Tax Reform

The Pension Reform Battle in California

The unfunded liabilities that stretch across states and municipalities has transformed from a major problem into a full blown crisis. Stockton, CA recently filed for bankruptcy along with several other municipalities across the country. The cities of San Diego and San Jose, in traditionally liberal California, have passed ballot initiatives that overhaul pension systems. Even Rhode Island recently passed significant pension reform of its own. Lawsuits abound between Union officials and taxpayer advocates who insist that pension liabilities must be solved.

News about pension reform efforts and the scope of the problem is everywhere. A new study released by StateBudgetSolutions.org estimates the total unfunded liability at $4.8 trillion.

As mentioned previously, this is not a partisan issue, but one of mathematics and fiscal responsibility. Mayors and labor advocates from Willie Brown in San Francisco to Rahm Emmanuel in Chicago have come out in favor of significant reforms. Most people are acknowledging the truth: that switching from a traditional defined benefit style plan to a defined contribution (or 401 (k) style) plan is a fiscal imperative.

Nowhere is this more apparent than in the recent pension fight in Sacramento. With the unfunded pension liabilities for the state of California growing and the public becoming more aware of the problem through city ballot measures and municipal bankruptcies, the stage was set for Governor Jerry Brown to take action. Governor Brown developed a compromise plan to switch new state hires into a defined contribution plan as well as some other measures to trim the budget. However, entrenched interests would have nothing of it. What actually passed in session was piece-meal small reform package. The retirement age to receive full benefits was raised, there was talk of reigning in automatic cost of living adjustments, and a few other minor cost cutting measures were also thrown in. But, the major reform that Governor Brown worked to pass, the defined contribution hybrid plan for new hires, was taken off the table.

As a result, California’s pension crisis continues to grow and significant reforms have been crippled. Despite this bad news, there are some rays of hope to the California pension problem. Governor Brown has backed significant reforms and worked with Republican legislators to implement real solutions. Furthermore, the people of California are waking up to the problem and are calling for it to be addressed head on (see San Jose). Former liberal California Governor Gray Davis is even getting behind these types of significant pension reforms as well.

When all this is put together, an informed public calling for significant change, Democrat and Republican leaders coming together to implement real solutions, and party leaders recognizing the necessity for action, the forecast seems to improve. Although California pension reform was stalled this time around, it will come back (out of sheer fiscal reality). As more states begin to take action and the crisis gets even worse, there is a simple realization that is sweeping the nation: the unfunded pension liabilities issue is one of fiscal responsibility and basic math, not a partisan one.


In Depth: Tax Reform

Mainstream economists, small business owners and taxpayers across the country understand that growth-oriented reforms mean increased opportunity for all. As demonstrated by the annual Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index, sound tax and fiscal policies are critical to economic health, allowing businesses and households to flourish. A …

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