What the Pension Ruling Means for Taxpayers

Tuesday, March 12, 2019

Page 9

IN MY OPINION (Column)

What the Pension Ruling Means for Taxpayers

By JON COUPAL

Last week, the California Supreme Court issued a ruling in Cal Fire Local 2881 v. CalPERS, a case involving public employee pensions. For taxpayers, the decision was a mixed bag. On the plus side, the court refused to find a contractual right to retain an option to purchase “air time,” a perk that allowed employees with at least five years of service to purchase up to five years of additional credits before they retire. Under this plan, a 20-year employee could receive a pension based on 25 years of contributions.

On the negative side, the high court left intact, for now, the so-called California Rule, which has been interpreted as an impediment to government entities seeking to reduce their pension costs. The rule, unique to California, provides that no pension benefit provided to public employees via a statute can be withdrawn without replacement of a “comparable” benefit, even as deferred compensation for services not yet provided.

The unanimous 54-page opinion by the Supreme Court resulted in a wide variance of headlines and social media posts. The Associated Press read “California’s Supreme Court upholds pension rollback.” Ironically, a conservative reform group sharply criticized the decision for failing to repeal the California rule outright while another conservative policy organization called it a “victory for taxpayers.”

So what was it?

Actually, a little of both. That the powerful public employee unions would lose any battle in California is notable. And for taxpayers, an express ruling against a labor organization—which this was—can only be viewed as positive.

This is not to denigrate all public employees in California, the majority of whom earn their pay and benefits. But for taxpayers, the pension crisis is a very big deal. More than a decade ago, the unions used their political muscle to obtain benefits offered nowhere else in the nation, including a series of laws which allowed public employees to spike their pensions. As a result, California now has hundreds of billions of dollars in unfunded pension obligations. This is debt, pure and simple, with no easy way to pay down that debt without big reforms or big tax hikes.

No sane policy leader in California disputes the severity of the pension crisis, which has already manifested itself by significant impacts on other government spending. This is called “crowd-out”—the phenomenon of an increasing share of a government entity’s general fund having to pay down debt as opposed to paying for services such as police, fire, libraries, schools and trash collection.

How bad can “crowd out” get? In the city of Chicago, only a nickel of every dollar generated from property taxes goes to city services while the remaining 95 cents goes to debt reduction. Taxpayers in Illinois, like taxpayers in New Jersey, New York and Ohio, are fleeing those states for lower-tax states. And the out-migration of California citizens because of high taxes is well documented. Much of these demographic changes are being driven by the nationwide pension crisis.

Taxpayers should also understand that this is a non-partisan issue. To his credit, former Governor Jerry Brown presented a 12-point comprehensive pension reform plan which, had it been enacted, would have solved virtually all of California’s public pension problems. Although the California legislature rejected most of the proposals, they did address some of the more egregious abuses including the airtime benefit law, which was later repealed in 2013.

If taxpayers are wondering about the extent to which further pension reforms can now be pursued in light of the Supreme Court ruling, they are not alone. Pension experts, local governments and labor interests are all wondering the same thing.

However, it is fairly certain that full repeal of the California Rule in one single case is unlikely. Pension reforms will probably be upheld only if they are modest, incremental adjustments to existing benefits. We can only hope that, in the meantime, pension costs don’t crush taxpayers more than they are doing so now.