Unions seek bad news on California reform initiative
Opponents of San Jose Mayor Chuck Reed’s constitutional amendment to allow changes to pensions in California were quick to trumpet an analysis of the initiative by the nonpartisan Legislative Analyst’s Office. Adversaries claimed the report found the initiative could potentially cost state and local governments ‘billions of dollars.” But in a rather obvious case of selective quotation, opponents left out the rest of the story, which was that the LAO found that any higher costs would be offset by tremendous pension savings for governments in the Golden State.
The nonpartisan LAO, whose job it is to evaluate the potential fiscal impact of ballot initiatives, noted in its actual study that among the several features of the pension initiative, dubbed by supporters the Pension Reform Act of 2014, is a requirement that underfunded pension plans in California must produce annual status reports which specify what kinds of actions the plans would have to take to reach full-funding within 15 years. That’s basically half the time-frame that most plans currently use.
Under a 15-year time frame, most governments with underfunded plans would have to sharply increase their current pension contributions (in the same way that shortening the length of any loan increases its monthly payments). That’s the bad news. The good news, as the LAO makes clear (but as opponents of the initiative neglect to mention), is that over time governments that adopted the accelerated funding levels would experience major savings that would “generally more than offset” the additional costs.
Moreover, as the LAO study clearly notes, no government would be required by the initiative to adopt the 15-year amortization schedule. Rather, the yearly funding reports are designed first of all as a way of ensuring that citizens have accurate information about the financial shape of their local pension system, so taxpayers could make more informed choices. Costs would only rise “to the extent that some government employers increase employer and/or employee contributions,” the report made clear.
Nonetheless, one group opposing the reform effort proclaimed that the measure “would be a financial disaster for taxpayers and retirees alike,” after the LAO report appeared in late December.
Pension accounting is a complex and sometimes obscure area. One of the greatest challenges that Mayor Reed and his supporters will face in promoting the reform initiative–whose major purpose is to allow governments in California to change the rate at which workers earn pension benefits for work they’ve yet to do– is misinformation about what the initiative will actually require from governments and workers, and what it will cost taxpayers. The campaign has only just begun.