THE CALIFORNIA gubernatorial campaign features two candidates with diametrically opposing views about state employee pensions that should fuel an essential debate about how we fund retirements of government workers.
Unfortunately, neither Democrat Jerry Brown nor Republican Meg Whitman seems to fully grasp the difficulty and complexity of the issue. Consequently, neither candidate offers a viable solution to ensure that we don't strap future generations with unconscionable debt created by the currently unsustainable retirement system.
Brown wants to make good, but inadequate, modifications to the current traditional pension structure while he clings to a fantasy that the system might be salvaged by a turnaround in the stock market.
Whitman wants to force most new state employees into a 401(k)-style savings plan and roll back pension benefits for many existing employees, but she glosses over the legal constraints that would make the rollback unlikely. Moreover, she would shelter public safety workers, who receive the most lucrative pensions, from key changes.
At the heart of the debate are two very different models for funding retirement:
Thus, defined contribution plans force employees to guess how long they're going to live when they divvy out their savings after retirement. If they live longer than anticipated, they will be broke. In contrast, the defined benefit plan provides more security for employees. It ensures they can count on monthly income in retirement no matter how long they live.
Unfortunately, in California, the defined benefit system has been badly abused by state lawmakers, local government officials and pension boards carrying the water of public-emplyoee unions. Benefits have often been set ridiculously high. Rules allow employees to inflate their pension payments. Employer and employee contribution rates have been set too low because pension systems have counted on unrealistic investment returns.
As a result, public employee pension plans in California are woefully underfunded, leaving state and local governments to make up the difference for years to come by using money that would otherwise go for badly needed services. And court rulings have made it nearly impossible to reduce the future accrual of benefits for current employees, even when it becomes apparent that the pension promises are unaffordable or too generous. Generally, once benefit levels are increased for an employee, they don't come down.
Whitman would limit the majority of new employees to defined contribution plans. That would require the blessings of the state Legislature or the voters. While changes for future employees are needed, the savings won't be fully realized for decades as new workers slowly replace existing ones.
Only changes for existing employees will generate meaningful immediate pension cost reductions. Toward that goal, Whitman proposes raising the retirement age for current employees, who are in defined benefit plans. She would increase the age at which general workers can leave and receive full pensions from 55 to 65. Put another way, workers would receive smaller pensions unless they worked longer.
From a policy perspective, that's a good idea. From a legal perspective, that's nearly impossible. The state Supreme Court has held that pensions promised to public employees when they start working, or during their time on the job, are constitutionally protected. Contractual obligations cannot be reduced during the course of a worker's employment unless they are offset by "comparable advantages."
It's a tall legal hurdle. The Whitman campaign insists it can be scaled, but a handful of pension attorneys I've talked to doubt it.
Finally, Whitman would leave future public safety workers, such as the California Highway Patrol and state firefighters, with defined benefit plans. She suggests she would increase the retirement age for maximum pension benefits from 50 to 55, again raising the same legal problems if she intends to apply the change to current employees.
Public safety workers account for nearly half the state's pension costs. But Whitman says she would treat them differently because they have told her that they would have a hard time recruiting without the current benefit structure. Yet, by her own admission, she has seen no empirical evidence to support that claim. Thus, she bases her position on anecdotal information from the very people who benefit from the existing pension program.
As for Brown, he's locked in on continuing defined benefit programs. Borrowing a line from President Bill Clinton, he advocates to "mend it, don't end it." But Brown doesn't seem to realize how badly it's broken, nor how much repair is needed.
He acknowledges that benefit increases approved by the Legislature and Gov. Gray Davis a decade ago were too generous. But Brown's looking to the stock market to fix the problem.
"I don't think we have to make all the decisions right away," he recently told Bay Area News Group editors. "We have to keep our eye on the market." And, "depending on the growth in the economy, it can be handled."
That head-in-the-sand mentality ignores the underlying problem: The pension shortfall was created by promises of unrealistically high benefits and prayers of commensurately high investment returns. The stock market dive of the past couple of years exacerbated the problem; it was not the cause. Indeed, the current actuarial shortfalls do not yet account for most of the recent market losses. The numbers could worsen before they improve.
Like Whitman, Brown would establish less generous pension benefits for new employees, but unlike his Republican opponent, he would keep those new hires in a defined benefit program.
The one key element both candidates agree on is that current employees should contribute more to their pensions. Indeed, Gov. Schwarzenegger has managed to negotiate larger worker contributions for about 20 percent of state workers. It's a start, but it's unlikely to offset the increasing state pension costs forecast ahead. It will be up to the next governor to make substantial improvements. One wonders whether either candidate is up to the task.
Daniel Borenstein is a staff columnist and editorial writer. Reach him at 925-943-8248 or firstname.lastname@example.org.