Fate of Governor’s Tax Hike May Hinge on Dem’s Action on Retirement Reform
Thursday, June 28, 2012
“Every time history repeats itself, the price goes up,” the late, great New York gossip columnist Earl Wilson once noted.
That kernel of wisdom offers useful perspective on the actions — or, to be precise, the inactions — of Democrats who now dominate the California Legislature. They’re on the brink of replaying a political scenario from the disco era, when lethargy by an earlier generation of lawmakers about a critical public finance issue led to Proposition 13, costing government $7 billion and ushering in the modern era of political dysfunction.
Then, tone-deaf Capitol politicians dithered far too long to respond to simmering public anger about skyrocketing property taxes, which boiled over with the landslide passage of the iconic 1978 tax cut.
Now, legislative Democrats are stalling on reforms of taxpayer-financed retirement plans for public employees. At a time when state and local pension plans have hundreds of billions of dollars in unfunded liability, and when pensions increasingly are viewed as a symbol of pigs-at-trough government spending, doubts about the potency of the issue were erased in the primary election, when voters in San Diego and, more significantly, San Jose, overwhelmingly passed initiatives to curtail public pension benefits.
“The pension vote in San Jose, which is … a more liberal city than the state as a whole, is a very powerful signal that pension reform is an imperative,” said Governor Jerry Brown. “It’s really important.”
Brown’s comments are instructive, given the key role he played both in the historic 1970s clash over property taxes and today’s controversy over pensions.
Then California’s 34th governor, Brown engaged in years of bickering with the Legislature as a real estate bubble, an outmoded system of calculating property-tax bills, and a massive state surplus generated outcry from homeowners demanding relief. By the time politicians agreed on a compromise, it was far too little, too late, as voters took the matter into their own hands with the government-slashing Prop. 13.
Now the state’s 39th governor, Brown recognized public concern over pensions early, sending the Legislature a comprehensive pension-reform package in January. Because unions largely fund their campaigns, however, majority Democrats have been wary, and the governor’s plan has languished in committee. Democratic leaders now say they’ll address the matter in August, after their summer recess.
By then it could be too late.
Republicans and anti-tax groups have begun campaigning against the $8-billion tax-increase initiative that Brown has placed on the ballot, charging that Democrats are grabbing for money while refusing to rein in spending; not surprisingly, pensions are a primary talking point.
“California government desperately needs real pension reform and spending reform,” said Joel Fox, a leader of the group against Brown’s tax plan. “Taxpayers cannot be relied upon to bail out the too-generous offerings politicians have handed out to public employees in health and pension benefits while the taxpayers struggle to support their own health care and retirement funds.”
If voters turn down his tax increase, Brown says, the state must make huge reductions in services, from parks to public schools, which would be hit with at least $2 billion in additional cutbacks.
Polling suggests that a failure to pass pension reform would fuel the Republican argument against the tax hike.
In a Public Policy Institute of California December survey, more than eight in 10 Californians said the cost of public pensions is a major problem (44 percent) or somewhat of a problem (39 percent); that view has grown steadily since 2005, when just 31 percent said the pension costs were a serious issue.
And large majorities favor reforms proposed by Brown: Seven in 10 said the state should change the current defined benefit system to a cheaper 401(k) plan; eight in 10 said employees should increase their pension contributions; and six in 10 support basing pension benefits on an average of compensation during employees’ service rather than on the highest annual salary they earned.
As a policy matter, there is disagreement about the long-range importance of pension costs to the financial stability of public finances. As a political matter, however, it is clear that failure to act on pensions will make it more difficult for Brown to counter conservative arguments and convince voters to raise their own taxes.
“Passing tax increases without first achieving serious reforms,” said anti-tax advocate Fox, “means we likely will be looking at more of the former and none of the latter.”