Tilting at pension reform

Jan. 22, 2010


What to do about public employee pensions is the thorniest, nastiest, most difficult question facing Sacramento lawmakers today. Few issues cause such disappointment and despair. Yet one group of activists and accountants is plugging away, trying to get a new pension reform initiative passed.

Their only real ally is recent history. In the last three years the California Public Employees Retirement System (CalPERS) has lost about a billion dollars investing in Newhall Ranch residential development, $100 million in Palo Alto apartment conversion and another $500 million or so in Manhattan apartments. These and other losses have considerably sapped CalPERS’ investment returns—so much so that a Jan. 20 Los Angeles Times story reports they “raised concerns about the ability of the country’s largest public pension system to cover the cost of retirement for 1.6 million state and local government workers, retirees and their families.”

Paying pensions and benefits for retired state workers is a huge drain on the state budget that robs other programs and services (health care, education, parks, etc.) of much needed funding. What to do about steadily (sometimes even retroactively) rising pension benefits for state workers at a time of declining tax revenue and economic calamity has long been one of  Gov. Arnold Schwarzenegger’s priorities—and one of his biggest disappointments. “I ask the Legislature to join me in finding the equivalent of a water deal on pensions, so that we can meet current promises and yet reduce the burden going forward,” Schwarzenegger said during his Jan. 6 State of the State Address, but few believe the Legislature will do much about it.

With such officials as Ron Seeling, CalPERS chief actuary admitting that current state worker pension benefits are “unsustainable,” you’d think Schwarzenegger would have no trouble getting action on pension reform. But no.

“I don’t think it’s in the interests of the Democrats because they’re protecting public employee unions,” Assemblyman Ted Gaines, R-Roseville. To be fair, most Republicans dip into the public employee till as well—last April newly elected Republican Assembly leader Martin Garrick accepted $2,000 from the California Correctional Peace Officers Association, for instance—which makes the power of the unions even stronger.

“Given the fact that public employee unions hold such a deep stranglehold over the Legislature, it will take a Don Quixote to crusade against any and all barriers,” Marcia Fritz, a Citrus Heights-based certified public accountant. As president of California Foundation for Fiscal Responsibility (CFFR), the group currently trying to qualify a pension reform initiative for this year’s ballot, Fritz knows all too well about tilting at Quixotic endeavors.

The seven-page measure—called the “New Public Employees Benefits Reform Act” until the Attorney General’s office writes an official title—would “provide for fiscally responsible retirement benefits for new public employees” hired after passage.

“[T]he current system of retirement benefits is too costly, overly generous, and cannot be sustained for new public employees,” the proposed initiative states. “Under the current system, some public employees can actually receive more income in retirement than they earned while working. The current system could result in billions of dollars in new taxes to meet the retirement obligations for public employees. Many local governments may be threatened with bankruptcy if no change is made.”

Currently, there are all sorts of pension formulas used by the state’s 2,000 or so public agencies and municipalities. Because of the “3 Percent at 50” plan—which calculates pension benefits by multiplying 3 percent of the worker’s salary for each year of employment—that was sponsored by then-Assemblyman Lou Correa,D, Santa Ana, in 1999, many municipalities allow workers to retire at 50 with close to 90 percent of their salaries. Fritz said her group’s initiative eliminates all that by setting up a single formula for calculating pensions for all public workers statewide.

Under the initiative, firefighters and police officers would receive 2.3 percent of the salary multiplied by each year of service upon retirement at 58. The multiplier for public safety employees would be 1.8, and they would have to wait until 60 to retire. For public employees that work for agencies that don’t require Social Security contributions, new employees would retire at “no less than the full retirement age, as defined in the United States Social Security Old Age and Survivors Insurance Program” to get 1.65 percent multiplied by their years of service (the multiplier for public workers who have to make Social Security contributions is 1.25).

It is, taken as a whole, only a slight reform. The initiative’s benefit package doesn’t affect current pensions at all, and in many ways is still more generous than private sector plans. Because the initiative is still in the signature-gathering phase, CalPERS hasn’t done any kind of cost analysis of it, according to Edward Fong, CalPERS spokesman.

“It’s similar to Social Security,” Fritz said. “And that is a huge threat to unions, because it takes away their negotiating tool. California is the only state that allows pension benefits to be negotiated in a contract. Other states have more open methods.”

Fritz says her CFFR has met with Schwarzenegger, but he has yet to formally approve the measure. Though a pension reform advocate, Gaines said he doesn’t yet know enough about the CFFR initiative to endorse it.

This isn’t to say Fritz completely lacks supporters. “I think it’s great,” Orange County Supervisor John Moorlach said when asked about the proposed initiative. “Pension reform has to be done—there’s been too much abuse. CalPERS does funny things. New benefit improvements are automatically retroactive. That’s not in the Constitution! CalPERS has taken everything actuaries have in their toolboxes and used it to the max. If we have another downturn like this one, CalPERS will implode.”

Moorlach, who got elected Orange County treasurer in the wake of that county’s 1994 bankruptcy and promptly put the county on a more or less strong fiscal footing, brings considerable clout to CFFR’s effort. But he also has recent, actual experience reforming pensions.

Last October, Schwarzenegger approved a deal hashed out between the Orange County Board of Supervisors and the Orange County Employees Association (OCEA) that creates a two-tiered pension plan for county employees. Under the deal, county employees can now choose between the current benefit package or a second plan that would require them to retire at a later age (65 instead of 55) but would get far less money taken out of the monthly paychecks than those opting for the current plan.

“It’s an experiment,” Moorlach said. “A lot of new hires are young, and may not want a pension plan. Current employees could drop into the lower tier, where they would get a raise of sorts because their withholdings would go down. We negotiated it the old fashioned way. It wasn’t easy.”

Nick Berardino, the OCEA’s general manager, says his county’s pension reform effort should be the model for the state. “Our feeling is that, obviously, pensions are an issue that requires considerable examination and evaluation,” he said. “But changes should be made at the collective bargaining table, not through an initiative. You can’t have a cookie-cutter resolution—you have to go to the bargaining table and work out the problem. We were able to do to this in one of the most conservative counties in the state, so it can be done.”

Berardino’s acceptance that state employee pensions need work is far from universally held among union officials. In fact, most look at CFFR’s proposed initiative not as a moderate change—the substituting of a single, still generous benefit for a motley mix of extremely generous benefits—but as something dangerous and sinister that must be stopped at all costs.

“We’re very, very strongly opposed to it,” Californians for Healthcare and Retirement Security chairman Dave Low told Investment Management Weekly in December. “It’s draconian. It dramatically cuts pensions for every new public employee.”

Fritz bristled at such criticism. “Dave Low says it reduces health benefits 50 percent,” Fritz said. “It does not. The cost is reduced by 50 percent—not the benefit. The benefit only goes down three percent. You have to work longer to get more benefits.”

For officials like Gaines, that’s the whole point.

“I’m not saying we shouldn’t have decent pay, decent benefits for public employees,” Gaines said. “We’ve just gone too far.”


Write a comment
  1. Lani Lutar
    Lani Lutar 22 January, 2010, 13:44

    The LAO fiscal impacts reports for the two versions of the initiative can be read here:

    Also, the AG has prepared title and summary for the initiative. I will post a link to that shortly.

    Lani Lutar, President & CEO, San Diego County Taxpayers Association

    Reply this comment
  2. Lani Lutar
    Lani Lutar 22 January, 2010, 14:07

    Here’s link to the AG prepared title and summary:

    Reply this comment
  3. Andy Favor
    Andy Favor 23 January, 2010, 11:57

    I don’t see the problem in amending the state constitution so that defined benefit plans can be frozen. State employees seem to lobby for growth in government every time we have an election. Yet, they are disconnected from the downside of their advocacy because no matter what, their pension is not on the line for reduction.

    During this recession, almost all of my clients who have defined benefit plans have frozen them. I know my plan has been terminated. Friends and neighbors say that we just have to accept the fact that we will have to work a year or two longer than we expected and we move on because that is life.

    If state workers had something to loose they would support fiscal reform and fight to eliminate the regulatory environment that is forcing businesses away from California. (Note: I have a very small list of those businesses that have left on my website for reference purposes.)

    At least that is the way I see it.

    Andy Favor, CPA
    Candidate for California State Controller

    Reply this comment
  4. Wayne Martin
    Wayne Martin 23 January, 2010, 13:30

    The problem is seen to be much worse when you “run the numbers”. Public safety people receive 90% of their exit salary, plus a COLA of 2% (although this could be up to 5%). Government types like to talk about this as “3% at 50” (or some such) nonchalantly, this little “formula” is guaranteed fiscal disaster for any agency agreeing to it. The following table explains:

    Using a COLA of only 2%, public safety retirees receive the following payouts:

    Total Pension Payouts
    $100K–10-Years: $1.1M | 20-Years: $2.5M | 30-Years: $4.1M
    $150K–10-Years: $1.7M | 20-Years: $3.4M | 30-Years: $6.2M
    $200K–10-Years: $2.2M | 20-Years: $5.0M | 30-Years: $8.3M

    This table calls out the yearly pension, with the COLA computed for up to thirty years of retirement. So, if a public safety employee retires with an exit salary (the amount the retirement benefits will paid against) of $150K, then if that person lives thirty years the government agency must pay that person another $6.2M via his/her “pension”. In many cases, this is more than the person made during his/her in-service working life.

    When CalPERS is able to make money on the stock market, then the government agencies often got off without paying very much into the “retirement account” for each employee. But when CalPERS loses money, then each agency (city, county, state, special district) must pony up additional funds to make these payments. Lately, these additional funds have gotten to be so large that some cities are paying 20%-40% of their general funds into payments for post-retirement expenditures (CalPERS and retiree Health Care).

    While most of the attention for pension reform has been at the State level, the real tsunami is at the City/County level–which hires about 1.3M full-time employees, statewide (and another 300,000 part-timers also).

    Most cities have never modeled their fiscal operation, so they don’t really have any idea how big this tsunami really is. However, using this little table above, it’s not hard to come up with a “figure-of-merit” number by multiplying the payouts against the number of employees. This number is a 30-year number, but still, it’s more accurate than not.

    The Legislature could help by requiring that all government agencies (including schools) compute some sort of a “retirement liability” profile for their agency, and then require government agencies to publish that information in their yearly budgets. The public needs desperately to know, and understand, these numbers. It will not be hard to see how it will be impossible in the future to continue to hire all of these people, and pay pensions that range from 80% to over 100%.

    Reply this comment
  5. Tim
    Tim 23 January, 2010, 16:15

    From a law enforcement/firefighter perspective there are two big issues. Injury retirements are abused at an unbeleivable level. If the public knew they’d be shocked. The formula is simple, hang around an agency for a few years, then fabricate some type of injury. PERS then pays 50 percent tax free for the retirees life. A guy can move on at a very young age making a pretty good living. Some then go work for other non PERS agencies (1937 act.) There are certainly legitimate injury retirements out there, but the majority “game it” and move on. There is nothing to prevent this abuse.

    Lastly mandating that cops work till 58 or 60 is insane. Most 58 year olds could never keep up with the operational tempo in an Agency like Oakland, LA or East Palo Alto.

    Reply this comment
  6. Richard Rider
    Richard Rider 25 January, 2010, 16:16

    Tim is correct. The infamous “chief’s disease” of the CHIP’s bosses going out on contrived disabilities is just the tip of the iceberg. We have a special standard for public safety disability — which in essence says that any middle age malady (high blood pressure, back pain, old sports injury, etc.) can be counted as a disability.

    And too often, it is.

    BTW, making half the disabled pension tax free saves more than half the taxes. A LOT more. Because of the progressive nature of the federal and particularly the state income tax, that tax-free half of the income comes off the top of the tax bracket — often cutting the total tax owed by 70-80% — or more.

    Reply this comment
  7. tough Love
    tough Love 26 January, 2010, 07:48

    Quoting …”It is, taken as a whole, only a slight reform. The initiative’s benefit package doesn’t affect current pensions at all, and in many ways is still more generous than private sector plans.”

    Lets examine this quote ….

    You bet it’s only a “slight reform”. From a financial standpoint, we’ll save nothing for 20-30 years by reducing pensions ONLY for new employees. We’ll be bankrupt within 2 years unless we IMMEDIATELY make these and greater reductions for FUTURE years of service for CURRENT (yes CURRENT) employees.

    “Still more generous, you say …. You bet it is. I’m very familiar with pension design & funding. The proposal is still at least 50% better than (the few remaining) Private Sector Defined Benefits Pension Plans. The cuts need to be greater. Why should Private Sector taxpayers pay for BETTER pensions than they get for themselves ?

    Reply this comment
  8. art
    art 26 January, 2010, 08:29

    this may be the most naive comment ever
    “It’s an experiment,” Moorlach said. “A lot of new hires are young, and may not want a pension plan. Current employees could drop into the lower tier, where they would get a raise of sorts because their withholdings would go down. We negotiated it the old fashioned way. It wasn’t easy.”

    Pollyanna is a pessimist- they want it, they know to the penny how much and when they will get it, and to say you are changing for new hires only means the problem wont be solved for 30 years.

    Reply this comment
  9. john moore
    john moore 26 January, 2010, 16:09

    Here in Pacific Grove,where we adopted [email protected] when we were in deficit with [email protected],stock market losses have cost the City 7-8 times more than payments to Calpers over the past 8 years. Anything that does not deal with Calpers investment losses won’t help enough to allow cities to provide customary services. In Pacific Grove,the city has practically eliminated all services that serve children.It is disgusting. John Moore

    Reply this comment
  10. Ishmael
    Ishmael 26 January, 2010, 17:29

    This proposal like most budget proposals in this state is a joke. In almost all categories California leads the nation in taxes — income, sales, property and the list goes on. Why, so we can pad a bunch of nonworking government pensions.

    I closed my business in California and moved it to Texas and am on my way there. There are lots of people like me and I believe anyone who startes a business in California that will be a national business has to be a total idiot.

    California is the Greece of the US and will just totally implode. What the legislature has done should be a crime.

    I am going to be sitting far away, drinking a cold beer and laughing when this thing goes KaBoom. This state has nothing but idiots running it.

    Reply this comment
  11. orcadrvr
    orcadrvr 27 January, 2010, 07:49

    Is there a typo in paragraph 10? Perhaps the second sentence should read: “The multiplier for “non” public safety employees….”

    Reply this comment
  12. PRI
    PRI Author 27 January, 2010, 09:17


    Nope, not a typo. The initiative makes a distinction between cops and firefighters on one side and “public safety” employees on the other…

    -Anthony Pignataro

    Reply this comment
  13. StevefromSacto
    StevefromSacto 29 January, 2010, 10:41

    Interesting how the right has been able to de-brand the so-called Foundation for Fiscal Responsibility as the brainchild of discredited former Assemblyman Keith Richman–whose last pension initiative was so flawed that Gov. Schwarzenegger dropped it like a hot rock–and use Marcia Fritz as the new figurehead. Unfortunately, the irresponsible message of the group remains the same. SSDD.

    Reply this comment

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