What is the Democratic Party's Solution to the Pension Crisis?

With some cities in bankruptcy and others on the verge, the status quo in California -- and around the country -- is no longer tenable

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When the financial crisis strained state and local budgets, public employee compensation became the subject of national political controversy, most notably in Wisconsin. Conservatives tend to think government workers are overpaid, whereas liberals often defend their compensation as a model for what the working class is due. If I lived somewhere other than California, I might think that the impact public employee pensions are having on cities here was made up by the right as a sort of reductio ad absurdum scenario -- heed our warnings or you could wind up like this!

But the fact is that many California cities are either deep in debt, in bankruptcy or on the verge of crisis due to the pension obligations they owe present and retired workers, especially police and firemen. In fact, the impact of pension liabilities here is so great that it's changing the nature of the political debate: there is no longer a credible argument that maintaining the status quo is tenable.

The cautionary tale many observers cite is Vallejo, Calif. As Michael Lewis put it in his recent dispatch, "Eighty percent of the city's budget -- and the lion's share of the claims that had thrown it into bankruptcy -- were wrapped up in the pay and benefits of public-safety workers." He added that "the city had 1,013 claimants with half a billion dollars in claims but only $6 million to dole out to them." Thus the sad, once unthinkable scene people encounter when they visit what's left of their municipal government headquarters: "The lobby of city hall is completely empty. There's a receptionist's desk but no receptionist. Instead, there's a sign: to foreclosure auctioneers and foreclosure bidders: please do not conduct business in the city hall lobby."

Back in January, when the New York Times investigated what bankruptcy meant for Vallejo in practice, it looked like a worst case scenario for conservatives and liberals alike: "The four unions representing city employees claimed that California law protected their contracts, but the bankruptcy court ultimately ruled that the city could cancel its collective bargaining agreements. That, in turn, forced the unions to agree to deals that they would not have accepted otherwise. The city has cut retiree health benefits from $1,500 to $300 a month and stopped making payouts on accrued leave time," the Times reported. "But pension plans for retirees and current city employees, including one that allows police officers to retire at 50 with as much as 90 percent of their pay, remain untouched. The city chose not to test whether messing with pensions would be allowed even in bankruptcy, and so remains on the hook for some $195 million in unfinanced pension liabilities. Meanwhile, much of the savings in the renegotiated union contracts come from severe work-force reductions: the police department is down to 90 sworn officers from 155 in 2003, and the fire department was slashed from 122 people and 8 firehouses to 70 people and 5 firehouses."

If there's anything good about what happened in Vallejo, it's that the situation there makes catastrophic economic forecasts about other cities believable, rather than mere abstractions that no one can quite bring themselves to believe or address. For example, take San Diego: "Dr. Joe Nation, a Public Policy Professor at Stanford University, said if nothing changes the city can still expect, on average, 95 percent of its payroll over the next 18 years will go toward pensions and retiree health-care costs."

95 percent! Imagine the misery if a city the size of San Diego goes the way of Vallejo.

I have a basic grasp of what Republicans would do in cities like San Diego. In fact, there's an initiative that pension reformers are trying to qualify for the local ballot there, says the Orange County Register. "It would require all future employees to enter a 401(k)-style retirement plan, prevent pension spiking by current employees, force all employees to pay a greater portion of their pension costs, and impose a five-year salary freeze across city government," the newspaper reports. "Opinion polls show that an overwhelming majority of Californians support comprehensive pension reform. Jon Coupal, president of the Howard Jarvis Taxpayers Association, explained, 'San Diego is the tip of the spear. If we can shift the balance of power in San Diego, it could be done anywhere.'"

What I don't understand is what the Democrats who make up a majority of the state's residents and legislature are planning. The liabilities are too big to solve the pension problem via tax increases alone. The status quo is destroying the ability of government to function effectively, or do much of anything besides pay out retirement benefits. But reforms like the one backed by Howard Jarvis are non-starters for a lot of Democratic politicians. The Golden State is in particularly bad shape, but the pension crisis caused by unaffordable promises made to public employees is going to affect states and cities all over the country. Permitting these entities to reach the point of bankruptcy only increases the eventual pain its creditors and even its employees suffer.

An editorial in a San Francisco newspaper is the closest I've seen to a tenable Democratic solution. "The first element of any new pension plan should be progressive in scale: capping pensions at, say, $100,000 (or lower); eliminating pension spiking; and requiring high-paid employees to contribute a higher percentage to the fund than low-paid workers would make sense," it argues. "Policy makers should treat this as what it is, a pay cut -- and any cuts should fall disproportionately on those who are more able to afford it." And then there's the kicker: "There should be no pension reform without tax reform. If San Francisco is going to ask its employees to do more to balance the local budget -- and that probably has to happen -- then city officials should be willing to ask the richest residents and businesses to share the pain too."

Has that San Francisco newspaper articulated the approach that Democrats will embrace nationally? Whatever the answer, these pension problems cannot be put off much longer, and in California, Republicans are going to be first to go before voters with a specific package of reforms.