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Jerry Brown is focused on balancing California’s budget. He has proposed multiple initiatives including extending the temporary state income tax increase, and the outright elimination of redevelopment agencies, to no avail. Californians do not have an appetite for tax increases, and redevelopment agencies provide valued services that improve the quality of life for local communities. Brown has now set his sights on public pensions, and vows to reform them to be a more sustainable benefit for public employees over the long term.

Under the current system, public pensions are unsustainable and show evidence of abuse. They are badly underfunded at an estimated $500 billion, though that figure may vary based on estimated contribution rates, time horizons, and actuarial rates. Brown would like to reform the public pension system to reflect the following:

  • Prohibit pension “spiking”: the practice which includes employees manipulating their overtime figures compared to prior years, accumulating significantly more unused vacation days compared to prior years, and/or creating special compensation to inflate the benchmark rate used to calculate their pension benefit.
  • Replace the defined benefit system: create a “hybrid” pension benefit system more reflective of a traditional 401(k) plan commonly found in the private sector, which would allow the beneficiary to bear some of the investment risk, opposed to the employer bearing all of it.
  • Repeal beneficiaries from being able to purchase service credits in order to retire early.
  • Place limits on the maximum receivable pension benefits.
  • Ban “double-dipping”: the act of employees collecting multiple pensions from multiple jobs.

The public union-backed coalition, Californians for Health Care and Retirement Security, expectedly criticized Brown’s plan. Their comments included that they had already conceded “hundreds of millions of dollars” and “these changes fly in the face of collective bargaining law.” The public unions understandably do not want to give up their lavish benefits, but the fact of the matter is that they are not affordable for the State, and the benefits come at the expense of taxpayers. Hundreds of millions of dollars is not much of a concession when the state is running a deficit in the tens of billions of dollars, and their public pensions are underfunded by hundreds of billions of dollars.

It is far too early to if Jerry Brown will be successful in his public pension initiative. Public unions will put up strong opposition, and they have very powerful lobbying groups. Public pension reform is critical to the economic health of the state, and a compromise should be reached. Brown is an experienced politician, and has proven the ability to push through reform in the wake of opposition. While the task ahead will be very challenging, Brown is committed to finding various means to balance California’s budget.

Billy Schmohl
Investment Information Coordinator

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