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Rhode Island is a tiny state with just over one million people in one thousand square miles. California is 37 times more populous and many times that size. And yet, when it comes to public employee pension reform, the tiny state of Rhode Island is acting both bigger and bolder.
For years, Rhode Island lawmakers watched fearfully as the state’s required pension contributions, the second-fastest-growing line item in its budget, exploded, doubling from 2003 to 2010. Without significant reforms, the liability was on track to double again by 2013. Lawmakers knew that if the pension liability remained unchecked, it would severely limit funding for other budget priorities.
California finds itself on a similarly unsustainable path. Earlier this month, the California Teachers’ Retirement Board announced that the $152 billion pension fund faces a $64.5 billion shortfall over the next three decades, an increase of $8.5 billion from last year. To put this in perspective, California spent $64.4 billion on K-12 education during 2010-11. Unless California acts to make its pension system more sustainable, the K-12 education budget – along with other important government priorities – will likely be carved up to feed the ever-growing pension deficit.
In Rhode Island, despite the growing recognition of the pension problem, the political obstacles to fixing it were high: The state is heavily unionized, and Democrats have held the legislature since World War II. But faced with numbers that threatened to devour the rest of the state’s $8 billion budget, an unlikely alliance between Gov. Lincoln Chafee (elected as an Independent), State Treasurer Gina Raimondo, a Democrat, and legislative leaders who were getting pressure from their home-district unions to avoid making any significant changes to the pension system, proposed and pushed through historic pension reform, saving $4 billion.
While most states just patch over their pension problems by slashing new teacher pensions or trimming minor provisions, Rhode Island made painful but necessary changes to its whole system. The reform law raised the retirement age for most workers and created a hybrid plan that combines a 401(k)-style account with a smaller defined benefit. The law also suspended cost-of-living increases to retirees for five years; after that, retirees will receive increases only if the pension fund is healthy. These changes, crucially, apply to new, current, and retired employees. While the law likely faces a legal challenge, the lawmakers wrote the bill to deflect that. They ensured that the reforms reflected a critical financial situation, used a temporary adjustment, and sought to share the burden across current employees, retirees, and taxpayers – a formula that also worked for similar reform in Minnesota.
California should take Rhode Island’s example to heart. Last fall, Gov. Jerry Brown acknowledged California’s dire financial situation when he released a bold 12-point proposal for pension reform. The proposal includes fundamental fiscal reforms such as raising the retirement age for new employees from 55 to 67, enrolling new employees in a hybrid plan, and increasing employee contributions to one-half of total pension contributions. The Democratic-controlled Legislature, however, continues to punt on substantive reform, focusing instead on relatively insignificant measures like eliminating pensions for convicted felons.
But while the political will is lacking, public will is not. In a nonpartisan poll last December, 83 percent of Californians thought that public pension costs were a problem. Sixty-eight percent of adults and 64 percent of public employees favored switching to a 401(k)-style plan. And earlier this year, in a surprising piece of political one-upmanship, the Republicans in the Legislature announced a package of bills identical to Governor Brown’s proposal.
California’s Democrats are beginning to look dangerously out of touch with budget realities – and with their constituents. Bipartisan support is crucial for pension reform, if only because the bar for implementing the governor’s proposal is high. Since teachers’ pensions are not subject to local collective bargaining, it will take nothing short of an amendment to the state constitution – a high bar indeed.
While California should recognize the serious consequences of pension reform for state employees and retirees, the state must act to secure pensions and protect its budget. Rhode Island is small but played big. California is big, and it needs to stop playing small.
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