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Kevin D. Korenthal: Pension cuts to the rescue

Right Here, Right Now

Posted: August 31, 2012 2:00 a.m.
Updated: August 31, 2012 2:00 a.m.
 

The California budget deficit is growing daily and the only plan that Democrats and the governor can come up with to solve the problem is higher taxes and spending cuts to education and welfare. Not only is raising taxes ill-advised in an ongoing recession, but it will fail to stem the bleeding in the state budget. And while spending reforms in education and welfare would be welcome, the shell game that Gov. Jerry Brown is attempting to play is unlikely to lead to real reform.

It’s true that the Legislature has few options for rectifying the $16 billion budget deficit that it is faced with, but I believe that it’s possible to identify solutions by exposing the parts of the economy which have most contributed to the overspending. The item topping that list is public pensions.

California’s public employee pension deficit reached $535 billion in 2010 and is projected to reach more than $800 billion in 2013. Supporters of the pension status quo have presented far lower numbers using the same dishonest accounting method that led to the U.S. mortgage market failure in 2008. Even though pension funds in the market are producing a 4 to 5 percent return, forecasters have assumed a return as high as 9 percent when predicting future pension liability. This is an important distinction because the low-ball forecasting is part of the reason lawmakers continually kick the can down the road without repercussions. It also predicts even larger deficits in the future, especially if the stock market continues to tread water or turns negative.

Stockton, a central California city of 300,000 recently filed for Chapter 9 bankruptcy protection after an extended deadline for negotiations with creditors, including the union pension programs, came and passed without a resolution. This is just one city in which pension liabilities have placed it on precarious financial footing and it could lead to a wave of such filings in the near future.

But it doesn’t have to be this way. Several California communities, including the County of Ventura, have shown the way forward in reforming municipal pensions. Ventura County has taken several baby steps over the years which have cumulatively helped reduce the deficit it faces in the future. Most recently, the county’s Supervisors voted unanimously to limit the ways many workers can use vacation and sick pay to pump up the amount they’ll receive in retirement. The creative math that makes it possible for some municipal workers to receive more in retirement than they received while working is one of the biggest scams helping exasperate the pension crisis in California.

The communities of San Diego and San Jose took more drastic action against pensions in the June 2012 elections. Both of these communities asked voters to weigh in on substantial pension reform measures that require more contribution by future employees. San Diego’s plan gives workers the option of contributing more or opting for a less lucrative package of benefits. The San Diego ballot measure also requires a vote by the people before any future increases in pension benefits can be made.

San Jose’s plan is similar to San Diego’s but includes reforming the pensions of first responders, something deemed too politically risky in the past. Both of these ballot initiatives were passed by overwhelming margins, which suggests that pension reform is popular with voters in these communities.

And if pension reform is popular with voters in politically diverse cities like San Diego and San Jose, it stands to reason they’ll be popular statewide.

Brown floated very mild pension language at the beginning of his latest term in office that local Assemblyman Cameron Smyth wrote into a law that went nowhere. Yet with just days until the end of the session, Democrats say they’ll pass a pension reform bill. In the meantime, the governor has placed his bets on a ballot measure that raises the sales tax on everyone and tax rates on families making $250,000 a year or more. He’s calling it a “millionaire’s tax.” Call it what you want, given the failure of Proposition 29, the so-called tobacco tax sponsored by cycling legend Lance Armstrong, the prospects for Brown’s tax hike are dim.

So while you’re celebrating Labor Day this Monday, keep in mind the debate that rages on in Sacramento between those seeking to reform expensive public sector pensions and those who are beholden to the status quo.

Kevin D. Korenthal runs a small business and is a 30-year resident of Canyon Country.

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