LEGISLATIVE REPORT: PENSION LAW AND POLICY
By Michael Karsch
The Sacramento Bee recently (end of March) reported that California public opinion polls about government pensions in our state indicate that public pensions are not as much of a “big problem” or “somewhat of a problem” as they were in 2011, when 83 percent said so; today those holding similar negative views of pensions is 63 percent. The Bee noted that the year after the earlier polling was when Gov. Gerry Brown got his pension reform (not all of his original proposal, but it did include hikes in what government employees must pay into their pensions with CalPERS) passed by the Legislature, and this may have signaled greater confidence. More recently the State Supreme Court threw out the “air time” add-on to benefits with CalFire, making another reform. But the U.S. Supreme Court also recently refused to hear the appeal by the City of San Diego to California rulings that this city’s attempted reform of its pension system in 2012 by voter initiative to convert its pension to a 401(k) for new hires. Also, it should be noted that the CalFire case showed confidence that the California Rule will continue. There are other cases coming before the State Supreme Court that address other changes in public pension law; these will be considered later this year.
The related issue of pension funding levels and unfunded liabilities are food for the skeptics. Connecticut has the lowest pension funding in the country, per YankeeInstitute.org. Wisconsin is number one, and California is 30. Connecticut’s unfunded pension liability is 45.13 percent of its gross state product, according to a report by the American Legislative Exchange Council. The state has only 20.28 percent of the money needed to keep its future promises to state employees and teachers.
Most financial advisers to pension plans used by government agencies across the country report concern about the viability of such plans due to their high unfunded liability levels. As I have reported in the past, there is another way to look at such funding liabilities. The Wall Street Journal reported on April 1 that the theory about how government agencies can pay for such over-indebted pension funds is voiced by a professor, Stephanie Kelton, at Stony Brook University (the State University of New York at Stony Brook) on Long Island. Since the 1990s she has promoted modern monetary theory (MMT). As I read it, this means that government agencies do not cease to exist, close down, move, etc. when finances get tight. They are not like a private business that can go bankrupt. Governments can go into debt, print money and straighten out their finances, according to the theory. Some cities have gone bankrupt, but these are unusual. “With inflation and interest rates now very low, the government has plenty of room to borrow and spend more, MMT advocates say.” Yes, mainstream economists are reconsidering the danger of deficits, Dr. Kelton says. Democrats, like Sen. Bernie Sanders and Congresswoman Alexandria Ocasio-Cortez have been consulting with Professor Kelton on how MMT can be useful in expanding government spending more for their goals. Is MMT an answer for escalating unfunded liabilities in government pensions?