USC Price School of Public Policy

Public Pension Panel

Experts Examine State’s Public Pension Crisis

By Matthew Kredell

Bedrosian Center Hosts Public Pension Panel

USC’s Bedrosian Center on Governance and the Public Enterprise and the American Society for Public Administration hosted a panel discussion on California’s public pension crisis May 19 at the Radisson Hotel across from the University Park campus.

Moderated by Bedrosian Center director Daniel Mazmanian, the panel included Stuart Drown, executive director of the Little Hoover Commission; Ed Derman, deputy chief executive officer of the California State Teachers’ Retirement System; Julie Butcher, regional director of the Service Employees International Union; Bruce Channing, city manager of Laguna Hills and president-elect of the City Managers Committee of the League of California Cities; and Juliet Musso, associate professor and director of graduate programs in public policy and management at the USC School of Policy, Planning, and Development.

Though the panelists came from differing backgrounds, they all agreed that public pension is a problem that must be addressed in California.

“This is not a simple issue,” Mazmanian said. “It can’t be resolved in a crisis atmosphere, so we need this kind of dialogue. What our school tries to do is bring people of contrasting viewpoints together and give them some policy options to discuss. Then you bring out their analytical side, their thoughtful side, their non-antagonistic side, which is the value of doing these kind of programs.”

The panelists discussed a report by the Little Hoover Commission, an independent and bipartisan state oversight committee, which asserted that California’s pension plans are dangerously underfunded to the point that counties and cities will be forced to reduce services and layoff employees to meet pension obligations in the future unless aggressive reforms are made.

According to the Little Hoover report, most retirement systems must deliver investment returns of 8 percent annually to keep pace with pension obligations. When investment returns fall short, the government is obligated to make up the difference. In another five years, pension contributions from government are expected to jump from 40 percent to 80 percent and remain at those levels for decades. Little Hoover estimates that the California State Teachers’ Retirement System will run out of money to send pension checks to retired teachers around the year 2040.

“All the big plans are overextended,” Drown said. “We looked at the 10 biggest plans, covering 90 percent of California’s public employees. All of them were funded below 80 percent. Without new revenues, governments will be forced to shift money from services to afford these rate increases. That’s going to lead to pay freezes, layoffs, park closures, shorter library hours, fewer public health inspections, fewer hours at the senior center.”

Causes of this problem discussed by the panel and in the Little Hoover report include the coming influx of retirements as the generation born during the post-World War II baby boom begin to leave public service. People also are living longer while still retiring in their 60s. The average retirement age in California and the nation is 62.

Another contributing factor is the troubled economy. Pension portfolios tumbled during the stock market crash in 2008. The California Public Employees’ Retirement System, which manages the largest public pension fund in the United States, saw its assets tumble 30 percent from a high of $260 billion in October 2007.

Government leaders have failed to plan for the cyclical nature of the economy. Pension benefits often are increased when the economy is good, and those increases are difficult to overturn once the economy weakens. In 1999, at the height of the dot-com boom, the state legislature passed a bill that enhanced pension benefits for California Public Employees’ Retirement System and set off pension increases across the state. Total state payroll costs increased 84 percent in the 10 years after the bill passed.

“This is not a problem that is going to be solved overnight, and there is no quick fix to the problem,” Banning said. “But there are things that can be done. We’ve got to stop the bleeding wherever we can and as quickly as we can. We believe that should be done at the bargaining table.”

The Little Hoover report makes several recommendations. The most controversial is to reduce future benefits for current workers. Pension benefits already accrued would not be touched. Also recommended is a hybrid system similar to what is used by the federal government, which has a three-tiered retirement program based on a modest pension formula supplemented by a 401k plan with salary matching up to 5 percent and social security. Little Hoover also suggested capping income for use in pension calculations and eliminating pensions for public officials.

Potential solutions are easily discussed but difficult to reach. Any legislative reductions likely would get caught up in litigation, meaning a solution is better reached at the bargaining table between unions and the governments.

“I kind of find this one to be depressing for a public policy person in the same way I find the social security problem to be depressing,” Musso said. “Some relatively moderate adjustments can put a lot of these systems on solid footing, and then the whole thing becomes so partisan and so ideologically infused that you make no progress at all.”



Panelists, from left: Bruce Channing, Laguna Hills city manager; Juliet Musso, SPPD associate professor; Ed Derman, deputy CEO, California State Teachers’ Retirement System; Julie Butcher, regional director, Service Employees International Union; Stuart Drown, executive director, Little Hoover Commission; and Dan Mazmanian, Bedrosian Center director
Photo by Ben Dimapindan