Defined Benefit Plans Per Se Are Not The Problem

The LATimes and CALMatters have been running an excellent series on public pension issues. However, the most recent article obscures a key point, which is that the “hybrid” plan Governor Brown proposed in 2012 for new employees would not have had any impact on scheduled pension costs. Governor Schwarzenegger made a similar mistake in 2005 when he proposed defined contribution plans for new employees.

Defined benefit plans per se are not the problem. DB plans work just fine when they are honestly governed, reported and funded. See, eg, the healthy defined benefit plans at Ontario Teachers’ and Berkshire Hathaway. California’s pension costs are rising because the state’s defined benefit pension plans have not been honestly governed, reported and funded. That dishonesty continues today.

Note also the following:

  • The article included a graphic entitled “State and Teacher Retirement Costs” that understates those costs because it doesn’t include teacher retirement costs at the school district level.
  • The article reports that the enacted pension reform would save $28-$30 billion of savings over 30 years but then incorrectly compares those savings to unfunded liabilities, which are present values, not pre-reform expected costs over 30 years. The correct comparison would be to ~$500 billion of pre-reform expected costs over that same period of time.
  • The article quotes a spokesperson for financial interests who oppose pension reform as saying “unfunded liability is not the same thing as debt” and that pension liabilities are just “snapshots in time.” But whether obligations are characterized as “debt” or “unfunded liabilities,” the consequences for citizens are the same: crowd-out of services and higher taxes (in fact, as the Stockton bankruptcy illustrated, unfunded pension liabilities can be treated as the most senior form of debt) and debt reports, like unfunded liability reports, are also snapshots in time. Eg, the State Treasurer’s Debt Affordability Report and the State Controller’s Unfunded Retiree Health Care Liability Report are both snapshots in time. That doesn’t make the obligations — however they are labeled — any less real.

California’s public pension and other retirement costs are at the inception of a steep rise caused by dishonest governance, reporting and funding. The consequences for citizens are enormous. To protect them, elected officials and candidates must fully understand the math.

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