Public Employee Pension Reform

Title: Public Employee Pension Reform
Principal Investigator: John Shoven
Dates: May 10, 2011 - February 9, 2012

Sponsor: The James Irvine Foundation

Background and Project Goals
Through research and public outreach, we seek to inform and impact California’s current public pension system debate and to ensure that reforms are fact-based, fair, and sustainable.

Public awareness of California’s public employee pension problems has grown substantially over the past year. That growth is due in part to the effects of the recent recession on pension fund assets, continued pressure on state and local finances, and growing media coverage of public employee compensation.

A few public officials have launched reform efforts, with some more effective than others. Most, including the recent proposal by Governor Brown,[1] do not adequately capture the magnitude of the underfunding issue nor do these proposals have significant impact. For example, Governor Brown’s proposal focuses on high-profile reforms (e.g., eliminating pensions for convicted felons, a prohibition on salary spiking, etc.), but it does not change benefits or other rules for existing employees (with the exception of eliminating “Air Time,” which is the purchase of additional service credits) or otherwise substantially improve pension system financial health. Consequently, these reforms are unlikely to result in significant savings. In fact, they will likely save less than the Schwarzenegger reforms from last year.

At the local level, there have also been limited reforms. Last month, San Jose firefighters agreed to 10% compensation reductions, including those for pension benefits, in order to minimize budget cuts. However, city officials have since indicated that these reductions are insufficient to avoid lay-offs and other budget reductions in the coming fiscal year. In the city of Los Angeles, a recent reform measure is projected to save $69 million in the coming fiscal year; that represents just one-half of one percent of the estimated long-term shortfall of $15.5 billion.[2] Most other local reform measures apply only to future employees and provide modest savings.

Many public officials have even demonstrated an unwillingness to begin a dialogue on reform. That reluctance is driven by understandable political constraints, and it is exacerbated by disagreements over the appropriate discounting of pension system liabilities, appropriate rates of return, governance, and a lack of consensus about appropriate policy options. Those disagreements divert attention from the growing consensus that public pension systems are in poor financial shape and that reform is required.[3] A project that focuses on both analysis and reform options can inform public officials about pension fund health, but more important, it can highlight a path to sustainable pension systems.

The purpose of this eight-month project,[4] to be housed and led by Stanford University and RAND, is to advance key research and outreach efforts­and to identify policy options­that lead to significant pension reform at the state and local levels in California. (This project is limited to CalPERS, which covers both state employees and most public employees in local government, and to independent pension systems, i.e., those covered by the County Employees’ Retirement Law of 1937. The project excludes CalSTRS and the University of California Retirement System.) The identification of policy options will play a key role in the development of fact-based reforms throughout California and will likely be exportable to other U.S. states.

The research portion of this effort involves measuring the funded status of major state and local pension systems, projecting government and employee contributions required to restore pension systems to a healthy status, and modeling the impact of pension obligations on other state and local expenditures. Outreach efforts will focus on closing the knowledge gap for elect