Governor Jerry Brown, as he leaves office is warning that California and its public agencies are on the road to “fiscal oblivion” if pension benefits can’t be adjusted down.
The media have been celebrating Governor Brown’s management skills at reversing the $27-billion state deficit he inherited from in 2010 from his predecessor, Arnold Schwarzenegger, to leave office in January with an alleged $13.8-billion surplus and a $14.5-billion rainy-day fund balance.
But Brown recently told reporters that California will be financially distressed again if the California Supreme Court rules in a case titled Cal Fire Local 2881 v. California Public Employees’ Retirement System against Brown’s 2012 California’s Public Employees’ Pension Reform Act that stopped the state and local selling of “airtime” that allowed public employees to spike their pension benefits by purchasing up to five years of un-worked service credit seniority.
California drastically increased public employee pension benefits in the fall of 2003, when the state allowed employees to purchase “airtime.” Prior to the pension spike, a 50-year-old fireman making $89,000 a year could retire at age 50 after 30 years of service and collect an $80,100-a-year pension with life expectancy of 76.3 years.
But under “airtime,” the fireman could purchase extra years of seniority at a cost per of $0.18022 per year for every $1 of salary. For $80,197.90, the fireman could increase his pension by $13,350 to $93,450. Such an investment in “airtime” would return a spectacular income stream of $351,105 over the next 26.3 years of life expectancy.
With many California public employees purchasing “airtime” to retire at 50 and make more than when employed, Democrat Brown ended the practice in 2013 for new hires after criticism that the practice amounted to a “gift of public funds” to his union allies.
Stanford University’s Institute for Economic Policy Research found that despite the state terminating “airtime” for new employees in 2013, the annual cost of funding the California Public Employee Retirement System (CalPERS) rose by 400 percent from 2003 to 2018 and would be up by 704 percent by 2030.
With an estimated unfunded pension liability of $464.4 billion in 2015, Stanford researchers estimated that the average unfunded liability per California household jumped from $9,127 in 2008; jumped to $21,491 in 2015; and would be over $40,000 in 2030.
The California Supreme Court heard testimony in Cal Fire v. CalPERS on December 5 over claims by the union that a 1955 decision set a precedent, referred to as the “California Rule,” that bars state and local government from reducing any promised retirement benefits without equivalent new compensation.
Lawyers for the state argued that the California Constitution is not a “straitjacket” and that making pension benefit changes should not be illegal under the California Constitution:
If the impairment is limited and does not meaningfully alter an employee’s right to a substantial or reasonable pension or if it is reasonable and necessary to serve an important public purpose, it may be permissible under the contract clause.
The biggest challenge for Brown’s effort to eliminate the California Rule is that he successfully lobbied the state legislature to pass collective bargaining for public employees in 1982, just as he was retiring from his second four-year term as governor.
The Bureau of Labor Statistics reported that average cost for the average private sector employee contribution for retirement and savings was 3.9 percent, and the average public-sector cost was 11.6 percent.
But even if the California’s Public Employees’ Pension Reform Act survives it Supreme Court appeal, CalPERS’ 2018 average cost for pensions as a percentage of worker compensation was 20.4 percent for State Industrial; 21.5 percent for State Safety; 43.5 percent for State Peace Officer/Fireman; and 55.2 percent for Highway Patrol.
The California Supreme Court is expected to release a decision regarding the California Rule in early 2019, just after Brown leaves office on January 7.