State-Sponsored Pension System-Californiafs Titanic
By Bob
WIlliams
President, State Budget Solutions
Tuesday, August 14th, 2012
Do California Legislators know the way to a San Jose styled Pension
Reform?
Californiafs public pension system is a complete disaster. Not only does the
state have the highest pension deficit in America, three California cities
recently filed bankruptcy. The California legislature did nothing to avoid
the escalating fiscal catastrophe and returns now after a month-long vacation to
tackle public employee pensions.
Among the proposals frequently heard around Sacramento is the truly awful
idea of launching a state-sponsored pension system for the more than six million
private sector California workers. This idea is akin to providing the
captain of the Titanic another boat to sink.
A state-sponsored pension system would wipe out many small businesses that
simply cannot afford to pay the employerfs share of these pensions,
especially when coupled with the increasingly heavy state, federal and health
care taxes.
There is also the near certainty that funds allocated for a state-sponsored
pension system will be funneled toward the current public employees unfunded
liability. Thus, California will continue kicking the problem to future
generations.
The California legislature needs look no further than San Jose for a model on
how to meet the problem.
San Josefs Mayor Chuck Reed and his allies negotiated with employee unions
last year to craft a pension reform measure for voter approval.. gMeasure Bh
created a new, low cost, hybrid retirement plan that includes Social Security
and possibilities for either a defined benefit or defined contribution
component.
No matter the shape of their specific plan, all new employees will contribute
50% of the total cost. Current employees can either pay an additional 4% to
their current plan, with the possibility that this contribution will increase,
or opt into the new hybrid plan. Measure B also gives the City Council the
ability to suspend cost of living adjustments during fiscal emergencies, and
requires voter approval for any future benefit enhancements. On June 6th, voters
approved Measure B with 70% of the vote.
San Josefs plan works because it stabilizes the pension system while also
paying down the debt.
California legislators should implement a state version of the San Jose plan,
putting an end to the defined benefit pension system for all employees and
switching to a defined contribution system with employees increasing their
contributions.
The new plan offered in San Jose is similar to the 401(k) plans offered by
the private sector. Defined benefit plans like the ones the state has now
guarantee specific benefits regardless of cost to taxpayers. Defined
contribution plans establish a fixed payment toward benefits. Instituting
defined contribution plans would prevent the endless cost escalations and abuse
of pension funds as secret loans by politicians. Moving to defined
contribution plans reduces the risk to taxpayers, provides lawmakers with a
reliable cost estimate for budgeting and gives state workers control over their
retirement funding.
The new California plan should guarantee that no government employer may pick
up employeesf required contributions to pensions and that lawmakers fully fund
the required contribution each year. In addition, until significant pension
reform is enacted, pay raises for all public employees should be frozen,
including step and cost-of-living increases.
California urgently needs pension reform for existing and retired public
employees.
Without action, all of California, including each county, city, town and
school district, will go bankrupt. That means essential public services must be
cut, government workers laid off, disrupting or eliminating public health,
safety and education. There is no option for status quo or incremental
adjustments. Drastic reforms, innovations and political courage are needed to
save California. The Day of Reckoning is NOW for California lawmakers.
Please note, statements and opinions expressed on the Fox&Hounds Blog
are solely those of their respective authors and may not represent the views of
Fox&Hounds Daily or its employees thereof. Fox&Hounds Daily is not
responsible for the accuracy of any of the information supplied by the site's
bloggers.