviest armor.

In light of the Supreme Court's recent free-speech decision opening the doors to unlimited campaign contributions by labor unions as well as corporations, the path to successful public pension reform at the ballot box could be even more difficult. Few private companies have a direct, material and vested interest in public pension plan politics, especially if the only resulting changes would be a reduction in costs for new hires. The payoff for corporate taxpayers is simply too far removed in time to make a campaign-underwriting effort worthwhile from a business perspective.

For the labor unions, however, pension and benefit issues can mobilize their members. An external threat provides a reason to march into battle to defend their workers' interests as they have defined them.

Ironically, the measures proposed by the California group in its ballot proposal were relatively tepid in the context of what's at stake. Although characterized by labor interests as Draconian measures, few objective observers could argue with a pension cap of 75 percent of salary, the elimination of pension-spiking or a prohibition on retroactive benefits increases without voter approval. Even the lower proposed multiplier for civilian employees could have been supplemented by a defined contribution plan to ensure adequate retirement income. No civil servant would have had to eat cat food in retirement, despite the unions' rhetoric.

Prepare for the next round. California's public employers must now accept the reality that the voters will not provide them budgetary relief. It's time to gear up for some hard-nosed collective bargaining, employer-by-employer. New and lower benefits tiers with higher retirement ages for new employees will be the norm for governments and agencies that now realize they can't afford their current benefits obligations. Incumbent employee contributions to the retirement funds must increase in order to get the operating budgets to balance. Retiree medical benefits must be capped for incumbent employees. For new employees, many public employers will reduce their benefits to post-Medicare supplements to achieve long-term fiscal sustainability, which will still compare favorably with local private employers.

In an ideal world, municipalities would introduce legislation to curb the abuses in public pensions in California. Unfortunately, I doubt that such a measure could pass this legislature. The public employee unions hold heavy sway in Sacramento. That leaves the bargaining table as the only viable game in town -- unless things get so bad that municipal bankruptcy becomes the only solution. That may become the sad end-game for some cities in California if the unions don't start to smell the coffee and accept reasonable reforms.

Is defined contribution the solution? If the CFFR folks want to succeed eventually with a defined contribution (DC) proposal, they need to be very skillful in its design. California's police and fire unions want defined benefits and most politicians will not fight them on a widows-and-orphans issue. A hybrid plan that is half defined-benefit and half defined-contribution -- sharing investment risk equally between taxpayers and employees -- would be logical but requires careful crafting. Making a DC plan strictly optional for public safety, along with reasonable higher retirement ages and the 75 percent pension ceiling, might be one way to find the middle ground. The financial industry would support that approach, taking half a loaf rather than none. Candidates like Whitman who prefer a DC approach might be well advised to refine their positions along such lines.

Girard Miller
Girard Miller | Finance Columnist |