The following post was written by Mary Williams Walsh. She has been reporting on public pensions for at least two decades. Few, if any, do it as well.
“What’s she really like?” is the question of the moment regarding Vice President Kamala Harris. Now that she’s the Democratic Party’s de facto presidential nominee, everyone wants to know.
We don’t know.
What we do know, at least in part, is what she was “really like” as an elected public official. Our story begins there. It doesn’t have a happy ending.
Go back some ten or 15 years ago. Kamala Harris was California’s state attorney general. The issue was public-pension policy in the wake of the global financial crisis, which erupted in 2008.
Public pension plans weren’t ready for anything like the near collapse of the global economy. As we’ve written here before, they had been miscalculating their obligations for years, promising more than they could really deliver, and hoping to make it all work with aggressive investments that would pay a lot more than reasonable assumptions would project. Put another way, they forgot about risk.
It wasn’t a great strategy for mature public plans with numerous retirees who are entitled to be paid every month, no matter what the markets are doing. Once the dust of 2008-09 had settled, most public plans found their invested assets had lost about one-fourth of their value. Their corresponding liabilities had only grown bigger, as public workers kept working and building up their benefits. Officials in many places had to make hard decisions about how to deal with the mismatch.
They took different approaches in different states. In some, like Rhode Island, officials decided the losses were so big that the whole pension system had to be restructured, rather like a bankruptcy restructuring. Every constituency — workers, retirees, taxpayers — would have to bear some of the pain, in the hope of achieving an equitable outcome. (The official who led Rhode Island’s restructuring was Gina Raimundo, then state treasurer, now President Biden’s commerce secretary.)
Other states, like California, said they couldn’t possibly make any changes to their pension systems. Not for retirees. Not for current workers. Their state laws forbade it. Even the pension accruals the current workers hadn’t earned yet, but expected to earn in the remaining years of their careers, were set in stone.
This is a tricky point, but it’s worth understanding because there’s a lot of money involved — and a good chance of being bamboozled if you don’t understand. It was on this point that Harris had to choose between the public good and special interests.
In a defined-benefit pension plan, workers build up their future pensions year by year as they work, through a process known as accrual. A company with a pension plan can halt the accruals any time. It’s legal, as long as every worker gets to keep the pension he or she has accrued up until the stop date. The workers may be very disappointed, and there have been some celebrated lawsuits over the years. But the law is clear: There’s no requirement that pension accruals continue unchanged over a worker’s entire career. They’ve been halted for millions of people. Typically the frozen pension plan is then replaced with a 401(k) plan.
That’s in the private sector, where pension plans are governed by a single federal law, the Employee Retirement Income Security Act, or Erisa. The states refuse to be bound by Erisa, so public pensions are governed by state laws. There’s a lot of variability. California has a doctrine known as the California Rule, which holds that accrual rates cannot be halted, or even slowed, for the duration of a public employee’s work life. California is home to America’s two biggest state pension systems, plus a number of local ones, and for all of them, the California Rule is an article of faith. At least nine other states base their own policies on the California Rule.
This means the kind of shared sacrifice that Rhode Island embraced is out of the question in California. All the pain of reviving a stricken pension plan after a market crash must be borne by the taxpayers, and to some extent by public workers who will be hired in the future.
One California city with its own pension fund is San Jose. It had big losses in the 2008 meltdown. In 2010 the city called for an audit. The auditor found a disturbing trend. San Jose’s taxpayers had been contributing $63 million a year to the fund in 2000, but in 2011 — the year Kamala Harris was sworn in as attorney general — they’d have to contribute $245 million. By 2016 the annual amount due would be $400 million, and it would continue to climb after that. Pension math is unforgiving. The audit measured a $2 billion hole. According to the California Rule, it was entirely up to San Jose’s local taxpayers to come up with all that money.
San Jose is a Blue City in a Blue State. Its mayor in 2011 was Chuck Reed, a Democrat, who started out in life in a Kansas housing project but made it to Princeton after a stint in the Air Force during the Vietnam War. He got a law degree at Stanford and joined a firm in San Jose, practicing commercial litigation and real estate law. On the side, he gave legal assistance to tenants in housing disputes and advised some local nonprofits. Those endeavors gave him the idea to run for city council in 2000. After six years on the council he ran for mayor and won.
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