Tilting at pension reform
January 22, 2010
Jan. 22, 2010
By ANTHONY PIGNATARO
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.”