Jerry Brown Goes To Court For Kids
According to the Sacramento Bee, California Governor Jerry Brown has asked the California Supreme Court to accelerate consideration of a lawsuit the outcome of which is existential for California classroom funding.
First, some background: The costs of government employee pensions are supposed to be shared by employees and taxpayers. Both contribute money upfront in the expectation that the sum of upfront contributions plus investment earnings on those contributions will be sufficient to make the pension payments. But if there is a deficit, only taxpayers are on the hook.
That isn’t a problem if upfront contributions are fairly set. But in California they are not. That’s because of self-dealing by government employees in charge of state pension fund boards, who establish artificially-low upfront contributions, which is the only cost they share. That leads to huge deficits that crush services for citizens.
Eg, pension costs in San Francisco Unified School District last school year were 3x the costs of just four years earlier. That meant under-staffed classrooms and under-paid teachers. While affluent San Franciscans can send their kids to private schools or move to suburbs where schools are often run as public-private partnerships, that’s not an option for most parents of 55,000 public school kids in that city. To add insult to injury, the city just imposed a regressive tax increase to cover up the soaring pension costs, further burdening that city’s shrinking middle-class population. None of that would have happened had upfront contributions been fairly set and funded. Pension fund board members were warned but chose to act unfairly.
This is where the lawsuit comes in. Pension deficits could be reduced if school districts could reduce unearned future benefit levels for current employees. The lawsuit asks whether California law prohibits such reductions. Government employees claim pension benefit levels in place when they start work cannot be lowered, even if not yet earned. Brown asserts differently.
Eg, let’s say an employee (“E”) who plans to work 30 years starts work on January 1, 2017 under a defined benefit pension plan that entitles employees in his or her work classification to retire at age 60 with a pension benefit equal to 2% times the number of years worked times the employee’s highest salary averaged over three years. Then, one year after E started work, the plan is changed to reduce the rate for that work classification from 2% to 1.9%. California’s government employee unions assert E’s pension rate may never be decreased, entitling E to accrue at the 2% level for all 30 years. (Yet at the same time they assert E’s pension accrual rate may be increased. In 1999 the state legislature and governor did just that — and even made the increase retroactive. As explained here, that constituted the largest non-voter-approved issuance of debt in California history.) In contrast, Brown asserts E should earn at a 2% rate for one year and 1.9% going forward. Just as current employees are not guaranteed not-yet-earned future salaries will equal or exceed their current salaries, they should not be guaranteed not-yet-earned future pension levels will equal or exceed current levels.
It’s not just schoolchildren suffering from pension deficits. Fast-rising pension costs are hurting teacher pay and LAUSD school board member Nick Melvoin reports “current teachers are struggling to pay for child care expenses, mortgage payments, and other living expenses as a consequence of this broken system, which--at best--only works for the fraction of teachers who remain for their entire careers.” Increased pension costs consumed more than 100 percent of schools’ share of California’s most recent tax increase, and there’s more to come. The Sacramento Bee reports rising pension costs have pushed some cities into insolvency. Spending on pension deficits by the state General Fund more than doubled in the last seven years, crowding out courts, social services and universities. All because of self-dealing by pension fund board members who refused to set upfront contribution levels fairly.
Warren Buffett has described pension costs as a “gigantic financial tapeworm that was born when promises were made that conflicted with a willingness to fund them.” That tapeworm is devouring the futures of millions of Californians. California’s Supreme Court should listen to Governor Brown.