January 3, 2007

governor puts off into future any serious consideration of pension, health-care debt

Wednesday, January 3, 2007
He'll be retired before reforms are made
The governor puts off into future any serious consideration of pension, health-care debt


When politicians face a major problem but lack the courage to propose a plan to actually fix it, they typically adopt the standard dodge: create a "blue ribbon" commission to study the problem. Often some of the appointees to such panels are part of the problem, which only assures that nothing of any substance ultimately will be adopted.

That's exactly the approach Gov. Arnold Schwarzenegger took with the state's unfunded retirement liability problem – the long-term debt faced by taxpayers to make good on the pension and health-care promises made to the state's large class of government workers. The governor last week signed an executive order that established the Public Employee Post-Employment Benefits Commission, charged with making recommendations after a year of study.

Some observers have praised him for at least recognizing a true problem, but this commission will do nothing more than delay by a year any real-world solution to such debt.

"Promised pensions and health benefits are vitally important to state workers and their families, especially public safety officers who put their lives on the line every day," the governor said in a statement. "And they are obligations that must – and will – be paid by government. Soaring obligations of this type, however, also remain one of the biggest problems facing governments everywhere for the simple reason that rising pension and retiree health care costs mean less money for other government programs such as education, public safety, environmental protection and health care."

The governor at least got it right about how big a problem these retirement promises represent. As his office pointed out, unfunded pension liabilities for the state's two main government pension systems amount to $49 billion and will go much higher after a federally mandated change in accounting practices forces governments to deal honestly with the full liability. The health care debt is estimated at $40 billion to $70 billion. In 2001, the governor's office explained, the direct annual cost to the state budget for pensions was $160 million. It's now $2.6 billion.

At this rate, if something is not done to control these benefits, taxpayers will have to pay far more in taxes or in new debt.

The governor did not really deal with the reason for the run-up in liabilities: Employee unions, especially those in public safety, have secured enormous increases in already generous benefits in recent years. Police and firefighters can retire with 100 percent of their final pay, and full health care benefits, guaranteed forever. Other government employees can retire with more than 80 percent of their final year's pay, such as Orange County employees, who received a retroactive pension spike a few years ago.

Compare those benefits with the 401-k-style plans and Social Security that most private sector workers will depend upon.

This is not only unsustainable, but unfair. As government employees retire at earlier ages with nearly full pay and Cadillac-style health benefits, many private-sector employees delay retirement and depend on benefits from the federal government's creaky retirement systems.

The Schwarzenegger executive order was lauded by some union officials. That should offer a hint that the commission will propose nothing that will fix the above-mentioned problem. In 2005, the governor had proposed pension reform, but did not push forward with it after he ran into political problems. Since then, he has abandoned any effort to reform the current system.

The technical solutions are fairly straightforward, albeit politically difficult to accomplish. Current government workers by law must receive their promised benefits, but new workers should be shifted from a defined-benefit plan with guaranteed benefits to a defined-contribution plan similar to those in the private sector. Health benefits, which can legally be changed, need to be trimmed back to real-world levels. Furthermore, the state government needs to slow spending, trim the size of government and start shutting down unnecessary departments.

Instead of doing any of that, the governor wants to spend a year gabbing about the problem in a commission that will be dominated by union members and Democrats who will resist any serious reform. What else would one expect from a governor who seems more interested in being liked than in fixing the state's serious problems?

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