FLASHREPORT

PROP 13 FOR PENSIONS

An exclusive column penned for the FlashReport by former Republican Assemblyman Keith Richman, M.D.

Back in 1978, California voters decided their own fiscal future by passing Proposition 13 over the objections of a political class so captivated by the status quo it did not think having elderly people taxed out of their homes was a serious problem.  Since then, hundreds of billions of dollars in property taxes have been saved and homeowners no longer fear the punishing tax assessments that followed rising real estate markets.

This year, the California Foundation for Fiscal Responsibility is leading a coalition of taxpayer groups and local leaders such as Scott Baugh, John Moorlach and Chriss Street in sponsoring an initiative to stop the fiscal damage being wrought by too generous retirement benefits for California public employees.  Even with numerous grand jury reports, $60 billion in unfunded pension liabilities and $150 billion in retiree health care debts, many union-fearing politicians deny a glaring fiscal problem or lack the courage to support a meaningful solution.

This fiscal crisis is caused by the very generous lifetime pension and health care benefits that have virtually disappeared from the private sector because of their rising costs and huge debts.  Already the cost of retirement benefits is crowding out spending for education, transportation, infrastructure, public safety and the quality of life investments that keep our state golden.

At the state level, payments for state employee pensions have increased from $160 million in 2000 to $2.7 billion next year and despite these huge cash infusions, the CalPERS retirement fund remains under-funded by more than $26 billion and the teachers’ pension fund is another $20 billion short.

In addition, a recent report based upon generous assumptions projects a $48 billion debt for state retiree health care promises.  If health care cost increases stay on their current trajectory, that debt would be $90 billion.  Indeed California provides the nation’s most generous state pension benefits -- 24 percent better than the next highest state -- and lifetime health care coverage starting at age 55 for most employees.

The devastation of local government budgets is proportionately worse.  The City of San Diego owes $2.4 billion in retiree benefits debts and San Diego County owes $1.8 billion. The City of San Jose’s salary and benefits costs have risen 45% in six years, more than twice the national average.  Contra Costa County owes nearly $4 billion in retiree benefits debt and the cost of paying it off would exceed 30% of the county’s budget

If you wonder where our education money will be going, the LA Unified School District owes $10 billion (more than $2000 per student, per year) just for its employee and retiree medical promises.  The state Legislative Analyst reports that the Fresno school district’s $1 billion retiree health care debt threatens its fiscal solvency.

Because as a matter of law the retirement promises made to current government employees must be kept, the best way to resolve this crisis is to establish limits on retirement benefits offered to new employees.

Although Governor Schwarzenegger has established a commission to investigate public employee retirement debts and recommend solutions, it is very unlikely any meaningful solutions will be adopted by state legislators beholden to union bosses or too worried about their next election.

The Public Employee Benefits Reform Initiative will reduce retirement benefit costs by increasing the full retirement age for all new government employees to 55 for police officers and firefighters, 60 for other safety employees and Social Security age for the rest.  With the exception of those who risk their lives for our safety, there is no reason government employees performing routine jobs should retire before their private sector counterparts.
 
In addition to requiring responsible full retirement ages, the initiative sets limits on benefit levels that reward a full career’s work with about 65-70% of average salary earned during an employee’s final five years.  Financial planners know this income replacement level provides a strong base for a secure retirement, especially when additional personal savings are included.

Although a previous pension reform effort tried to move government employees to defined contribution plans such as 401(k)s, with protections against expensive salary spiking, pension fund raids and accounting abuses, the current defined benefit system can be retained at a much lower cost. The lower cost of the initiative’s benefit limits for non-safety employees in Social Security is about 6% and in line with the 401(k) match offered by many private sector employers.  The initiative also allows fiscally responsible government agencies to establish defined contribution plans.

Preliminary estimates show the Public Employee Benefits Reform Initiative will save more than $500 billion during the next thirty years.  These remarkable savings can help pay down the debts owed to current employees and retirees.  If voters do not impose reasonable limits on public employee retirement benefits, politicians will call for tax increases to retire these huge retirement debts in the years ahead.

Of course, changing Proposition 13 will likely be their first resort.

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YESTERDAY DR. RICHMAN AND HIS FOUNDATION FILED THEIR BALLOT MEASURE WITH THE CALIFORNIA SECRETARY OF STATE'S OFFICE.  FOR MORE INFORMATION ON IT, GO HERE.
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Keith Richman MD is a health care executive with Lakeside Healthcare Inc. and serves as the President of the California Foundation for Fiscal Responsibility, a 501(c)4 organization dedicated to resolving California’s public retiree benefits crisis.  Dr. Richman represented the 38th Assembly District covering the north San Fernando Valley, Simi Valley and Santa Clarita from 2000-2006.