As I stated in an earlier article, I did not think Governor Brown and the small band of Republicans capable of independent thinking would come to an agreement on tax extensions.
The talks only proved how impossibly wide the gulf is between their respective positions. Brown serves at the convenience of the public unions and the Republicans didn’t want to recognize their role as a minority party – the GOP lost a great opportunity to raise awareness of the need for massive pension reform. They cluttered up the discussions with too many issues rather than focusing on the single most danger to the state’s ability to endure financially in the long run. By doing so, they handed Governor Brown a ready-made platform to roll out an insipid proposal for dealing with the growing, unsustainable cost of pensions.
The Governor’s message is “look what I am doing that the Republicans would not agree with.” He knows that way too many people will not realize his proposal lacks substance. It’s like stating that murder is terrible and should remain outlawed. Who wouldn’t buy that?
End the purchase of additional retirement credits.
No more pension holidays.
Prohibit employers from covering employee pension contributions.
End retroactive pension increases.
Ending pension benefits to felons – that would worry the Grim Sleeper murderer if such a provision could be made retroactive. However, he’s covered under LACERS, so terminating pension payments for convicted state retirees is moot in his case. This “reform” might be the lamest of all since even incarcerated felons are prohibited from receiving Social Security benefits (see my interview on this subject). This measure should have been in place from the start, but it appears that public union employees are, in Orwellian terms, “more equal” than those receiving SSA benefits.
Mind you, Brown’s recommendations are positive steps, but they don’t begin to address the most critical problem: the inherent instability of the defined benefit plan. There is no proposal for greatly increasing employee contributions to protect the citizens from market risk associated with plan assets – the citizens bear the entire risk of the unfunded pension liability estimated to be as high as a half-trillion dollars and growing.
To illustrate the impact of these proposals, pension spiking is estimated to cost the taxpayers $100 million per year – nothing to sneeze at. By contrast, a slight one-percent increase in the unfunded liability is equal to $5 billion. Even a lesser estimate of the liability would make the elimination of pension spiking a mere blip (the state’s Legislative Analyst estimated the liability as $136 million, but that did not include a provision for public school teachers or the UC system). People are living longer and longer. Just that reason alone will continue to increase the stress on pension funding. Don’t get me going on the unsustainable earnings rate assumptions used to assess the health of the plans.
The liability can only be reduced through much higher employee contributions. It would be fair to ask participants to cover at least half the cost for the risk-free guarantee they possess. We all accept lower yields for risk-free returns on personal investments. The same should be true for the return on contributions to a risk-free plan. So far, there is only talk of introducing a hybrid plan with a 401K-type feature as a supplement to a less generous defined benefit plan.
Even Brown’s meager recommendations drew criticism from labor leaders who claimed they could only be negotiated though collective bargaining. Guess who he will acquiesce to? This only proves the need to force the debate in the light of day.
This brings me back to the Republicans.
They could have rolled out a specific proposal for a measure that deals with all of the above and put the ball in Brown’s court. Instead, they simply took the ball and went home.
Brown would have been forced to publicly refute or defend their ideas – and he would have caught a lot of flak from the public and pension experts had he dismissed such a plan.
The Republicans could have insisted that a tax extension would have to be conditional on the passage of a substantive pension reform measure. Once again, Brown would have had to categorically debate it in the court of public opinion.
The Governor got off the hook. The details of the behind closed doors discussions with the Republicans got lost behind the doors.
Very sad. An opportunity lost.
Some other group will have to carry the banner.
And, at what great cost to the taxpayers.
Great article Paul. I just can’t believe that the only way the Republicans could fix these union driven problems has to allow him to keep the unreasonably high level of our current taxes, at the same level for 5 more years. It would only be a jumping off point for his attempt to drive them even higher.He was a lousy Governor the first time around and is just going to give us more of the same thanks, to the Democrat Legislature. He will ultimately drive us further into the realm of Bankruptcy, The high tax levels have already driven so many productive businesses to other states and with Obama’s help to other countries.