From today’s Wall Street Journal…

Jerry Brown’s Pension Punt
The California Democrat won’t consider 401(k)s for state employees.

The race for California Governor ought to come down to which candidate has a better chance to rein in the special-interest asylum that is the state legislature. Republican Meg Whitman is a conservative former eBay CEO but a political rookie, while former Democratic Governor Jerry Brown is a liberal but might be quirky enough to do a Nixon goes to Sacramento. Judging by his recent pension reform plan, however, Mr. Brown still has some relearning to do.

This year, the Golden State is running a $19 billion deficit, at least $6.2 billion of which is owed for retiree pension and benefit payments. That number is expected to nearly triple in the next decade as the pension tsunami gains speed. All told, California’s unfunded pension liability is scored at more than $120 billion, with some estimates rising to $500 billion.

For that, Californians can thank the state’s bloated benefits, low employee and employer contributions to the pension plans, and the inflated investment-return assumptions used to hide pension costs. As investment returns have turned south, the state has had to make up for shortfalls by cutting back on higher education, parks and social services.

Which brings us to Mr. Brown’s proposed reforms. On the plus side, the plan would reduce pension "spiking," which happens when employees rack up overtime and bonuses to inflate their final year’s compensation upon which retirement benefits are based. Mr. Brown would also increase employee contributions, raise the retirement age to 60 from 55 for new hires, and improve accountability, standards and transparency of pension boards.

This is fine as far as it goes, but many of his reforms have already been negotiated by Governor Arnold Schwarzenegger. The Governor’s fixes would reduce the state’s pension bill by less than $1 billion this year, leaving taxpayers on the hook for more than $5 billion. It’s unlikely Mr. Brown’s reforms would save much more.

A larger problem is Mr. Brown’s refusal to consider defined contribution plans. A 401(k)-style plan for new hires is a cornerstone of Ms. Whitman’s reform plan and should be part of any serious proposal to rein in pension costs. Two thirds of Californians supported the idea in a poll earlier this year, no doubt because most of them have similar plans from their private employers. But it doesn’t poll well with public unions because employees, not state taxpayers, would have to bear the risk of their pension investments. Defined contribution plans give the state budget certainty and control over pension costs, but they also make pensions subject to the overall health of the economy.

Unions prefer defined benefit plans because they can extract benefit promises from lawmakers in exchange for political support. So while lawmakers and unions may agree to scale back benefits now, once (or if) California’s economy manages to recover, there’s nothing to stop lawmakers from giving away the store again.

So far, only Alaska, Michigan and the District of Columbia have braved public union opposition to enact defined contribution plans. But a handful of other states, including Oregon and Washington, have experimented with hybrid plans that combine a modest defined-benefit plan (often invested at a risk-free rate) and a 401(k)-style plan.

The hybrids do less to contain state costs, but they represent the kind of compromise that a fiscally serious Democrat could plausibly sign on to. Mr. Brown seems to have flunked his first test of political independence from the Sacramento mob.

This entry was posted on Monday, August 2nd, 2010 at 12:00 am and is filed under Blog Posts.