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New Book Explores California’s Pension Crisis

New Book Explores California’s Pension Crisis
New Book Explores California’s Pension Crisis GUEST: Lawrence McQuillan, author, "California Dreaming: Lessons on How to Resolve America's Public Pension Crisis"

Tom: I AM TOM PLEDGING YOUR LISTENING TO KBPS MIDDAY. FINANCIAL MARKETS HAVE BEEN BOOMING GIVEN THE CALPERS TERRIFIC RETURNS ON INVESTMENT, THE BAD NEWS IS THAT THEY ARE ONLY 77% FUNDED AND PUBLIC PENSION FUNDS LOOK LIKE A DISASTER WAITING TO HAPPEN. AND THEY TELL US THAT ILLINOIS FUND IS ONLY ABOUT 40% FUNDED. WHAT WE HAVE TO DO WITH CALIFORNIA'S PUBLIC RETIREMENT FUND AND WHAT WE DID IN SAN DIEGO IS CHANGE FROM GUARANTEED BENEFITS TO GUARANTEE CONTRIBUTION. JOINING ME TO TALK ABOUT THAT IS LAWRENCE McCLELLAN AND HE IS AUTHOR OF THE BOOK CALIFORNIA DREAMING. THE BOOK IS PUBLISHED BY THE INDEPENDENT INSTITUTE OF OAKLAND. Tom: WHY DID YOU WRITE THIS BOOK? THE UNFUNDED PENSION DEBT IN CALIFORNIA IS THE GREATEST FINANCIAL CHALLENGE AT THE STATE LEVEL AND LOCAL GOVERNMENT LEVEL. UNLESS WE GET A HANDLE ON STEIN -- SKYROCKETING COST WE WILL SEE IT DIVERTED TO THE PENSION AND CORE GOVERNMENT SERVICES. Tom: WHEN YOU TALK ABOUT LIABILITY HOW MUCH TO PAY FOR PENSION? ABOUT $750 BILLION AND IT IS A HUGE DEBT. THIS IS MONEY THAT SHOULD BE IN THE GAME TODAY AND COULD ALREADY HAVE BEEN EARNED BY GOVERNMENT EMPLOYEES. THIS IS MONEY THAT SHOULD BE THERE AND THEY ARE TRYING TO SCRAMBLE TO FIND THE MONEY AND THEN THEY DIVERT MONEY FROM OTHER PROGRAMS AND DIVERT MONEY FROM OTHER PROGRAMS AND ESSENTIAL GOVERNMENT FOCUSES. THEN THEY DEVELOPED TO PENSIONS TO PAY FOR THE DEBT. AND THEN YOU ARE FACED WITH DETROIT AND THEN WE WILL MAKE FUNDAMENTAL CHANGES IN THE PENSION SYSTEM. Tom: HOW DID THE PENSION TSUNAMI HAPPEN? @HAPPEN BECAUSE POLITICIANS MAKE PROMISES THEY COULD NOT KEEP IN THE INCREASED PENSION BENEFITS OVER TIME AND NOT PUTTING IN ENOUGH MONEY YEAR-BY-YEAR TO COVER THE COSTS. IT'S JUST IRRESPONSIBLE MANAGEMENT AND EVEN THEN WE ARE SEEING GOOD RECORD RETURNS IT'S NOT ENOUGH TO GIVE US OUT OF THE PROBLEM. WHEN THEY ARE FLUSH WITH MONEY WHAT DO THEY DO EXPECT INCREASE BENEFITS MORE AND STOP CONTRIBUTING TO THE FUNDS AND HAVE A PENSION HOLIDAY AND IT DOESN'T SOLVE THE PROBLEM BECAUSE OF IRRESPONSIBLE BEHAVIOR. Tom: I THINK CALPERS IS 77% FUNDED AND I THINK THAT IS CORRECT AND WHEN YOU CONSIDER THE FACT THAT WE HAVE HAD AN UPMARKET SHOULD GET A 20% FUNDED? IT SHOULD BE OVER FUNDED AND THERE'S ALWAYS CORRECTIONS AND DOWNTIME. YOU KEEP YOUR ASSETS WITH A MUCH HIGHER LEVEL. IT'S A RESPONSIBLE WAY TO DO IT AND IF YOU LOOK AT THIS OVER JUST A FIVE-YEAR PERIOD THEY UNDERFUNDED PENSION PLAN BY $11 BILLION. AND THEY'RE NOT EVEN MAKING A GOOD-FAITH EFFORT TO PUT THE MONEY IN. WE REALLY NEED TO MOVE AWAY FROM THE TRADITIONAL BENEFIT APPROACH AND SHIFT TOWARD A MODERN 401(K) PLAN LIKE THE PRIVATE ONE HAS DONE DECADES AGO. Tom: WE HAVE OFFERED THIS NEW BOOK CALLED CALIFORNIA DREAMING THAT HE HAS OFFERED THIS NEW BOOK IN THE CITY OF SAN DIEGO WAS ALMOST DRIVEN TO THE POINT OF BANKRUPTCY DUE TO PENSION LIABILITY, HOW HAVE OTHER CITIES DEALT WITH PENSION PROBLEMS? SOME STATES HAVE AND MAY HAVE GONE TO A 401(K) PLAN AND WE'VE BEEN SLOW TO MOVE IN THIS DIRECTION AND WE HAVE SEEN MANY PLACES GO BANKRUPT BECAUSE THEY COULD NOT PAY PENSION EXPENDITURE -- EXPENSES. WERE SLOW TO MOVE IN THAT DIRECTION BECAUSE THERE ARE CITIES THAT HAVE DONE IT OR ARE CONSIDERING IT AND THEY HAVE A BROAD BALLOT INITIATIVE THAT IS BEING LED BY FORMER MAYOR CHUCK REED THAT ALLOWS A SHIFT TOWARDS A 401(K) APPROACH GOING FORWARD. VALID MINCER -- IF THE BALLOT MEASURE PASSES. Tom: COULD YOU GIVE US EXAMPLES OF WHAT YOU ARE TALKING ABOUT? ONE WOULD BE TO GIVE VOTERS THE RIGHT OF FIRST REFUSAL AND A PROPOSAL TO INCREASE PENSION BENEFITS AND THEY HAVE NOT ALLOWED VOTERS TO APPROVE S AND THEY SHOULD HAVE PREAPPROVAL AUTHORITY AND IT WOULD PUT A CHECK OR GRAIN IN SOME OVERLY GENEROUS TYPE. ALSO ANOTHER IDEA FROM THE BOOK IS TO SHIFT TO A 401(K) BUT A GENEROUS ONE. I PROPOSED A 10% CONTRIBUTION THAT WOULD BE MADE EVERY PAY PERIOD AND THEY WOULD PUT 10% INTO A REQUIREMENT ACCOUNT AND IT IS VERY GENEROUS COMPARED TO THE PRIVATE SECTOR. IT IS AROUND 2 TO 4% AND EVEN IF WE SHIFT THEY WOULD STILL SAY THEY SHOULD SAVE OVER 6% PER YEAR. AS WE MENTIONED EARLIER YOU WOULD GIVE US A PLAN TO FINANCE AND THOSE WITH THE RETIREMENT BENEFITS CAN HAVE THEM OTHERWISE THE MANY MIGHT NOT BE THERE. Tom: I HAVE TO LAUGH A LITTLE BIT WHEN YOU TALK ABOUT THE INITIATIVE AND YOU GIVE VOTERS THE OPPORTUNITY TO IMPROVE OR DISAPPROVES. I HAVE TO IMAGINE THAT I VOTE NO EVERY TIME. THAT COULD BE THE CASE IN SAN FRANCISCO HAS HAD THE AUTHORITY AND THEY HAD REGULARLY VOTED DOWN PENSION INCREASES. I THINK THAT'S THE OPTION OF THOSE WHO LIVE IN THE AREAS. I THINK I HAVE EVERY RIGHT TO DECIDE AND SINCE THEY ARE PAYING THE BILLS LONG-TERM. Tom: IS IT FAIR TO SAY THAT THE ESSENCE OF THE REFORM IS TO DO WHAT WE'VE DONE IN SAN DIEGO. WHERE ONLY THE CONTRIBUTION IS GUARANTEED. PRIVATE SECTOR HAS SHOWN THAT THE OLD MODEL OF THE GUARANTEED IS JUST SO EXPENSIVE THAT IT IS NOT SUSTAINABLE LONG-TERM. AND ALSO OTHER STATES THEY ALL HAVE MASSIVE DEFICIT THAT THEY ARE TRYING TO FIX AND FINANCE. I THINK I PROPOSED A REASONABLE APPROACH BECAUSE IT OFFERS A GENEROUS 401(K) PLAN FOR GOVERNMENT EMPLOYEES GOING FORWARD. IT ALLOWS CITIES TO BE PUT BACK INTO THE OLD PLAN TO PAY FOR BENEFITS THAT ARE ALREADY EARNED ANYTHING CURRENT RETIREES ARE THERE AND THEY ACTUALLY REDUCE BENEFIT CHECKS FOR CURRENT RETIREES IN THE CITY OF DETROIT. IT'S A DEFINITE THREAT. Tom: YOU THINK THE CITY DECLARES BANKRUPTCY IT DOES RELIEVE THEM. IT REDUCES PENSION FOR RETIREES AND THOSE IN STOCKTON SAID THEY COULD REDUCE FOR CURRENT EMPLOYEES THEY WERE ALREADY RETIRED THEY COULD SEE THOSE REDUCED. MY PLAN GUARANTEES THAT IF WE SHIFT TO A 401(K) STYLE WHO WILL HAVE ENOUGH SAVINGS TO GUARANTEE FOR THE BENEFITS. Tom: THE INVITED ONE LEADER TO BE ON THE PROGRAM. IF YOU MOVE PUBLIC WORKERS WHO LET DRY UP A NEW INVESTMENT THAT IS NEEDED IN THIS CASH AND -- -- MAKE IT LARGER. KNOW IT DEPENDS ON WHAT HAS BEEN PROMISED HER EARNED. Tom: THEY SHOULDN'T CONTRIBUTE. MY PLAN WOULD ACTUALLY PROVIDE THE SAVINGS THAT WOULD MAKE SURE THAT THERE IS ENOUGH MONEY. THERE IS NO MECHANISM IDENTIFIED TO PAY FOR THE COST AND IF ANYTHING CURRENT RETIREES ARE SOON TO BE THERE IN THE SYSTEM AND THERE IS NO GUARANTEE THAT THE MONEY WILL BE THERE AND IF YOU MAKE THIS SHIFT WILL BE SAVED ON REGULAR BASIS AND YOU COULD PAY OFF THE DEBT OR WHEN PEOPLE RETIRE. Tom: WHAT DO YOU THINK ABOUT THE POLITICAL WILL THAT WOULD BE NEEDED TO DO THIS, CALIFORNIA IS BLUE AND THEY HAVE QUITE A BIT OF INFLUENCE. THE PUBLIC IS AHEAD OF THE LEGISLATORS AND THEY BELIEVE THAT PENSION COSTS ARE EITHER PROBLEM AND THEY DO NOT NEED TO BE CONVINCED AS MUCH AS LEGISLATORS THAT THEY WILL OBVIOUSLY GO THROUGH AND I THINK THE LEGISLATORS WOULD KILL IT MISSES A WAY TO GO DIRECTLY TO THE PEOPLE AND PEOPLE ARE WAY AHEAD OF POLITICIANS AND THEY REALLY UNDERSTAND WHAT ACUTE PROBLEM THIS IS AND HOW THEY CAN BE MOVED AWAY FROM COURT ESSENTIAL SERVICES. THIS WOULD HAVE A VERY STRONG CHANCE OF PASSING. Tom: IN SOME STATES THAT IS THE CASE? IS CALLED THE VESTED RIGHTS AND IT'S NOT EXPLICITLY IN THE CONSTITUTION LIKE IT IS IN SOME STATES THAT IT HAS BEEN INTERPRETED BY THE STATES AND THE PHRASING HAS BEEN INTERPRETED TO PROTECT WITH CURRENT EMPLOYEES GOING FORWARD. TIRED TO SEE IF THEY DECIDED THAT WRONGLY AND IT COULD BE CHANGED IN ANOTHER INITIATIVE DOWN THE ROAD BUT THE ONE THAT HAS BEEN PROPOSED WILL NOT TOUCH THAT. Tom: YOU'VE TALKED ABOUT THIS WOULD GIVE VOTERS THE RIGHT TO REFUSE BY LOCAL OR STATE GOVERNMENTS, WHAT IS THE STATUS OF THAT? I THINK IT'S NOT YET QUALIFIED. WITH THE ATTY. GENERAL. SHOULD I GIVE THE SUMMARY AND DEPENDING ON HOW IT READS CHUCK REED WANTS TO LITIGATE OR NOT WILL DEPEND ON EXACTLY THE WORDING BUT THEN IT WOULD GO TO THE PUBLIC FOR SIGNATURE GATHERING AND THEY NEED ABOUT 500 AND AND THEY NEED ABOUT 585,000 FROM REGISTERED VOTERS TO QUALIFIED AND THIS WOULD BE FOR NOVEMBER 2016 WE ARE LOOKING AT A LONG CAMPAIGN AND IT WILL GATHER STEAM OVER TIME FROM BOTH SIDES. Tom: WE WILL END IT THERE IN MY THINGS TO LAWRENCE IS A SENIOR FELLOW AT THE INDEPENDENCE INSTITUTE AND IS AUTHOR OF THE NEW BOOK CALLED CALIFORNIA DREAMING. LESSONS ON HOW TO RESOLVE PUBLIC PENSION CRISIS. GREAT TO BE WITH YOU. Tom: BE SURE TO TURN IN TO THE EVENING EDITION TONIGHT. YOU'VE BEEN LISTENING TO MIDDAY EDITION ON KBPS .

Booming financial markets have led to positive returns for California's public employees pension fund known as CALPERS. As of Monday, the fund had a total market value of $300.8 billion.

But some people are voicing concerns that CALPERS is still only 77 percent funded. An effort is underway to get a statewide initiative on the November 2016 ballot that would cut spending on pensions.

Lawrence McQuillen, author of the new book “California Dreaming: Lessons on How to Resolve America's Public Pension Crisis,” said funding CALPERS is the state’s greatest challenge.

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“Unless we get a handle on sky-rocketed costs, we’re going to see reduced services elsewhere because money will be going to the pension plan,” McQuillen told KPBS Midday Edition on Tuesday.

McQuillen said he suggests California gives voters more of a say on any pension payment increases or move to a 401(k)-type plan.

“Michigan and Alaska have moved to 401(k)-type plans,” McQuillen said. “We’ve been very slow to move in that direction.”