Opinion Piece By Jon Copal, President of the Howard Jarvis Taxpayers Association – July 28, 2018 –
In truth, Sacramento politicians are very dependable. You can depend on them to raise your taxes, pass meaningless resolutions attacking President Trump and hurt the private sector by eliminating workplace arbitration and enacting even more burdensome regulations. And finally, they are very dependable in avoiding the most important threats to California’s financial solvency, especially dealing with unfunded pension liabilities.
Much has been written about California’s unfunded pension crisis. By 2024, normal contribution payments by cities and counties to CalPERS are estimated to total nearly $3 billion, and the unfunded contribution payments are estimated to total $5.5 billion. That shortfall of nearly $3 billion a year will continue to increase unless reforms are enacted – soon.
California’s pension crisis exists in large part due to the very nature of defined-benefit plans. Unlike defined-contribution plans, where the taxpayers’ obligation to each public employee ends with every pay period, defined-benefit plans depend on a projection of future investment returns. And therein lies the problem. California has been horribly wrong in its application of assumed rates of return, leading to hundreds of billions in unfunded liabilities.
And this shortfall is occurring in good economic times when the state of California is relatively flush. A recession will quickly expose this short-sighted thinking, yet the Legislature continues to believe that local municipalities will continue to pass regressive sales tax increases to bail themselves out. Already, 24 cities have sales tax rates at or over 9.5 percent, and more cities are destined to join them.
Not only is the Legislature not acknowledging the scope of the problem, it’s not even taking simple common-sense steps to address it. Senate Bill 1149 was a bill introduced by moderate Democrat Steve Glazer, out of the San Francisco Bay Area. Glazer, who made pension reform a major issue in his election, attempted to create an optional defined contribution program similar to a 401(k) for new state employees. The University of California system has had a similar plan for two years now, and one-third of new employees have opted in to it. It is completely voluntary.
Optional “DC” plans make a lot of financial sense for the employees. According to data from CalPERS, 60 percent of 25-year-olds hired in any given year will leave the state workforce within 15 years. Various studies have shown that the break-even point between the current defined-benefit model (where individuals receive a set amount of money annually in retirement) and Glazer’s defined-contribution model is roughly 15-20 years. When did you last see a millennial stay in a job 15-20 years?
SB 1149 gives new younger workers the flexibility of portable benefits. They can transfer a 401(k) plan from job to job by rolling it over into an IRA. Even if they switch jobs multiple times, their retirement nest egg will continue to grow. The same cannot be said under a defined-benefit model. If vested, employees will receive a percentage of their final salary in retirement. But that amount doesn’t grow with inflation and can’t be collected until they hit 62. What sense does that make in today’s transferrable gig economy?
Despite its clearly voluntary nature, legislators in the Senate Public Employment and Retirement Committee killed the bill on a party-line vote earlier this year. That’s a shame, because if politicians can’t pass a bill allowing new employees to have access to a completely voluntary defined-contribution retirement model, there is little hope for reform. Meanwhile, those unfunded pension liabilities continue to increase, creating pressure for higher and higher taxes at the city, county and state level.