Is Pension Reform Dead?

Sacramento is currently consumed with taxes.  There are between four and seven separate tax proposals being kicked around in the state capitol these days.  The three primary proposals are Governor Jerry Brown’s sales and income tax increase, the Molly Munger/PTA proposal and the California Federation of Teachers’ “millionaire’s tax.”  All three are heading for the November ballot where many project voter confusion and irritation will doom them all.  A “circular firing squad” is how the situation has been described by Brown’s top political adviser, Steve Glazer.  The governor is not a happy man as Sacramento is awash in red ink.

The current state budget (approved last summer after legislators had their pay docked for failing to pass a balanced budget on time) was balanced in an illusory fashion thanks to $4.0 billion in new found revenue – “miracle money” as it was known.  The miracle money was projected based on a twelve month extrapolation of a one month bump.  No one outside of Sacramento bought into the illusion, including Wall Street who refused to issue so-called “revenue anticipation bonds” (that would have allowed the state to borrow against anticipated revenue) without certain spending triggers being adopted.  Begrudgingly, Sacramento accepted the triggers, borrowed the money and held its collective breath for the reckoning soon to come.

The wait was short.  Revenues are currently $2.5 billion below projections, spending is another $2.5 billion above projections, leaving a total budget $5.0 billion out of whack, and that is after $1.0 billion in triggered spending cuts.  That’s a lot of red ink.  And it’s not an aberration.  The structural deficit, the amount by which spending exceeds revenues, is a constant.  Current total spending is about $100 billion while current total revenues are between $80 and $85 billion.  The structural deficit, while currently at 15-20%, might be reduced to the 5-10% range in better times, but it’s always there.  So what does the Governor intend to do about it?  Well, his current proposal cuts spending by an additional $5 billion and projects increased revenues of another $7 billion through a combination of sales and income tax increases.  That’s right, the math doesn’t quite add up, but remember we’re talking about Sacramento.

Having failed to garner any Republican support for last year’s tax “extensions,” the Governor is circulating his latest proposal around the state hoping to get enough signatures and qualify the measure for the November ballot.  He’s telling voters and the press that the additional revenue will pass on to schools and public safety, but the fine print contains no such requirements and the schools lobbies have by and large failed to get in line behind the Governor on this one.  The less gullible believe that while the governor may indeed pass some of the new tax revenues on to the schools, he will at the same time withdraw a like amount of general fund revenues currently allocated to the schools and redirect that money to the counties to pay for “realignment” (i.e., the transfer of state prison inmates to local county jails).  And what about the competing proposals?  Molly Munger (daughter of Charles Munger, Warren Buffet’s business partner) is spearheading an initiative to increase all income taxes in the hope of realizing $10 billion in new revenues, all of which would pass on to the schools, as the fine print apparently confirms.  The PTA and schools lobbies generally favor the Munger proposal.  And there remains also the third proposal promoted by the California Federation of Teachers (CFT), which would impose the so-called “millionaires tax” on the wealthy.  The Governor has been unsuccessful in getting either the Munger or CFT camps to back down as all three head for a showdown in November.

So how does pension reform figure in to all this?  Sadly, it doesn’t.  While the governor is keenly aware of the sour mood among voters and the lack of credibility any tax increase proposal will have absent pension reform, it looks as if pension reform in Sacramento is dead.  The governor has indeed proposed a 12-point pension reform plan, but the union controlled Democrats in the legislature have shown no interest in acting on it.  The best chance the governor may have had to coerce reluctant legislators to adopt his reform proposals, as modest as they may be, went down the drain following the collapse of the Pension Reform Initiative (PRI) as its proponents folded up their tent and went home following Attorney General Kamala Harris’ scathing titling of the proposed initiative as slashing police and fire pensions.  Indeed the PRI contained more meaningful reforms than the governor has proposed, but now that the threat of serious reform has been taken off the table, the Democrats have even less incentive to approve the governor’s plan.  What leverage the governor may have enjoyed is gone.

If pension reform is to be achieved, it will have to come from the local level where cities and counties have seen their ability to provide the most basic of government services decimated as more and more local revenues are siphoned off to feed the insatiable appetite of the public employee pension beast.  While 80% of the state budget goes to schools and local government, 80% of local government budgets go to salaries and benefits, and much of that to highly paid public safety employees.  That makes local governments the first to feel the bite of the unfunded pension liabilities.  But local government officials are also highly dependent on union contributions to fund their campaigns so mustering the courage necessary to challenge those unions and tackle the pension issue is not for the timid.  Still, some cities, notably San Jose and San Diego, have fought to remove binding arbitration and other union weapons in an effort to address the problem.  Officials in those cities have been hammered by the unions and one can only hope they have the resolve to weather the storm.  For the rest of us, the challenge lies in waking up local voters to the impact these pensions are having on local roads, parks and other basic services and electing officials willing to challenge the unions.  It’s going to be a long slog.

Dan Drummond

Executive Director

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