California Lawmakers Are Ignoring History by Boosting Pension Benefits as the State’s Economy Teeters

As Mark Twain wrote, “History doesn’t repeat itself, but it often rhymes.” Lately, I’ve been hearing a recurring rhythm—and getting the blues—as the legislature is about to repeat a grievous mistake. The issue involves public-employee pensions, as the legislature has advanced two bills that would exacerbate the state’s pension problems in much the way it did 27 years ago.

First the requisite history lesson. In 1999, the Legislature passed Senate Bill 400. The stock market was booming, and the nation’s largest pension fund, the California Public Employees’ Retirement System, was awash in cash. “Investment earnings had averaged 13.5 percent for a decade, soaring in the two prior years to 20 percent,” per Calpensions. The state’s pension plans, it noted, were funded at 100 percent to 139 percent.

In private 401(k) plans, employees contribute a portion of their income to investment accounts. When the market soars, the employee’s account goes up and vice versa. The employee owns what’s in the account. With “defined benefit” accounts, the pension fund invests the contributions. Employees receive a guaranteed pension based on a formula. If stocks soar, investment funds are in good shape to pay what’s promised. If they tank, it creates shortfalls that are backed by taxpayers.

Flush with cash, union-friendly CalPERS lobbied the legislature to significantly increase pension formulas rather than prepare for a rainy day. S.B. 400 created a “3 percent at 50” retirement benefit for California Highway Patrol officers. They could then retire at age 50 with 90 percent of their final pay after 30 years of service. The benefit applied retroactively, in some cases boosting pensions by 50 percent.

When public-employee unions want to boost benefits, they start with public safety unions, given the wide support that police and firefighters have from the public. By design, “3 percent at 50”  spread from CHP to police and fire agencies across the state. Agencies then gave their other employees the old public-safety formula. Hey, they had to do it lest they have trouble with recruiting.

Lo and behold, the stock market didn’t keep soaring. Markets go up, and they go down. The ensuing bust caused massive unfunded pension liabilities, as funding levels fell far below those halcyon days. CalPERS currently is now funded at a poor 79 percent, which is considered decent by post-financial-crisis standards. Governments slashed services and raised taxes to cover their massive new pension contributions. If you’re wondering why California public services of every type are so dismal, this tops the list of reasons.

“Proponents sold the measure in 1999 with the promise that it would impose no new costs on California taxpayers,” explained a 2016 Los Angeles Times retrospective. “The state employees’ pension fund, they said, would grow fast enough to pay the bill in full. They were off—by billions of dollars—and taxpayers will bear the consequences for decades to come.” Ironically, it noted, the Dow Jones Industrial Average started dropping precipitously the same year (2000) that SB 400 went into effect.

The state spent 12 years trying to dig itself out of a hole, culminating in the 2012 passage of the Public Employee Pension Reform Act, led by then-Gov. Jerry Brown. Pensions are a tough problem because of something known as the California Rule (really a series of court decisions rather than a regulation). Once a governing body grants a public employee a vested benefit boost, it cannot take it away, even going forward. Therefore, anyone who received the new pension formula would receive it until their dying day—no matter its impact on budgets or services.

PEPRA was modest, but it wisely increased retirement ages and reduced benefits for new hires. It didn’t fix the problem immediately, but it was designed to slow the state’s pension debt after a decade or so. As the younger workforce has grown, the system has stabilized. Now, public employee unions are complaining that most of the governmental workforce is receiving the PEPRA-era benefits—and they’re lobbying the legislature to vastly expand those payouts.

Just like in the past, the legislature is starting by boosting public-safety benefits. For instance, Assembly Bill 1383 would authorize public agencies to reduce retirement ages and increase benefit formulas for police and fire for political reasons. It basically guts PEPRA. Also like S.B. 400, the legislation passed the Assembly floor on a bipartisan basis (70-2). The bill almost certainly will be expanded to other categories of workers if the past is an indicator.

Furthermore, the Legislature is also looking at creating a DROP (Defined Retirement Option Plan) that would let public-safety employees, who already earn eye-popping pension payouts, retire with a giant lump-sum payout when they retire at enviably young ages. That atrocity passed the Assembly floor with only one “no” vote. And the Legislature is doing this at a time when the national economy is teetering, and the stock market is volatile.

If it all sounds eerily familiar, that’s because it is.