Wednesday, August 29, 2012

Governor Jerry Brown of California Reached an Agreement to Reform Public Employee Pensions. Or Did They?

Governor Jerry Brown reached a Pension Reform Deal With the Legislature. Or Did He?

Governor Jerry Brown announced an agreement yesterday with the Democratic leaders of the California legislature to reform public pensions in the state.

Or did they?

Union leaders reacted, to take a phrase from Vice President Biden, like “squealed pigs.”

Or they did?

Was it strum and drum, or simply Kabuki?

The Governor, Democratic legislators, and the public employee unions are in a quandary.

They desperately want the voters to approve a massive tax increase in November. They know though from the votes in San Diego and San Jose that the voters, even liberal Democratic voters, are fed up with the public employee unions, which are viewed as looting the public fisc.

The pension funds are short hundreds of billions of dollars to cover the projected long-term pension liabilities for current employees. Cities are galloping into bankruptcy because of the pension and health expenditures.

The voters are in a surly mood, but voting Republican is not an option in many legislative districts.

The political and union leaders believe the voters will not approve a tax increase unless the legislature enacts pension reform.

The Democratic leaders and the individual Senators and representatives understand it is political suicide to buck the union leaders.

Governor Brown calls the reforms “a radical change.” A better term would be a “cosmetic change.”

He claims that the reforms will save $18 billion over three decades. That’s $600 million annually, or chump change in the budget and pension deficiencies. The state, school districts and local governments are already paying extra to the pension funds to cover the obligations. CalPers, the major public pension plan, says it will be unable to estimate any cost savings until after the November election.

The Legislature had an opportunity to act earlier in the year on the Governor’s proposals, but ignored them. The legislative session ends Friday.

Suddenly, after a two hour discussion, an agreement is reached, supposedly without union representatives present.

If you believe that, I have a bridge in Brooklyn or to Oakland for sale.

A few major changes occur, but the practical impact will be small. View it as a start.

The Devil is in the details.

The Governor had proposed that pensions become 401(k)’s rather than defined benefits. That’s history. The risk therefore remains on the state, and hence the taxpayers.

Second, most of the changes apply to new employees rather than current employees. The near term savings will therefore be minimal. Current employees with the hundred billion shortfall will feel little pain.

The current retirement plans for public sector employees, ignoring police and fire, are more generous than private pension plans, but far somewhat short of Greece.

Government employees can retire as early as 50 but can wait for full retirement at 63. At 63 they earn 2.4% of their highest annual salary times the number of years of employment. “Spiking” is a common practice in the last year of employment in that cooperative bosses let employees rack up large amounts of overtime, which are used to calculate the base salary for pension purposes.

The proposal will raise the minimum age of retirement to 52 with full retirement at 67. The multiplier percent rate will increase to 2.5% though.

It’s magic; you take with one hand and give back with the other.

Spiking will now be moderated by looking not to the highest year, but the average of the three most recent years of employment. That’s a start.

A cap will be placed on pensions of $110,000 annually if the beneficiary is receiving social security or $132,000 if not. This reform is estimated to apply to only 3% of the pensioners.

Employees will now also be required to contribute up to 50% of the costs.

It’s a start.

The changes though do not apply to charter cities, such as Los Angeles, which is careening towards bankruptcy. Nor do they apply to the University of California system.

The Governor and legislature have also not addressed the exploding health care costs.

Let’s do some simple math.

The proposed tax increases are optimistically estimated to raise $6 billion annually. They won’t. More entrepreneurs and businesses will flee the state.

The current projected state budget deficit has risen to $19 billion. The pension reforms, if not changed by future legislatures, will save $600 million annually.

$6 billion and  $600 million are substantially short of $19 billion.

The math doesn’t add up.

As President George H. W. Bush will say: California “is in deep doo doo.”

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