October 2004

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Guest Commentary

Keith Richman is a member of the state Assembly representing the 38^th District, which includes parts of Los Angeles and Ventura counties. A physician of internal medicine, Dr. Richman was first elected in 2000.

Everyone concerned about California’s future should worry about our dismal record of fiscal responsibility. While record budget deficits, mounting debt and abject credit ratings have dominated recent public debate, far-too-generous public employee pensions are a ticking fiscal time bomb threatening all levels of government.

Indeed, the cost of providing pension benefits in some jurisdictions may exceed 25 percent of available revenue in the years ahead. The city of San Diego and counties of Contra Costa and Orange all face unfunded liabilities of more than $1 billion that will take many years to eliminate. This year the state is set to float a $1 billion pension obligation bond to help cover pension costs that have ballooned from $200 million to $2.6 billion in just four years.

Government agencies, taxpayers and future generations need relief from this ominous fiscal threat. We must reform our pension system to protect taxpayers and the important investments in education, infrastructure and health care needed to improve California’s future.

School, state and local government employees have always enjoyed some of the nation’s most generous pensions. A California state employee who worked 24 years and retired at age 60 would receive an annual pension of $36,098. The same worker in Oregon would receive $24,831, in Illinois $24,250 and in Florida $20,424.

During the last 20 years, the private sector has transitioned its retirement programs from defined benefit plans that guarantee a payment based on age and years of service to defined contribution plans best known as 401(k)s. These ubiquitous plans allow employees to take their money with them when they switch jobs. They can control the investment of the funds and pass them along to heirs as part of an estate.

Most California government agencies, including the state itself, have ignored this private sector trend. In fact, they have enhanced the benefits that allow most state employees to retire at 55 years of age. Public safety employees are able to retire at age 50 with up to 90 percent of their pay. Several of the most generous enhancements were given during the stock market boom of the late 1990s and 2000, when unusually high rates of return allowed very optimistic estimates to show the enhanced benefits would be paid by higher investment earnings alone.

As you might imagine, the most vocal supporters of the “cost free” public pension enhancements were the public employee unions who dominate state and local governments, school districts and special districts. Their leaders use union dues to help elect the senators, Assembly members, city council members, county supervisors and board members that approved the generous increases. It has been a clear example of narrow special interests driving our government institutions to the brink of insolvency.

Just like many mutual funds full of high-flying internet stocks, pension fund values and promises of “free” employee benefits cratered when the market bubble burst. Because employees’ vested rights to the newly enhanced benefits cannot be taken away, the costs of fulfilling these new financial obligations will burden government budgets for decades.

The first step toward long-term fiscal responsibility is to stop making expensive promises to new employees. When the Legislature reconvenes in December, I will introduce a constitutional amendment to close all state, local, school and special district defined benefit plans to new members. Instead, government agencies would offer all new employees the same type of defined contribution plans offered by nearly every private-sector employer.

California faces a $6 billion budget deficit next year and a $10 billion deficit in 2006. Part of the solution must be reducing the cost of public employee pensions. By giving public employees the same pensions as private employees, we can save money, stabilize our fiscal health and dedicate more money to the improvements California needs to enhance our quality of life for decades to come. The public employee unions are sure to fight any changes, but the public interest, fiscal responsibility and common sense must prevail.