As Mark Twain wrote, “History doesn’t repeat itself, but it often rhymes.” Lately, I’ve been hearing a recurring rhythm—and feeling melancholy—as the Legislature is about to repeat a grave mistake. The issue involves public employee pensions as the Legislature introduces two bills that would exacerbate state pension problems just as they did 27 years ago.
First, a necessary history lesson. In 1999, the Legislature passed Senate Bill 400. The stock market is booming and the California Public Employees Retirement System, the nation’s largest pension fund, is flush with cash. “Investment returns have averaged 13.5% over the past decade, soaring to 20% in the first two years,” Calpensions said. The report states that the state’s pension plans are funded between 100% and 139%.
In a private 401(k) plan, employees deposit a portion of their income into an investment account. When the market surges, employees’ accounts rise, and vice versa. Employees own the content in the account. Through “defined benefit” accounts, pension funds can invest contributions. Employees receive guaranteed pensions based on a formula. If the stock market soars, investment funds are well placed to deliver on their promises. If they struggle, it creates a taxpayer-supported shortfall.
The well-funded, union-friendly California Public Employees Retirement System (CalPERS) lobbied the Legislature to significantly increase the pension formula rather than plan for a rainy day. SB 400 provides California Highway Patrol troopers with a “3 percent at age 50” retirement benefit. They can then retire at age 50 and receive 90% of their final salary after 30 years of service. The benefit is retroactive and can increase pensions by 50% in certain circumstances.
When public employee unions want to improve benefits, they start with public safety unions because police and firefighters have broad public support. By design, “3% of 50” spreads from the CHP to police and fire agencies across the state. Agencies then offered the old public safety formula to other employees. Hey, they have to do it to avoid recruiting trouble.
Lo and behold, the stock market didn’t continue to soar. The market will go up and it will go down. The subsequent recession created huge unfunded pension liabilities because funding levels were far lower than in halcyon days. CalPERS is currently only 79% funded, which is not bad by post-financial crisis standards. Governments have cut services and raised taxes to pay for huge new pension contributions. If you’ve ever wondered why public services of all kinds are so bad in California, this is the number one reason.
A 2016 report explained: “Sponsors marketed the measure in 1999 with the promise that it would impose no new costs on California taxpayers.” Los Angeles Times Retrospective. “They said the state employee pension funds would grow fast enough to pay their bills in full. They lost billions of dollars, and taxpayers would bear the consequences for decades to come.” Ironically, it noted, the Dow Jones Industrial Average began a steep decline the same year SB 400 went into effect (2000).
The state spent 12 years trying to extricate itself, finally passing the Public Employee Pension Reform Act in 2012 under then-Gov. Trump. Jerry Brown. Pensions are a thorny issue because of the so-called “California Rule” (actually a series of court decisions rather than regulations). Once a governing body gives a public official a vested boost, it cannot take it away, even in the future. As a result, anyone receiving the new pension formula will continue to receive it until the day they die – regardless of its impact on the budget or services.
PEPRA is modest, but it wisely raises the retirement age and reduces benefits for new workers. It doesn’t solve the problem immediately, but it’s intended to slow the state’s pension debt after a decade or so. The system has stabilized as the young workforce has grown. Now, public employee unions complain that most government workers are receiving PEPRA-era benefits, and they are lobbying the Legislature to significantly expand those payments.
Just like in the past, the Legislature started by improving public safety benefits. For example, Assembly Bill 1383 would authorize public agencies to lower the retirement age and increase benefit formulas for police and firefighters for political reasons. It basically destroyed PEPRA. Like SB 400, this bill passed the Assembly on a bipartisan basis (70-2). If the past is any guide, the bill will almost certainly be extended to other categories of workers.
Additionally, the Legislature is considering creating a DROP (Defined Retirement Option Plan) that would allow public safety employees who already earn eye-popping pension payouts to retire at an enviably young age and receive a huge one-time payment. This atrocity passed parliament with just one dissenting vote. And the Legislature did so amid a faltering national economy and a volatile stock market.
If this all sounds eerily familiar, that’s because it is.
This column first appeared in the Orange County Register.
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