Will statewide pension reform help local governments reign in costs?

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California state lawmakers have until midnight Friday to enact the pension reforms they’ve promised this year. Democratic leaders have said they’ll introduce an amended version of Gov. Jerry Brown’s 12-point pension plan well before that deadline.

Brown’s plan, which Republicans adopted and put into bill form in February, calls for higher contribution rates for existing employees and smaller benefits for future employees. It also calls for a statewide standard to help cities and counties that are struggling to pay employee pensions.

During the dot-com boom, the California Legislature voted to lower retirement ages and increase pension benefits for state employees. They also voted to apply the more generous formulas retroactively. Gov. Brown criticized that choice when he testified at a state hearing this year on his pension reform plan.

“I remember I was Mayor of Oakland at the time” Brown said. He recalled asking lawmakers how they’d pay for the enhancements, and says he was told: "It won’t cost anything."

“I was incredulous at the time” Brown quipped. “I’m still incredulous.”

It was 1999 when CalPERS—the nation’s largest pension fund and the one most state employees belong to—calculated that investment returns would be strong enough to sustain greater benefits with little financial impact for government employers.

Santa Monica’s City Manager Rod Gould says, as a result, when local governments were negotiating with their employees, "It was a lot cheaper for them to offer better benefits, in terms of increased pensions, than more salary. And so many of them did.”

Then the housing market crashed, so did the economy, and a lot of retirees lived longer than expected. As pension benefits continued to grow, and the investments made to help sustain them continued to flag, a growing chorus of people said it should stop.

But it continued. The Little Hoover Commission, an independent state agency that makes recommendations on how to improve government, found that nearly 200 public agencies continued to boost pensions after 2008.

Why? Commission executive director Stuart Drown says local officials testified at hearings in 2010 that they didn’t understand the financial risks of expanding pension benefits. Others said they had to compete with other government employers. Drown says they were also under political pressure from unions and other constituents—and still are.

“Let’s be honest: the political pressures are real and they are part of our process and so we need a system that recognizes the natural political pressures that are there, and frankly saves these folks from themselves.”

Drown acknowledges that unions have made some huge concessions in recent years—but worries there will be a lot of pressure on government to restore pay and benefits when the economy improves.

“The new arrangements have to be long term if the cities and the counties are going to work their way out of this pickle,” Drown says.

He believes the legislature should cap benefits, raise retirement ages and curb pension abuses. Applying those changes to both state and local governments would level the playing field between employers and reign in costs, Drown says.

Santa Monica's Gould says local governments usually bristle when the state intervenes, but in this case he thinks it’ll help. He says whether you believe public pensions are fair or exorbitant, they have undeniably become a larger percentage of city and county government budgets. Santa Monica’s city’s pension commitment, for example, grew from $10 million to $44 million over the past decade.

“Increased pension costs are crowding out our ability to provide the services and the capital projects that sustain our communities—that’s the crux of the issue." Gould says "Whether you’re a Republican or Democrat, or big city or small city, or rural or urban, that’s a similar problem wherever you sit.”

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