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The Issue That Divides Dems: Public Pension Reform

The Issue That Divides Dems: Public Pension Reform

By Carl M. Cannon - October 27, 2013

The popular narrative in national politics these days is that the Republican Party is on the brink of civil war. This is an intramural competition that pits small-government, Obama-bashing, Tea Party refuseniks vs. the go-along-to-get-along GOP establishment.

That’s the familiar plotline, anyway, and Republicans’ fortunes in the 2014 midterm elections and the 2016 presidential race are believed to hinge on the outcome. But amid much less media coverage, the Democratic Party has formed battle lines of its own, with much higher stakes than the next two political campaigns.

The Democrats’ theater of battle is not primarily in Washington—it’s the state capitals and cities—and the issue is public employee pension reform. It’s not a sexy subject. Even ominous actuarial tables are more likely to induce glazed eyes and yawns than memorable battle cries. Yet what up for grabs is the very quality of life in some of America’s most iconic cities and suburbs.

Typically, reform is being led by Democratic mayors. It’s being resisted by leaders of public employee unions, who are also Democrats. California state legislators tend to side with the unions over the mayors, preferring the status quo—and the campaign contributions from unions—to an intramural fight.

The problem, however, is that the status quo will not hold any longer. Detroit is virtually a one-party city. It has also filed for bankruptcy. These two facts are not entirely coincidental. Five decades’ practice of awarding generous pension benefits to city employees, even while Detroit was in the process of losing two-thirds of its population and slashing the workforce, has left the city with a budget in which 40 percent goes to paying former workers—with long-term obligations to these retirees approaching $44 billion.

Even as the city faced bankruptcy, the unions were disinclined to negotiate any changes in their contracts, preferring to fight in court, which is where matters stand today: a trial began in federal court in Michigan this past week. Litigation is also where the city of San Jose, Calif., is headed.

Last year, under the urging of Mayor Chuck Reed, San Jose’s city council put a ballot measure before voters that limited pensions for new employees, gave employees the choice of either contributing more to their pensions or accepting a lower-cost plan, required retired employees to kick in higher health care premiums, and gave the council control over cost-of-living adjustments. This measure was put before voters—Democratic “blue” voters in a “blue” city in “blue” California—who passed it with nearly 70 percent support.

So everyday Americans get it—they understand math—even if union leaders and their enablers in state government do not. (The San Jose unions have filed a lawsuit challenging the ballot measure.) And California is Ground Zero for public employee pension folly in large part because of Sacramento. In the halcyon days of the last millennium (well, okay, 1999) Gov. Gray Davis shepherded through the Legislature a profligate—and retroactive—increase in public employee retirement benefits, particularly those in the public safety area.

Local governments across the state were urged by the bargaining units of their public employee unions to follow suit, and most did so. From the Bay Area to Orange County, the upshot was public safety employees retiring in their early 50s at 90 percent of their salary—guaranteed for life—along with automatic cost-of-living increases.

At the time, California Public Employees' Retirement System (CalPERS) board President William D. Crist called the measure “a special opportunity to restore equity” for public employees “without costing a dime of taxpayer money.” You could say he was right: It didn’t cost a dime, it costs $14 billion—and counting.

The rationale, if one can use a word for such largesse, is that the stock market was soaring, California real estate was ever-rising and the economy was humming. When all that ended, the public employee gravy train did not. Economic assumptions, as Stanford Business School professor Joshua Rauh points out, are just that—assumptions—but public pension benefits are signed contracts, and not easily broken.

There are three problems here. The first is that that they were underfunded. The second is that the contracts were so generous they probably were unsustainable anyway. The third is that, irrespective of anything else, the unions say that pensions already awarded are essentially inviolate. The term they use for this doctrine is “vested rights,” and the public employee unions, most of the state’s Democratic lawmakers, and some California case law back them up.

To combat this thinking, Chuck Reed and the mayors of San Bernardino, Santa Ana, Anaheim, and Pacific Grove—four Democrats and a Republican—are proposing a statewide ballot measure codifying the ability of state and local government to tweak the pension benefits for current employees.

The public employee unions will fight this referendum, at the ballot box and in the courts. Their answer, on display in a Michigan courtroom last week, is that, well, a promise is a promise, these pension shortfalls are being exaggerated—and, in any event, taxes can always be raised to cover them.

Chuck Reed and his pals welcome this debate. They know this isn’t a future problem—it’s a current one. “We’re mayors, so we’re closest to it,” Reed says, noting that he and his fellow municipal officeholders are the ones who have to lay off police officers, curtail library services, close community centers, freeze new hiring even as their cities grow—all to pay the salaries and health benefits of those no longer working.

“We see the effects of all that,” he added. “We feel the pain.”

Although he’s careful to skirt gratuitous criticism of other Democrats, Reed knows his party has been asleep at the switch on this subject. Over lunch this week in New York, I asked him if he would consider running for governor after his term expires next year. He rejected that idea out of hand—he actually recoiled physically—but he did suggest something intriguing. He thinks that California’s current governor, also a Democrat, might surprise people on this issue during his expected second term. 

Carl M. Cannon is the Washington Bureau Chief for RealClearPolitics. Reach him on Twitter @CarlCannon.

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