The Economist, 11/12/11.
JERRY BROWN, aged 73, likes to joke that he is not only California’s governor but also its “best pension buy”. After all, he has spent much of his life in public service (including a first stint as governor from 1975 to 1983), but neither draws a public pension nor plans to, if he can get himself re-elected. Nonetheless, his commitment to fixing California’s daunting public-pension problem has been in doubt. A Democrat, he was elected one year ago in a race against a self-financed Silicon Valley billionaire, largely with the help of independent spending by public-sector unions. The question has been whether he can stare down his own allies, those unions, and pass the necessary reform.
Mr Brown has now released a plan. Initial reactions suggest that he may pass his test: the unions were outraged, many Democratic legislators (often beholden to the unions) felt awkward, and several Republican legislators were supportive. But now everything is in flux, as all parties choose their tactics for the fight.
The main changes Mr Brown proposes concern new employees of state or local governments. They would have to wait till 67 to retire, whereas many current government workers can retire at 55 or even earlier. They would also have hybrid plans, with part of the traditional defined-benefit pension replaced by a defined-contribution plan of the sort common in the private sector. Mr Brown also wants to make current as well as new employees contribute half of the cost of funding their pension (today, many pay nothing). And he wants to end sneaky ways of upping benefits (called “spiking”) and other abuses.
This is all eminently sensible. Indeed, it is remarkably similar to the demands a handful of Republican legislators were making in June, when Mr Brown was begging for their votes to reach the necessary two-thirds majority to let Californians vote in a ballot measure to extend some tax increases. (He did not get those votes, and ended up with an all-cuts budget he doesn’t like.)
Even so the proposal still falls short, says David Crane. He is a Democrat who advised Mr Brown’s Republican predecessor, Arnold Schwarzenegger, and who was a gadfly on one of the large pension-plan boards for 11 months. California’s unfunded pension liabilities are staggering, he points out; they have been estimated at between $240 billion and $500 billion. Plugging that hole will increasingly crowd out other things that Democrats care about, such as schools, parks and courts. But Mr Brown’s plan might save at best $11 billion over 30 years.
Which is why Mr Brown’s plan may not be the final one. This month, a group led by several eminent Republicans filed two versions of what may become a ballot measure in next year’s general election. With a nod to Mr Brown’s effort, one alternative is somewhat more aggressive, the other a lot more. The main difference is that current workers would start paying much more of the cost of their pensions.
This Republican plan, in whichever form, might end up helping Mr Brown: either by showing the unions how bad the alternative is, so that they support him after all; or by allowing him to tell them that he tried to be considerate, but now has to endorse the tougher Republican plan as part of a package of other ballot initiatives. In that scenario, the state just might achieve the grand bargain that seems to be eluding the rest of the country.
Link to full article: http://www.economist.com/node/21538201