Public employee pension “reform” or dismantlement?

Public employee pension “reform” or dismantlement?

While the Governor and Legislative Democrats grapple with the state’s fiscal crisis by proposing severe budget cuts matched with tax extensions, our Republican colleagues remain on the sidelines. Recently, however, they made their first demand – destruction of pension plans of public employees.

You remember retirement plans? Just about everyone working for a large company used to have one. Then some smart MBAs figured that corporations could save a bundle of money by dropping pension plans and substituting 401(k) – style benefit plans. The corporation would pay out less, retirees would reap “benefits” from a perpetually growing stock market, and investing firms would earn lavish fees. Of course, the market goes up and it goes down, and if an employee about to retire is caught on the wrong end of the graph, well life is tough.

So now our colleagues say that in order to consider letting voters decide whether to extend taxes to help fill the budget gap, Democrats must first agree to mandate that all new state employees forgo state pensions and instead contribute to 401(k) –style benefit plans.

Requiring state employees to enter into 401(k)-style benefit plans is not “pension reform”; It is the complete dismantlement of our state’s public employee retirement system and presents a host of potential dilemmas.

Retirement plans can be broken into two basic categories – defined benefits (DB) plans and defined contribution (DC) plans. Defined benefit plans pay out specific benefits to retirees that cannot be changed or limited during that individual’s lifetime. Defined contribution plans define the specific contributions the employers and/or employees make to an individual’s retirement account, but do not specify the amount of the benefit paid out upon retirement. Then there are 401(k) plans which depend entirely upon the market and an individual’s skill or luck.

Historically, public sector employees are paid lower wages than comparable private sector employees. Secure long-term retirement benefits are often the hook that keeps valuable employees in public sector employment rather than leaving to find higher wages in the private sector. Substituting a DB system with a DC system or 401(k) plan would discourage civil service employment and increase turnover rates, resulting in an inconsistent workforce and loss of institutional memory.

Studies have shown that DBs are less expensive to administer and do much better than DC systems. Average administrative costs for a DC system are 2% of assets, while a DB system costs only .18% of assets. And DB systems employ top quality investment managers, consistently outperforming DC systems in down market times.

Today many state employees contribute to both systems, often to defer taxes, and that’s well and good. And there are ways to reform pension plans that are common sense and fair. The Governor, for one, is talking about such reforms. But requiring state employees to enter into a 401(k)-style defined contribution retirement plan would put public employees at the mercy of Wall Street, and would represent a major step back to retirement insecurity, not “reform.”

Failure is not an option.

Failure is not an option.

This year’s budget process is on hyper-drive, the spirit of reform is in the air, and lots of options are on the table, many of which could be up to the voters. Will my Republican colleagues’ staunch “no new taxes” pledge deny the voters a chance to vote on a compromise budget package? If so, then my friends on the other side of the aisle face a challenge.

The Senate Committee on Budget and Fiscal Review held its first hearing on Governor Brown’s proposed budget on Thursday, January 13. In view of Brown’s desire to have the Legislature adopt the budget by March 1, we have a very ambitious schedule before us to examine the proposal and to hear the public’s concerns about it.

Consistently, polls show that the public favors a balance of cuts and new revenues to balance budget deficits. Brown’s proposal, congruent with the electorate’s thoughts on the matter, will ask voters to approve extending existing taxes that are set to expire this year. In order to do that, Brown will need a 2/3 vote of the Legislature to place the proposals on a June special election ballot.

Many of our Republican colleagues, most of whom have signed the Grover Norquist pledge against any and all tax increases ever, have come out opposed to Brown’s initiative. So a legitimate question arises, what if our Republican friends have their way and the Legislature is unable to place the question before the voters? What is their Plan B?

We could close every state park and shut down the entire CSU and UC systems and still not solve this problem. A Plan B would necessarily include closing down schools, universities, prisons, parks, highways, firefighting, public safety, and other state services. It seems only reasonable that those who oppose Brown’s initiative should let the rest of us know what path they would prefer instead. Brown’s plan raises an additional $12B in revenues; what would they cut to replace $12B in additional revenues?

Those who oppose Brown’s proposal should tell us what they would cut to replace those revenues. And if they fervently believe their constituents would want this, their proposed cuts should start at home. My colleagues opposing these revenue options should make a list of state services in their district that they are willing to shut down to help close this deficit. This would, of course, have to be on top of the tens of billions of cuts that Brown has already proposed.

A $12 billion hole divided by 40 Senate districts equals a $400 million dollar hole for each Senator. So for those Senators that oppose putting these revenue options to the voters, the challenge is to remove $400 million worth of state services from their districts. Failure is not an option.